House GOP Makes the Next Move on GSE Reform

The Obama administration’s February report that outlined a series of near-term and long-term proposals for reforming Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac provided a starting point for Congressional debate—and now House Republicans appear ready to act.

This afternoon, Republicans on the House Financial Services Committee held a press conference to unveil eight separate proposals for providing near-term reforms to Fannie and Freddie. Several of the GOP proposals mirror those made by the Obama administration, including an increase in Fannie and Freddie’s guarantee fees and a winding down of both GSE’s investment portfolios, which currently hover around $1 trillion. Of particular significance, however, is the GOP’s omission of a long-term proposal for replacing Fannie and Freddie, highlighting the difficulty in significantly decreasing the GSE’s outsized role in the U.S. housing finance market.

Below is a summary of each GOP proposal: 

Executive Compensation—Introduced by Chairman Spencer Bachus (R-AL), the Equity in Government Compensation Act of 2011 would suspend current compensation packages for Fannie and Freddie’s senior executives and replace them with compensation packages on par with current pay rates for senior employees in the Executive Branch of the Federal Government.

Congressional Oversight—Introduced by Rep. Judy Biggert (R-IL), the Fannie Mae and Freddie Mac Accountability and Transparency for Taxpayers Act of 2011 would require the Inspector General of the Federal Housing Finance Agency to submit quarterly reports to the Congress during the conservatorship of Fannie and Freddie.

Risk Retention—Introduced by Rep. Scott Garrett (R-NJ), the GSE Credit Risk Equitable Treatment Act of 2011 would prohibit mortgages held or securitized by Fannie or Freddie from being exempted from the risk retention rules established under Dodd-Frank and currently being proposed by the FDIC.

Investment Portfolio—Introduced by Rep. Jeb Hensarling (R-TX), the GSE Portfolio Risk Reduction Act of 2011 would incrementally impose caps on Fannie and Freddie’s investment portfolios so that it reaches $250 billion after five years.

Guarantee Fees—Introduced by Rep. Randy Neugebauer (R-TX), the GSE Subsidy Elimination Act of 2011 would increase the guarantee fees over two years that Fannie and Freddie charge investors in exchange for a guarantee of the timely payment of interest and principal on Mortgage Backed Securities (MBS).

Debt Issuance—Introduced by Rep. Steve Pearce (R-NM), the GSE Debt Issuance Approval Act of 2011 would prohibit Fannie or Freddie from issuing any new debt without approval from the Secretary of the Treasury.

Affordable Housing—Introduced by Rep. Ed Royce (R-CA), the GSE Mission Improvement Act of 2011 would repeal Fannie and Freddie’s congressionally-mandated affordable housing goals.

Lending Markets—Introduced by Freshmen Rep. David Schweikert (R-AZ), the GSE Risk and Activities Limitation Act of 2011 would prohibit Fannie and Freddie from approving any new financial products while in conservatorship or receivership.

The House Financial Services Subcommittee on Capital Markets & Government Sponsored Enterprises will consider the eight GOP proposals during a hearing on Thursday, as Federal Housing Finance Agency Acting Director Edward DeMarco is slated to testify.

The piecemeal approach to GSE reform is a continuation of House Republicans’ legislative strategy in the 112th Congress, aimed at avoiding comprehensive proposals that are more liable to political attack and getting bogged down in the legislative process.

The fast-track approach, however, will only go so far in the Senate. During a GSE reform hearing on Tuesday, Banking, Housing and Urban Affairs Committee Ranking Member Richard Shelby (R-AL) made clear in his opening statement that housing finance reform will require a long and protracted congressional debate that may last beyond 2012.

“Before Congress can consider legislation, this Committee needs to do its homework,” said Shelby. “The Committee needs to thoroughly examine Federal housing policy and identify the problems with our current system. Accordingly, I believe this hearing is premature.”

Shelby, one of the leading critics of Dodd-Frank, warned his colleagues that hastily crafted GSE reform legislation would lead to “unintended consequences,” citing the financial reform legislation as an example.

Not So Fast on GSE Reform

In the political heat of the 2010 Congressional debate over the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), Republicans in both the House and Senate offered up amendments that would have eliminated the federal government’s $150 billion support of the beleaguered housing giants, Fannie Mae and Freddie Mac, and would have led the two Government-Sponsored Enterprises (GSEs) on a speedy path to full privatization.

In 2011, with a new House majority and the Financial Services Committee (HFSC) gavel in hand, the GOP and its previously-offered proposals for reigning in Fannie and Freddie—which collectively guarantee or own an estimated 50 percent of all new U.S. home mortgages—do not appear as simple or clear-cut in practice.

At the heart of the questions raised at this morning’s HFSC hearing over the Obama administration’s newly-released proposals for GSE reform were what the federal government’s long-standing role in the housing finance system should be and how a diminished federal role will affect U.S. homeownership, consumer access to credit, support for low-income communities, and a still-fragile U.S. housing market.

Providing testimony was Treasury Secretary Timothy Geithner, who relayed the Obama administration’s hope that Congress can approve legislation within the next two years to dismantle Fannie and Freddie over an extended timeframe and slowly shift the mortgage credit industry closer to the private market. Geithner cautioned against Congress moving too slowly or too quickly, stating that either move could further destabilize the U.S. housing market and potentially disrupt the broader economic recovery.

