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feature SECONDARY MARKET | 77 se c on da r y m a r k e t The M Report A na ly t ic s congressional approval and structural housing reform. Now, almost five years into conservatorship, the debate of the GSEs' future remains, in many ways, at a standstill. This stagnation is aggravated by the fact that the fate of the GSEs may already be sealed. Last August the Treasury and the GSE regulator, FHFA, amended Fannie Mae and Freddie Mac's terms of the senior preferred share purchase agreements that appear to solidify their eventual wind down. At best, they are in an apparent state of permanent thrall, unable to move forward conclusively. s e r v ic i ng the brakes on growing euphoria about the future of the GSEs by proposing standards and protections to ensure that reform of Fannie Mae and Freddie Mac is not cast aside in the wake of their record profits. Sens. Bob Corker (R-Tennessee), David Vitter (R-Louisiana), Mark Warner (D-Virginia), and Elizabeth Warren (D-Masasschusetts) introduced the Jumpstart GSE Reform Act in March. The legislation limits the application of revenue generated from increases in the guarantee fees charged by the GSEs. The legislation also restricts the selling of preferred GSE shares without This third round of amendments ended the original dividend payment structure, under which the GSEs were drawing on Treasury funds to make "round-trip" payments back to the Treasury. Instead, under the new provisions, the required dividends are replaced by a quarterly sweep of all net income over a capital reserve threshold of $3 billion to the Treasury. That capital threshold drops to zero in 2018, at which point all GSE profits will go to the Treasury. Moreover, the preferred share purchase agreements make no provisions for repurchase or principal repayment of the Treasury's preferred share holdings. Before conservatorship, the GSEs had been used by policymakers before to pursue political ends, such as meeting affordable housing and other social goals. There is little doubt those activities, while well intentioned (and also mandated) took a huge toll on their financial soundness, and therefore on their long-term ability to perform either as commercial enterprises or as stable pillars of our housing finance system. Worryingly, the GSEs' new status as potential cash cows now threatens to divert attention from longer-term questions, such as how best to structure a sustainable housing finance market, as policymakers are tempted to use them as short-term fiscal policy fixes. But the future of the mortgage market is too important to leave to such distractions. The perils of GSE dependency on the Treasury became all too clear during the financial crisis; now that circumstances have changed, is it any healthier for the Treasury to depend on the GSEs? The newfound profitability of the GSEs, welcome news as it is, should not lead us to forget about the long-term solution we need: a sustainable housing market that supports sensible, wellconsidered public policy goals; creates a central role for private capital in housing finance; and supports a thriving, stable housing finance market for homebuyers now and in the future. Or ig i nat ion short-term cash flow that the GSEs now offer could tempt policymakers to maintain the overwhelmingly dominant roles of Fannie Mae and Freddie Mac, delaying—perhaps indefinitely— incentives for the return of private capital. Opinions differ on the prospective value of the GSEs without government support. Former Treasury Department official Jim Millstein recently proposed recapitalizing the GSEs without their implicit government guarantee. Notably, however, the Federal Housing Finance Agency (FHFA) published two reports in May on the viability of segmenting off and selling Fannie Mae and Freddie Mac's business operations. The reports found that without the implicit government guarantee, the operations would "have little inherent value," and would return "little or no value" to the Treasury and American taxpayers. Similarly, industry groups and Washington think tanks differ on how to resolve the housing finance reform debate. The American Enterprise Institute (AEI) has supported completely eliminating the GSEs. The Mortgage Bankers Association and the American Bankers Association have supported more moderate approaches to reform, supporting either structural changes to the government's role in housing finance or much more gradual wind downs for Fannie Mae and Freddie Mac. President Barack Obama's administration has not proposed any new ideas for housing reform either. The most recent substantial proposal released by the White House was the Treasury's white paper entitled Reforming America's Housing Finance Market. That report is over two years old. On the legislative side, no meaningful housing finance reform bills have gotten off the ground, or committee floors for that matter, in the current 113th Congress. A bipartisan Senate coalition has at least acted to put