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54 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest SECONDARY MARKET gOP victories Put spotlight on gse reform even though parties agree change is needed, will another congressional stalemate thwart any real progress? n ow that Republicans will have a majority in both the House and the Senate come Janu- ary, it has been widely speculated that GSE reform will be near the top of their to-do list. Sen. Richard Shelby (R-Alabama) is expected to take over as the new chair of the Senate Banking, Housing, and Urban Affairs Committee next month. Shelby previously served as the committee's chair from 2003 to 2007 and is a longtime proponent of reforming the conservatorship model. To say Republicans have an uphill battle ahead where GSE reform is concerned is an under- statement. The president has the power of the veto pen, and while both sides have vowed to work together on areas that they can agree, the extent to which President Obama would support major Republican-led legislation remains to be seen. Furthermore, consensus on what a good reform plan would look like has yet to materialize. The mere use of the phrase "GSE reform" triggers many questions that will need to be answered before such a gargantuan task can be undertaken: How much and exactly what type of reform is necessary? Should Fannie Mae and Freddie Mac be consoli- dated into one GSE or be elimi- nated altogether? Or should they be left alone? What, if anything, is going to replace the GSEs? The question some might be asking is: Why is GSE reform necessary? It's clear from examin- ing statistics that the housing industry is far from returning to its pre-recession levels of normalcy, hampered by minimal growth in both home sales and home prices. The federal government took Fannie Mae and Freddie Mac un- der conservatorship in September 2008 and now enjoys billions in profits from the two GSEs, funds that have been diverted to the U.S. Department of the Treasury since 2012. To provide an idea of just how profitable the GSEs currently are, Freddie Mac's net worth stood at $5.2 billion as of September 30, 2014. Proponents of GSE reform say the status quo isn't working for investors, who they say assume all the risk on the loans pur- chased by Fannie and Freddie and take the hit when these loans go bad. Not only that, some key of- ficials such as Federal Housing Finance Agency (FHFA) Director Mel Watt have recently suggested lowering the conventional down payment from 20 percent to 3 percent in order to expand mort- gage access to lower income, yet apparently still credit-worthy bor- rowers. Watt said FHFA and the two GSEs are working together to find that balance where lenders can relax lending standards and still manage risk effectively. According to some, the answer may lie not in eliminating both GSEs, but merging them into one entity. Washington, D.C.-based attorney Stephen Blumenthal, former deputy director and acting director of the GSEs' previous regulator, the Office of Federal Housing Enterprise Oversight, makes the case that Fannie Mae and Freddie Mac could be consolidated into one entity. Blumenthal asserts that the expense it takes to run two GSEs is "simply unacceptable" given the number of duplicative operational procedures (mainly overhead costs such as employee compensation and compliance). The two GSEs already work together on some issues. Recently, Fannie Mae and Freddie Mac created a corporate entity they jointly own that will operate the Common Securitization Platform,