There seems to be a little more common ground on GSE reform but the terrain is rocky and has deep chasms so it could be slow going before Congress and the Administration can finally resolve the issue at the heart of the financial crisis of ten years ago.
Federal Housing Finance Agency (FHFA) Director Mel Watt last week responded to a request from Senate Banking Committee Members Mike Crapo (R-ID) and Sherrod Brown (D-OH) and outlined his most detailed views to date on housing finance reform and the role of Fannie Mae and Freddie Mac. Watt suggested Fannie and Freddie could be reincorporated as private entities, owned by shareholders, and be governed by strong liquidity and capital requirements. The government would provide an explicit guarantee for catastrophic losses. In other words, they would operate like public utilities, including having a regulated rate of return.
The Independent Community Bankers of America (ICBA) were quick to praise Watt’s stance on preserving the role of local lenders in originating mortgages, particularly in rural communities. Even Mortgage Bankers Association (MBA) President Dave Stevens had positive things to say about Watt’s ideas, noting in particular the MBA’s own proposal calls for a government guarantee behind mortgage backed securities (MBS).
A few days later, Craig Phillips, a senior counselor to Treasury Secretary Steven Mnuchin, indicated Watt’s proposals are generally in line with Treasury’s general thinking. Mnuchin said late last year that housing finance reform is a priority for this year and listed ending the conservatorship, protection of taxpayers and preservation of the 30-year mortgage as guiding principles in housing finance reform.
Very quickly, mortgage bankers called on Congress to get the job done as soon as possible. With tax reform done, they want to end the long impasse over Fannie and Freddie’s role in housing finance and transition to system in which they can supplant the GSEs – even if they do not explicitly state that that is their aim. Phillips would not be pinned down on the timing but, like Watt, said the ball is in Congress’s court.
The telegraphing between policymakers and private sector interests could be seen as a sign of genuine interest in addressing this last piece of unfinished business from the 2008 financial crisis before election-year politics completely cripples Washington. On the other hand, just beneath the surface agreement on the goals and principles of reform, as serious differences in approaches and the government shutdown serves as a reminder that commonsense and goodwill are in short supply in Washington.
Watt and Mnuchin seem disinclined to exercise their statutory authority to end conservatorship without Congressional approval of plan for how to go about it. Congress, however, seems stuck reworking ideas that have come up short in the past while balancing this year’s political realities.
As in the past, most of the focus is on the efforts of Senators Bob Corker (R-TN) and Mark Warner (D-VA) who have been revising a proposal they put forward in previous Congresses. The details of their revised bill are not known and there have been reports that the two senators have diverged on some key issues. The current iteration is said to envision putting Fannie and Freddie into receivership and create 10 private sector guarantors which would have a government backstop for catastrophic losses. This hews closely to a proposal from the Mortgage Bankers Association.
Watt supports making more room for private capital in home lending but he believes the creation of 10 or more new entities to compete with Fannie and Freddie would undermine more than help a stable, liquid secondary market.
Meanwhile, retiring House Financial Services Chairman Jeb Hensarling, a longtime critic of the federal government’s role in housing, has come to acknowledge that a government guarantee in the secondary mortgage market will have to be part of any solution that could make it the president’s desk. If the Senate is trying to win support from House conservatives then lawmakers will have to look beyond the lure of displacing Fannie and Freddie and ponder whether compelling taxpayers to back MBS issued by a sprawling network of private-sector guarantors is in any way consistent with getting the government out of the home loan business. Likewise, if Fannie and Freddie were to disappear, people of modest income in rural areas, who often vote Republican, could find it harder to access affordable finance options from small, community-based lenders.
What might be driving the desire to finally deal with the GSEs is an accounting adjustment in the new tax law that moves Fannie and Freddie closer than ever to needing another “bailout” to cover possible quarterly losses. In response to this looming possibility, last month Treasury and FHFA agreed to another change in the terms of the conservatorship to allow the GSEs to keep about $3 billion in equity capital each. While that move might have signaled Washington’s growing angst over the political fallout of another bailout, they are more likely to see it as more time to haggle and delay.
Watt deserves credit, once again, for trying to keep things real. And yet, for all the recent flurry of activity, taxpayers, shareholders and average people seeking homeownership remain at the mercy of a broken Congress and an unpredictable Administration.
