It's been more than three months since the Obama Administration announced it would solicit public comment on the nation's housing finance system.
While a few comments contained concrete proposals for the future government role in housing finance, most submissions were general commentary on the causes of the housing crisis, with broad suggestions that the government should divest itself of GSE ownership.
Wednesday is the deadline for commentary, and a number of comments are already on file with the government's official online repository, Regulations.gov. In addition, a number of industry sources are releasing their comments to the media via press release campaigns. In April, the Treasury Department posed seven questions to the public ranging from what role should the government play in housing finance to the future of Fannie Mae and Freddie Mac.
One of the biggest criticisms of the sweeping financial regulation legislation that President Obama signed into law today does not specifically address the government-sponsored enterprises (GSEs).
HousingWire sources inside the Congressional Republican delegation said during the process of debating the financial reform bill, leading Democrats in both houses of Congress "promised up and down the aisle," that Congress will address the GSEs in the beginning of 2011. Republicans tell HousingWire they will push for the debate to begin earlier.
"The U.S. mortgage business is now left essentially nationalized with no plan in place to address reform. At $145bn and rising, the GSE bailout will undoubtedly turn out to be far and away the single largest cost to the taxpayer from the recent financial crisis," wrote John Duffy chairman and CEO of global investment bank Keefe, Bruyette & Woods (KBW: 17.65 +1.32%).
The investment bank is one of the latest to submit commentary, which included its own plan for comprehensive GSE reform. Under the KBW proposal, the GSEs would be transformed into cooperatives of mortgage lenders, which the company said would put those lenders' capital at risk ahead of the taxpayer.
"We believe that one of the most important issues related to Fannie Mae and Freddie Mac is capital," Duffy wrote in KBW's commentary. "Unless the companies are shut down and their portfolios are run off, the companies or any successor entities will need capital."
The transfer would occur over the course of a three-step process. First, private sector funds would recapitalize the GSEs in the transition to the cooperatives of lenders. The arrangement would promote market discipline with "skin in the game" on the part of private mortgage originators.
The GSEs would wind down their portfolio retention activities under this proposed arrangement, except for retention activities to support the guarantees of conforming mortgages. The proposal also includes establishing a "Bad GSE/Good GSE" structure to aid in the transition. The third step in the KBW plan requires continuity of the securitization process to ensure no disruption in mortgage availability.
"We believe that the best option for the GSEs is to separate the existing books of business into old bad GSEs that are put into runoff and new good GSEs that are run as cooperatives of bank mortgage lenders in a structure similar to what exists with the Federal Home Loan Bank System (FHLBs)," Duffy said. "This is not a traditional good bank/bad bank structure because the bad bank will not have any equity. The bad bank will just be a vehicle that is used to run off the legacy portfolios."
Another submitted commentary came in a joint letter by the US Conference of Mayors, the National Association of Counties, National Association for County Community and Economic Development and the National Community Development Association.
In that letter, the groups said financial reform should include an emphasis on affordable housing, and they called on the GSEs to resume purchase of tax-exempt mortgage revenue bonds and multifamily bonds issued by member municipalities to support affordable housing.
Outside of the public comments to the government, the mortgage industry continues to struggle with the uncertainty around Fannie and Freddie's future. In its quarterly report released Tuesday, MGIC Investment Corp. (MTG: 4.14 +6.98%) — parent company of the mortgage insurer Mortgage Guaranty Insurance Corp. (MGIC) — includes safe harbor disclosures specifically addressing the GSEs.
"Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses," the company said.
Indeed, the future of the GSEs is of keen interest to the mortgage insurance industry. The sector's trade group, the Mortgage Insurance Companies of America (MICA) submitted public commentary on the matter, noting that according to its estimates, the mortgage insurance industry has already paid $14.5bn in mortgage insurance claims to Fannie Mae and Freddie Mac and by the time the mortgage crisis is over, the industry estimates that total will reach $30bn.
"The capital and regulatory strength of the MI industry as well as its proven ability to withstand periods of heavy defaults, is in sharp contrast to other forms of external loan-level guarantees," MICA said in its commentary. "Federal housing policy should only allow other forms of guarantees by providers that are regulated, well capitalized, and that can demonstrate a proven capacity to satisfy their obligations and ensure prudent loan originations."
"MICA recommends that federal housing policy not permit use of derivatives, including credit default swaps (CDS) as an acceptable form of guarantee," the statement added.
Write to Austin Kilgore.
The author held no relevant investments.
