Dave Stevens’ Alternative GSE Reality

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According to Dave Stevens, everything seems to be in place for his members – the Too Big to Fail (TBTF) Banks — to displace Fannie Mae and Freddie Mac. As the conservatorship of the two government sponsored enterprises (GSEs) enters its ninth year, Mortgage Bankers Association President David H. Stevens myopically believes that all that is needed is for Congress to implement the MBA’s framework for GSE reform. Not so fast!

In a blog last week, Stevens recounts how the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), “… made a number of positive, administrative reforms to the GSEs: leveling guarantee fees; preventing special deals for individual lenders; creating the CSP; and working to create the single security, supporting liquidity and competition in the multifamily market, to name a few.”

While this all may sound great for Wells Fargo and Bank of America and the other TBTF banks, Stevens omitted another FHFA action that has been less positive for Fannie and Freddie shareholders, taxpayers, and prospective home buyers – the Net Worth Sweep. Since being implemented in 2012, the Sweep has ignited a court battle about the government’s unconstitutional taking of private property without compensation. It has exposed a pattern of deeply disturbing secrecy, evasion, and contradiction among government policymakers. It has set the stage for two of the largest financial service companies in the country to be operating without capital buffers just a few months from now. This raises the prospect of more taxpayer funded support, which will whip up anew a political storm in Washington and ensure an extended impasse on a permanent post-conservatorship arrangement federal housing finance policy. Other than that, how was the play Mrs. Lincoln?

While there are principles in the MBA plan that reflect consensus about goals of homeownership and access to affordable rental housing, the MBA plan would also mean significant changes in federal policy and create new risks for taxpayers. Notably, the creation of new private sector guarantors to issue Mortgage Backed Securities (MBS) along with an explicit government backstop for MBS losses could create a disincentive for large banks to act more prudently than they did in the past.  To be clear, the taxpayer wasn’t on the hook for MBS prior to 2008, but MBA’s plan would put them there going forward.  Dave Stevens likes to talk about “privatizing gains and socializing losses,” and the MBA plan is the best example of this we’ve seen to date!

And despite showing no mathematical analysis, Stevens claims the MBA plan is uniquely comprehensive and detailed. In fact, a blueprint put forward a few months ago by the banking and financial analysis firm of Moelis and Company performs the rigorous financial analysis that MBA seems to have skipped. The chief difference is that in that in Moelis’ “Restoring Safety and Soundness to the GSEs,” the rights of shareholders are taken into account and taxpayers would have far greater certainty they would not have to be forced to rescue Fannie and Freddie in a future, inevitable market crisis.

Stevens also argues that Congress must complete the work of GSE reform, saying it should be an “utmost priority.” However, it should be readily apparent that the unprecedented chaos in Washington of late as both parties struggle to get their bearings, makes swift bipartisanship unlikely at best. A faster path to ending the conservatorship would be for the Trump Administration to use its statutory authority in the Housing and Economic Recovery Act (HERA) to fulfill its mandate to restore the GSEs’ soundness and solvency and let them get back to business as shareholder owned entities enabling the pursuit of the American Dream.

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