GrahamFisher new white paper on Fannie Mae and Freddie Mac reform
In this paper we review the historic changes in the role and functions of the government sponsored enterprises, Fannie Mae and Freddie Mac (GSEs) as secondary market guarantors of primary market lending. We then explore the manner in which government housing policies directed the GSEs to expand mortgage financing without regard to other important regulatory and social priorities and discuss how these innovations caused private mortgage originators to follow the GSEs down a path toward more — but less sound — mortgage products. We then demonstrate how these actors together, with private mortgage insurers (PMIs) and rating agencies, enticed consumers and investors into shouldering unacceptable levels of financial risk that led to the financial crisis.
In contrast to recent purported “GSE reform” proposals offered in Congress, which further empower the nation’s largest banks and lenders with a new government backstop, undoing much of the progress achieved by post-crisis legislation and regulation of those same financial institutions, we offer a plan that places the GSEs back in their historic role as countercyclical providers of liquidity to the primary mortgage market. It does so in a manner that limits the GSEs’ political and market influence while allowing them to support affordable housing and, by leveling the playing field between large and small lenders, the growth and vibrancy of the smaller lenders and banks which are more closely tied to the communities they serve.
This GSE reform proposal is grounded in the current existing powers granted to the regulatory community through the Housing and Economic Recovery Act of 2008 law (HERA) and regulatory provisions of the Dodd-Frank Act, both of which were acts of Congress. If the current Director of FHFA recognized the previous failures to follow statutory requirements of HERA, and chose to correct these failings, he could place the secondary mortgage market on a viable path to meaningful reform.
As demonstrated by section 1367 of HERA, since the time of the decision to place the GSEs into conservatorship, the conservator’s powers have been abused. HERA clearly states that only the Director of the FHFA has the authority to determine the GSEs should be placed into conservatorship . Also, while the Director of the FHFA had the authority to appoint the agency as conservator, it also had the discretion to appoint an independent conservator . HERA clearly states: “When acting as conservator or receiver, the Agency shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency” .
GrahamFischer full white paper on Fannie Mae and Freddie Mac reform