Mortgage finance reform back on track?

Inman News

A flurry of activity among policymakers and influential real estate industry leaders suggests a plan for reforming the nation's mortgage finance system is finally starting to take shape.

Whether the plan can pick up enough momentum to win over lawmakers who question whether the government should have a role in housing finance remains to be seen.

It's been nearly five years since the government placed Fannie Mae and Freddie Mac -- "government-sponsored entities" (GSEs) that help channel investment into mortgage lending -- in conservatorship.

Now industry bigwigs and Capitol Hill veterans from both political parties are coalescing around a formative plan released in late February to overhaul Fannie and Freddie.

The GSE-reform blueprint, engineered by a commission from the Bipartisan Policy Center (BPC) that includes former lawmakers and industry experts, calls for replacing Fannie Mae and Freddie Mac with a "public guarantor" that would keep money flowing into mortgage lending in the event of a housing market meltdown.

The blueprint is the culmination of 16 months of brainstorming among a commission of industry leaders, experts and former lawmakers and officials who span the political gamut.

They include former Republican Senator Christopher S. Bond, former Democratic Senate Majority Leader George J. Mitchell and former Republican Senator Mel Martinez, who also served as the secretary of the U.S. Department of Housing and Urban Development.

The proposal has been relatively well received among trade groups, though the National Association of Realtors and National Association of Homebuilders have said they disagree with some aspects of the plan.

On the heels of the report's release, two Democrats and two Republicans on the Senate Banking, Housing and Urban Affairs Committee last week introduced the "Jumpstart GSE Reform Act."

The bipartisan bill would lock Fannie and Freddie in the crosshairs of reform by prohibiting the Treasury from abruptly relinquishing control of them, and barring Congress from milking them for cash. Like the bill, the BPC plan is conscientiously bipartisan, perhaps making it more likely to inspire Congress than previous proposals.

The bill comes as the Federal Housing Finance Agency -- Fannie and Freddie's government overseer -- ramps up efforts to wind the companies down.

At a housing conference attended by a roster of industry heavyweights last Friday, FHFA acting director Edward DeMarco acknowledged recent progress in the path to housing reform. He called the Jumpstart GSE Reform Act a "terrific sign," though he emphasized that policymakers will have to pass a bill to bring about a full-on revamp of the GSEs.

DeMarco also seemed to signal support for the BPC plan, whose template dovetails with a securitization platform that he is erecting to succeed Fannie Mae and Freddie Mac and accommodate any future restructuring ordered by Congress.

The proposal received significant attention at the "2013 Housing Summit," hosted by JPMorgan Chase at its New York headquarters last week.

Under the plan, the government would significantly reduce its footprint in the mortgage market by instructing Fannie Mae, Freddie Mac and the Federal Housing Administration to slash the size of the loans that they back. Theoretically, private capital would then fill that credit void.

The plan also calls for reigning in the Federal Housing Administration's mortgage-market share, and devoting more resources to rental housing.

According to the proposal, the wind-down process of the GSEs would take somewhere between five and 10 years, after which the government would replace the GSEs with a "public guarantor."

Similar to Fannie Mae and Freddie Mac, the public guarantor would charge a fee to stamp qualified mortgages with a government guarantee. It would also provide the infrastructure for bundling home loans into mortgage-backed securities (MBS) for sale to private investors, providing liquidity to the mortgage market as Fannie and Freddie have done.

But in contrast to the GSEs, the public guarantor would be entirely government-owned, and private insurance companies would bear the predominant risk associated with mortgages backed by it. Its guarantee would only kick if those companies failed.

To armor taxpayers, the insurance companies would be required to hold enough capital to survive a housing collapse just as severe as the one that sparked the Great Recession.

The BPC proposal is reportedly the only blueprint designed specifically to balance political views.

Ken Colton, who gave a presentation on the proposal at the housing conference last week, described it as a "variant" on one of three future housing models floated by the Obama administration in a 2011 report.