Overall, the Obama administration’s near-term proposals for winding down Fannie and Freddie received general praise from Republican committee members who described the proposals as positive first steps.

Rep. Scott Garrett (R-NJ), who will play a leading role in the House’s GSE reform efforts as Chairman of the Capital Markets and Government Sponsored Enterprises Subcommittee, enumerated a handful of near-term initiatives that he and the Obama administration can agree on. Among those include:

  • A gradual increase of the guarantee fees that GSEs charge investors in exchange for a guarantee of the timely payment of interest and principal on Mortgage Backed Securities (MBS).
  • A reduction in the GSE’s investment portfolio. By 2008, Fannie and Freddie held more than $300 billion in private-label MBS – MBS collateralized by subprime mortgages – ultimately exposing the GSEs to significant losses as the housing market plummeted during the financial crisis.
  • A gradual increase in down-payments for GSE home mortgages. The Obama Administration’s proposal calls for Fannie and Freddie- insured mortgages to eventually have at least a ten percent down payment.
  • A reduction in the GSE conforming loan limits. The Administration’s proposal calls on Congress to allow the temporary conforming loan limit ($729k) increase as approved in 2008 to expire as scheduled on October 1, 2011 and revert back to previous levels ($625k).

The longer-term housing finance options, however, appear to be more tricky. Members of the GOP expressed particular concern over one of the Obama Administration’s three long-term GSE reform options, which would maintain a privatized system of housing finance that would be coupled with government backstop to ensure credit access during a future housing crisis. HFSC Chairman Spencer Bachus (R-AL) argued that such a backstop would perpetuate a moral hazard created by allowing the GSEs to gain access to less costly credit through an implicit federal government guarantee of GSE-issued debt. In response, Geithner said that a privatized housing finance system with no federal backstops would merely shift moral hazard to the private lending industry.

When compared to the contentious GSE debates of last year, Tuesday’s hearing provided an air of political civility that may eventually give rise to a bipartisan solution for GSE reform this Congress. But one thing remains abundantly clear, the debate still revolves around the reform of a multi-trillion dollar mortgage finance industry that is still highly complicated and highly political. With no easy solutions in sight, this debate may take a while.

The Obama Administration's Plan for Winding Down Fannie Mae and Freddie Mac

On February 11, 2011 the Obama Administration delivered a report to Congress that provides a path forward for reforming America’s housing market. The Administration set forth a plan to wind down Fannie Mae and Freddie Mac in order to shrink the government’s current role in housing finance in a timely matter. The Administration’s plan focuses on bringing private capital back to the market through a number of different measures including:

  • Phasing in increased pricing at Fannie Mae and Freddie Mac to make room for private capital
  • Reducing conforming loan limits
  • Phasing in a 10 percent down payment requirement
  • Winding down Fannie Mae and Freddie Mac’s investment portfolios
  • Returning the Federal Housing Administration (FHA) to its traditional role to ensure that the private sector, so that when Fannie Mae and Freddie Mac’s presence in the market shrinks, the private sector, not FHA, picks up the new market share.

The Administration also proposed three possible courses for long-term reform:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.

Click here to read the full report or the Treasury press statement.

Reforming America's Housing Finance Market: A Report to Congress (PDF)

Fed Closes Its Wallet on MBS...Private Investors to Fill the Void?

After 15 months of unprecedented intervention in the secondary mortgage market, the Federal Reserve—currently the proud owner of nearly 25 percent of mortgage debts—is calling it quits. The Fed's $1.25 trillion emergency program to stabilize the U.S. housing market through the purchase of mortgage-backed securities (MBS) officially expires today.

First announced in November 2008, the Fed initiative to purchase MBS issued by government sponsored enterprises (GSEs )—including Fannie Mae, Freddie Mac, and Ginnie Mae—has largely been viewed as a catalyst in spurring the nascent recoveries in both the housing and stock markets, helping to lower home mortgage rates and free up capital for private investors. In particular, market analysts credit the Fed purchasing program with paving the way for a record $375.4 billion of investments into bond mutual funds in 2009, as lower returns on mortgage securities led investors to corporate bonds, equities, and other riskier assets.

At a time when the U.S. economy remains fragile, the Fed’s departure from the housing sector may help determine just how fragile economic conditions really are. For months, market observers have raised concerns that a Fed exit could cause significant spikes in mortgage rates, leading to higher foreclosures and a slump in investor confidence. In fact, Fannie Mae's and Freddie Mac’s February announcement that they will repurchase $200 billion in delinquent mortgage loans, was a tacit acknowledgement that government backstops cannot be removed swiftly.


However, a number of analysts are also predicting that the effects of the Fed pullout will be rather minimal, as the current shortage of AAA-rated debt has made private fund managers increasingly eager to begin reinvesting in MBS, especially when such securities are backed by propped-up GSEs like Fannie Mae and Freddie Mac. In addition, these analysts also project that U.S. banks—which have steadily increased capital levels and are now flush with extra cash—will step up to fill the void left by the Fed.


The role of both Fannie and Freddie in ensuring a smooth transition for the housing finance system will be something to watch closely over the next few months. The GSEs are under intensified scrutiny on Capitol Hill, as the Obama administration prepares a sweeping proposal for a GSE overhaul. Treasury Secretary Tim Geithner told Congress last week that the administration will initiate a public comment period on April 15 in order to solicit ideas for Fannie and Freddie’s restructuring.