Almost six years into conservatorship and barely any progress has been made to reform Fannie Mae and Freddie Mac to create a new housing finance system, which places private capital in the first-loss position.
According to a new paper from Urban Institute’s Laurie Goodman, “This task has proved very difficult, and it has been made more difficult by a deeply divided Congress. While today (in mid-2014) members of Congress generally agree on the principles of a new system, they have yet to reach consensus on what the design of the system should be, leaving a legislative solution in the near term unlikely.”
Currently, the two main reform proposals are:
- The House proposal sponsored by Financial Services Committee Chairman Jeb Hensarling, R-TX, and other committee leaders, H.R. 2767, ends the taxpayer-funded bailout of the GSEs by phasing out the enterprises within five years, increases competition by ending federal control of the mortgage finance system and grants more options to consumers when selecting mortgage products.
- S.1217, sponsored by Sens. Mark Warner, D-VA, and Bob Corker, R-TN, seeks to unwind the GSEs' involvement in the secondary mortgage market, expand the role of private mortgage insurance, and create a single government backstop through the new Federal Mortgage Insurance Corporation (FMIC) to provide a common securitization platform and catastrophic mortgage insurance for qualified mortgage-backed securities.
While these two reforms vary on several levels, one of the main differences is that in one there is no government guarantee and in the other there is a catastrophic government guarantee. The Corker-Warner bill contains the catastrophic government guarantee, and while there is considerable debate around the guarantee, consensus has slowly formed around it.
Using this consensus, there are seven main elements:
- The 30-year, fixed-rate mortgage must be preserved.
- Private capital must take the first loss.
- A catastrophic guarantee is necessary to preserve the TBA market.
- A catastrophic government guarantee is best done through an FDIC–type insurance fund.
- The liquidity of the TBA market is best served with a single platform or a single security.
- The platform/bond administration functions should be separated from the risk-taking activities.
- Some type of affordable housing features — assuring access to credit for underserved borrowers and underserved communities — are necessary.
From here, the institute outlines the top 10 issues (click next page to see the list) that still need to be addressed.