The option was the only one that recommended maintaining broad access to a government guarantee regardless of economic conditions. Another option called for a severely restricted government guarantee that would only be made broadly available during market slumps. Another option was to eliminate anything resembling the guarantee Fannie and Freddie have provided.

As the Treasury noted, the primary advantage of a model like the BPC template is that it wouldn't raise borrowing costs as much as other plans, and it would ensure that 30-year fixed-rate mortgages continue to be widely available. Some experts say without a government guarantee, the traditional "plain vanilla" mortgage might lose market share or even become extinct.

Colton, who served as consultant for the proposal, said an analysis showed that the BPC model would only raise interest rates on qualified mortgages by 0.1 to 0.2 percent.

The FHFA has recently ramped up efforts that would facilitate a transition to this model. DeMarco announced in August 2012 that the FHFA would attempt to reduce the GSEs' mortgage holdings by a larger percentage in 2013 than in previous years, the BPC proposal noted.

Private-label MBS -- securities not guaranteed by Fannie, Freddie and Ginnie Mae -- were the primary source of funding for subprime lenders until the fall of 2007, when investors would no longer buy them. Since the collapse of the secondary market for private-label MBS, Fannie, Freddie and Ginnie Mae -- which guarantees payments on MBS backed by loans insured by the Federal Housing Administration -- have been involved in funding about nine out of 10 home loans.

Late last year, FHFA announced it was ordering Fannie and Freddie to hike guarantee fees -- a move largely motivated by the desire to bring back the secondary market for mortgages not guaranteed by the government. The two increases in guarantee fees instituted last year brought the average guarantee fee to around 50 basis points -- about double what they were before Fannie and Freddie were placed in conservatorship.

In recent months, the FHFA has provided signs that it may accelerate such initiatives. In a March 4 speech, DeMarco said FHFA expects to increase guarantee fees again in 2013, transfer more of its mortgage risk to the private sector, and continue to hammer out a "common securitization platform."

That would nudge the GSEs model closer to one outlined by the BPC by beginning to forge a private-insurance shield to protect taxpayers, and erecting a securitization platform that Fannie and Freddie's successor could inherit.

And so would the Jumpstart GSE Reform Act, introduced last week by Senators Bob Corker, R-Tenn., Mark Warner, D-Va., David Vitter, R-La. and Elizabeth Warren, D-Mass.

The proposed bill would prohibit the Treasury from selling its preferred shares of Fannie and Freddie without Congressional approval and GSE reform, thereby removing its ability to abruptly jettison the GSEs out of the government's hands.

In addition, it would block the GSEs from potentially drifting towards sustained nationalization, by preventing Congress from hiking the guarantee fees charged by Fannie and Freddie to offset government spending. In 2011, Congress voted to raise the fee to make up for lost revenue from a tax cut, and in December of last year, the House passed a bill that would extend those hikes to pay for immigration reform.

There's "a perception on Capitol Hill -- a correct one -- that the two giant companies now under government control have no one left to protect them from financial assaults," syndicated columnist Ken Harney wrote last fall. "That means they are fair game when revenues need to be raised without violating no-new-taxes pledges."

Despite what looks to be a recent push for GSE reform, Congress may be too busy with other issues to reach consensus on the issue this year. While industry leaders may be coming closer to uniting behind a model for GSE reform, lawmakers may not follow in their footsteps.

Mark Calabria, director of regulation studies at the Cato Institute, maintains that there remains "very little consensus" in Congress on GSE reform, and that recent developments aren't likely to change that.

"Certainly DeMarco is trying to move the process but he's about the only one," Calabria said. "So I don't see any of the fundamental politics or process issues having really changed."

On Monday, House Republican Conference Chairman Rep. Jeb Hensarling reintroduced a bill he'd originally put forward in 2008 that would accelerate the process of either shutting down Fannie and Freddie or transitioning them to fully independent private companies if it's determined they can function without government support.

Hensarling's said his bill is similar to the option put forward in the Obama administration's plan to transition to "a very limited role for the taxpayer in housing finance."

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