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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

Caution: GSE reform could have serious unintended consequences

Guest blog by former Ginnie Mae president Joseph Murin

May 26, 2015

The role of the government sponsored enterprises, Freddie Mac and Fannie Mae, in combination with government-owned corporation Ginnie Mae, has been fairly straightforward for decades: ensure that capital flows freely to American mortgage lending markets so that the American dream remains achievable for all. 

While most now consider the GSEs to provide an implicit guaranty, as opposed to Ginnie Mae’s explicit guaranty, all three play a critical role in making mortgages available to many Americans who otherwise might not be able to afford a home.

The thought of dramatically altering that guarantee, or worse, eliminating it, is one that is extremely worrisome to me.

Let’s consider the role of Ginnie Mae (with which I am most familiar). Chartered in 1968 for the express purpose of making homes more affordable for Americans with what would now be considered “riskier credit profiles,” Ginnie Mae has stayed true to that mission throughout. In fact, Ginnie Mae began to grow through the Great Recession, as private markets and the GSEs tightened their standards in response to what has often been called the “Subprime Meltdown.” 

Many now believe that, without the federal guarantee behind Federal Housing Administration, Department of Agriculture and Veterans Administration mortgages, the economy may have plummeted even further than it did.

In 2014, the Urban Institute supported this premise. 

“Without Ginnie Mae and its full-faith and credit guarantee the government insurance programs could not have played such a critical counter-cyclical role and the downturn in home prices would have been much more severe,” Urban Institute’s Housing Finance Policy Center Director Laurie Goodman wrote in 2014. “If investors, overseas and domestic, private and public, had been unwilling to take interest rate risk through Ginnie Mae and GSE securities, the real estate market would have sunk much further.”

When the GSEs were placed into the conservatorship of the Federal Housing Finance Agency in 2008, their future role in the overall mortgage market was questioned. We’ve heard ideas ranging from minor tweaks to absolute phase out of the two giants. They’ve also ranged from mild to outlandish.

But let’s consider just how important the GSEs and Ginnie Mae are to our housing infrastructure.

As of late 2014, almost 80% of new mortgages were backed by some kind of government guarantee. To simply eliminate such a cornerstone would be no different than tearing down 80% of a building’s foundation.

The assumption that, even with time, private markets would simply pick up the role of the GSEs and Ginnie may or may not be accurate. But what if it is wrong? The economic chaos would be astronomical, and simply picking up the pieces of the infrastructure we had just replaced would be no mean feat.

I, personally, am a strong supporter of free market principles. At times, I believe some boundaries have been overstepped in the name of regulating mortgage lending and protecting the consumer. But we also must balance reality with our ideals. Without the government guarantee, our housing industry would be left to the whims of a private market. We’ve already seen what private markets tend to do in times of economic crisis or hardship: they hunker down and mitigate risk. 

Although the argument rages as to whether or not tighter mortgage lending standards have limited consumer access to credit, there can be no doubt that most mortgages are originated with the intention of selling them onto the secondary market. Thus, they are originated under the terms of GSE or Ginnie Mae standards. It would seem that even the free market has been flowing toward the security of the government guarantee.

Now consider what would happen if those delivering the implicit or explicit government backstop were hamstrung or even removed from that mission. Mortgage lending would become much riskier for banks and non-bank lenders. Historically, bankers don’t like risk. Nor do many investors.

Without a relatively uniform standard of underwriting and origination standards (which we have now with the GSEs and Ginnie), investors, too, would likely become more skittish when approaching mortgages for investment. We’d likely see the number of lenders available to consumers and homebuyers — especially smaller lenders — dry up as risks increase and profitability declines (because of the decrease of investment capital).

The cost of a mortgage would likely go up. The result to the consumer would be anything but positive. Perhaps the consumer would be safer in a limited number of respects; but that consumer would also, in many cases, be frozen out of the home-buying market.

Do the GSEs and Ginnie Mae need some changes? Perhaps. Should we endeavor to protect the taxpayer from the potential of future mortgage industry collapse and government bailouts? Of course.

But before we throw the baby out with the bathwater, let’s take a moment to recognize that the overall benefit far outweighs the harm and risk we can experience with these entities. Unless we, as a nation, have turned our back on the American Dream and the ideal that most (if not all) Americans should have access to affordable homes, we need to maintain, in large part, the role of the GSEs and Ginnie in that dream.

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