Fannie Mae – Jumpstart GSE Reform: Industry Experts & Consumer Advocates Express Grave Concerns
On the same day that a New York Times opinion piece was released calling for the winding down of Fannie Mae and Freddie Mac, a group of mortgage industry experts and consumer advocates held a conference call to discuss their grave concerns with the Jumpstart GSE Reform bill as put forth by Senator Bob Corker (R-Tenn.) just before Thanksgiving.
The call was hosted by Joshua Rosner, Managing Director of Graham Fisher & Co. Rosner just released a new paper, “GSE Reform: Something Old, Something New, and Something Borrowed,” in which he argues that GSEs should be treated similarly to public utilities—highly regulated, natural monopolies that have a duty to serve the public.
Rosner was joined on the call by Mike Calhoun of the Center for Responsible Lending, Glen Corso of Community Mortgage Lenders of America, Gerron Levi of the National Community Reinvestment Coalition, and Scott Olson of the Community Home Lenders Association.
General sentiment among the panelists was that Fannie Mae and Freddie Mac should be released and recapitalized for five primary reasons:
- The housing finance market served 1/5 of the economy, leading the way for people to build wealth and move in to the middle class. As such, the GSEs are necessary to serve all lending institutions—not just large bankers. Community banks have a unique position in society and can offer more flexible loan products to service underserved communities. To remain viable, these community banks needs access to the secondary markets.
- The GSEs have an affirmative obligation to ensure credit flows to traditionally underserved borrowers. Latinos and African Americans are among the fastest growing demographics—if these underserved borrowers are unable to access conventional loan products, it will drag the economy down and perpetuate income inequality. If the GSEs are wound down, it could have a tremendous impact on the GSEs affirmative obligations.
- Similarly, the GSEs have a mandate to lend in underserved markets—especially rural markets. The GSEs are needed so that banks can serve all The GSEs have a specific mandate to lend in underserved areas—if we don’t have a system that requires banks to lend through the entire country, the majority of markets will be passed over.
- The housing finance system must be able to serve throughout market cycles. If Fannie Mae and Freddie Mac hadn’t provided $5 trillion in housing credit following the recession, we would still be in the recession. The GSEs are critical to ensure lending during market downturns when larger institutions are most likely to constrict access to capital.
- Recapitalization of Fannie Mae and Freddie Mac is necessary to provide an adequate capital cushion. Small lender groups are concerned about having a cash window, and why the GSEs don’t need to have strong capital reserves like traditional lenders is baffling to industry experts. “It’s completely absurd” to have the GSEs transfer all credit risk and operate without any capital, one panelist noted.
As the Jumpstart GSE Reform bill currently stands, there are provisions that will impair FHFA, the GSEs regulator, from ensuring the system remains liquid, viable and accessible to all lenders at all times. Jumpstart handcuffs FHFA from fulfilling these duties on behalf of the taxpayers and in the best interests of the marketplace.
Panelists also recognized that the Housing and Economic Recovery Act (HERA), which was more than a decade in the making before its passage in 2008, has already ushered in many crucial housing finance reforms. We need to build on those reforms, they say: the GSEs governance and guarantee structures are among the common concerns that can be addressed under the current system. Calhoun recommended reform include a structure with mutual ownership and a mechanism so that smaller intuitions can really have a voice. All panelists agreed the GSEs must retain their duty to serve the entire market, across geographies and demographics.
Corso was among those who reminded the audience that the GSEs have, by and large, met America’s housing finance needs. “We haven’t had a massive breakdown. We’ve kept mortgage credit flowing” since the housing crisis, Corso noted.
Rosner used that as a launching pad to get into the details of his paper: The “GSEs operated well until 1992, until we created GSE reform legislation as a result of the savings and loan crisis. The only other time the GSEs were in crisis was because of their portfolios,” Rosner stated. And even then, it was only Fannie Mae that struggled; Freddie Mac did quite well. Other troubles stemmed from the GSEs lack of capital and mission creep (from the secondary market into the primary market).
Reform is needed, Rosner and other panelists agreed. But winding down the GSEs isn’t the answer. Given how unlikely it is that Congress will enact meaningful GSE reform between now and 2017, the most practical next step is to recapitalize Fannie Mae and Freddie Mac and release them from conservatorship.