Here are the top 10 issues that still need to be addressed, according to the Urban Institute:
- What form will the private capital that absorbs the first loss take: A single guarantor (a utility), multiple guarantors, or multiple guarantors along with capital markets execution? How much capital will be required?
- Who will play what role in the system? Will the same entity be permitted to be an originator, aggregator, and guarantor?
- How will the system ensure that historically underserved borrowers and communities are well served? To what extent will the pricing be cross subsidized?
- Who will have access to the new government-backed system (loan limits)? How big should the credit box be, and how does that box relate to FHA?
- Will mortgage insurance be separate from the guarantor function? (It is separate under most proposals, but in reality both sets of institutions are guaranteeing credit risk. The separation is a relic of the present system, in which, by charter, the GSEs can’t take the first loss on any mortgage above 80% LTV. However, if you allow the mortgage insurers and the guarantors to be the same entity, capital requirements must be higher to adequately protect the government and, ultimately, the taxpayers.)
- How will small lenders access the system? (All proposals attempt to ensure access, some through an aggregator dedicated to smaller lenders—a role that the Home Loan Banks can play.)
- What countercyclical features should be included? If the insurance costs provided by the guarantors are “too high” should the regulatory authority be able to adjust capital levels down to bring down mortgage rates? Should the regulatory authority be able to step in as an insurance provider?
- Will multifamily finance be included? How will that system be designed? Will it be separate from the single-family business? (The multifamily features embedded in Johnson-Crapo had widespread bipartisan support, but the level of support for a stand-alone multifamily legislation is unclear.)
- The regulatory structure for any new system is inevitably complex. Who charters new guarantors? What are the approval standards? Who does the stress tests? How does the new regulator interact with existing regulators? What enforcement authority will it have concerning equal access goals? What is the extent of data collection and publication?
- What does the transition look like? How do we move from a duopoly to more guarantors? Will Fannie and Freddie turn back to private entities and operate as guarantors alongside the new entrants? How will the new entities be seeded? What is the “right” number of guarantors, and how do we achieve that? How quickly does the catastrophic insurance fund build?
Most of these questions have no easy answer, and with no sense of urgency, higher legislative priorities and a lack of compromise, little change has happened and is not expected to happen soon.
“The current state of the GSEs can best be summed up in a single word: limbo. Despite the fact that Fannie Mae and Freddie Mac were placed in conservatorship in 2008, with the clear intent that they not emerge, there is little progress on a new system, with a large role for private capital, to take their place,” Goodman said.