TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 55 of 67

54 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT I t has been 14 years since Freddie Mac and Fannie Mae were put under full operational control of the Federal Housing Finance Agency (FHFA) at the height of the financial crisis in September 2008. At the time, then-Treasury Secretary Henry Paulson called the move a "timeout" reflecting the tempo- rary nature of the move. According to Don Layton, the Senior Industry Fellow for the Joint Center for Housing Studies at Harvard University, also the former CEO of Freddie Mac, believes that the Government Sponsored Enterprises (GSEs) falling into conservatorship was widely regarded as the result of fundamental flaws in their op- erations and structure. As such, scores of people on all sides of the of the ordeal believed that a simple recapitalization and being returned to the private sector as a bad move. This situation created what came to be known as GSE re- form, or the process of determin- ing how to revise the country's housing finance system so that the GSEs could never endanger the country's financial stability again. Currently, there are no plans in Washington on GSE reform meaning conservatorship will continue for the foreseeable future. The Biden administration has not shown a major interest in the topic of GSE reform. While there was a major focus on reform in 2009, the topic became a "back- burner" issue by 2017. Interest in reform picked up during the tenure of FHFA's then-Director Mark Calabria from 2019-2021, but not much discussion has hap- pened since. Layton states that GSE reform is not dead as two activities are underway, even though the thought of exiting conservator- ship appears to be in suspended animation. To better inform people on the subject, Layton proposed and answered four questions on the current state of GSE reform. What Happened to All the Big, Bold Proposals for GSE Reform? T he majority of big proposals for the GSEs occurred be- tween 2009–2016 when interested parties from across the financial spectrum—including industry associations, policy advocates on both the political left and right, academics and, of course, govern- ment officials—looked to replace the entities with something different. Popular ideas included a single government-owned monopoly, breaking up the GSEs into smaller "mini-GSEs," turn it into one or two cooperatives owned by the mortgage indus- try, or winding down the GSEs and letting the private sector to replace loan volume. One GSE reform bill that got the furthest in congress was the bipartisan Corker-Warner Bill of 2014 which called for competing "mini-GSEs," but it never came close to becoming law. Public examination of the bill brought up serious concerns about the proposal which ranged from fatal flaws to a general consensus that the bill was unworkable in practice. Around 2018, policy experts and mortgage industry players shifted away from revolution and moved towards evolution keeping the GSEs operations as normal to avoid disruption to the complex mortgage markets. Thus "com- prehensive GSE reform" has now become "GSE reform" meaning the companies will be reformed rather than replaced. If anything, the GSEs have thrived under conservatorship. Many of the reforms instituted in the last 14 years have helped them along including: limiting investment portfolio size limits, shedding risk via credit risk transfer transactions, and the re- quirement of a robust and much higher capital requirement. "This evolutionary approach to GSE reform thus called for keep- ing all the changes made during When Will the GSEs Exit Conservatorship? Not much has happened as of late in the discussion of bringing Fannie Mae and Freddie Mac out of conservatorship as current talks are in a "suspended animation" for the time being. Don Layton, former CEO of Freddie Mac, explores where conservatorship stands and what needs to happen in order for it to end.

Articles in this issue

Archives of this issue

view archives of TheMReport - _FULL-MReport_March2022