Milken with a bold take on Fannie Mae reform which shareholders among others wont like – see details belowThe housing finance reform debate has regained momentum, as those involved aim to move towards bipartisan housing finance system legislation in 2018.
While different approaches have evolved from the discourse about potential reforms of the secondary mortgage market structure, they all address some key elements of housing finance reform that any effective legislation must embrace.
This paper assesses these key elements of reform as well as the common elements of the two predominant models that satisfy or advance these elements.
The paper suggests the following key elements of housing finance reform:
- The private sector must be the primary source of mortgage credit and bear the primary burden for credit losses.
- Private firms benefiting from access to a government backstop must be subject to strong oversight.
- A level playing field for all firms engaged in housing finance.
- Broad access for Americans to sustainable mortgage credit on competitive terms.
- New mechanisms to support affordable housing.
While there is no shortage of content on the topic, two different conceptual approaches to reforming the secondary mortgage market structure are motivating legislative discussions. The first is a model in which multiple guarantor firms purchase mortgages from originators and aggregators and then bundle them into mortgage-backed securities (MBS) backed by a secondary federal guarantee that pays out only after private capital arranged by each guarantor takes considerable losses (the multiple-guarantor model).
This approach incorporates several elements from the 2014 Johnson-Crapo Bill1 and a subsequent plan developed by the Mortgage Bankers Association. Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—would continue as guarantors, but would face new competition and would no longer enjoy a government guarantee of their corporate debt or other government privileges and protections.
While the multiple guarantor and DeMarco/Bright models differ in many ways, they share important common features; both address key elements of housing finance reform that any effective legislation must embrace. In the remainder of this paper, we first identify these key reform elements. We then assess some common features of the two models that satisfy or advance these elements. The final section delves more deeply into the operational challenges of translating into legislative language specific reform elements that are shared by or unique to one of the two models. Getting housing finance reform right requires staying true to high-level critical reform elements while ensuring that technical legislative requirements make economic and operational sense.
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