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BPC discussion: Fannie, Freddie reform can happen but one step at a time

Separate housing finance and housing policy

Reform of the GSEs and housing finance may come, but it’s more likely to come in small bites rather than the big prix fixe Johnson-Crapo or the PATH Act.

Further, both Democrat and Republican lawmakers would be more likely to get on board if housing finance and housing policy were separated, because both sides largely agree government is playing too big a role in the housing market.

Those were two of the big takeaways from the Bipartisan Policy Center’s discussion on reforming the nation’s housing finance system with U.S. Reps. Randy Neugebauer, R-Texas, and John Delaney, D-Md., members of the Financial Services Committee, on Thursday afternoon.

Hosted by The Wall Street Journal national economics correspondent Nick Timiraos, the discussion focused on the possibility of Congress enacting comprehensive legislation this term, and the Federal Housing Finance Agency’s potential administrative steps, including expanding risk-sharing activities between GSEs and private investors, and developing a common securitization platform, to laying the foundation for reform.

This comes as the seventh anniversary of conservatorship for Fannie Mae and Freddie Mac approaches.

Timiraos joked that it seemed like there was no will to undertake GSE reform in Washington, saying it was like a New Yorker cartoon with the punch line “Tuesday doesn’t work for me, how about never? Does that work for you?”

“I don’t think the White House made this a top priority. In the Senate they made a pretty decent run at a bipartisan proposal [referring to the Johnson-Crapo bill]. A lot of Senators turned around and expected to see the White House behind them but no one was there,” Delaney, the Democrat in the discussion, said.

Some said that “…with a few changes to PATH Act it could have gone through but now the window has closed.” Timiraos asked Neugebauer, “Did you relinquish leadership on this issue by insisting on something too ideologically pure…?”

“If we put that bill on the floor it could pass, but the question is, could it pass with bipartisan support to become law?” he responded, in seeming agreement.

But what that left was the status quo.

“Now we have federal government handling the housing finance market and in reality controlling the housing industry,” Neugebauer said. “The majority think that’s not a good direction to go. It’s not good for government to be able to manipulate an industry so important to the American economy.”

A look at the various comprehensive housing reform bills that failed in the last Congress, in a report from Structured Finance Industry Group can be read or downloaded here.

The two congressmen also discussed what incremental steps could undertaken in Congress.

“The Common Securitization Platform is clearly achievable,” Delaney said. Congress needs to “take the government’s role and break into two discrete components. There’s the role in providing liquidity to housing market, which is important. Want it to be more predictable like banking. And then there’s the government role in pricing of the risk, which I’m not a supporter of. Historically government has mixed up the roles… and been in position to put its thumb on the scale.”

Neugebauer concurred.

“Government does not know how to price risk appropriately, and generally prices risk politically. We should separate housing finance from housing policy. Detach the finance piece from political process and allow those markets to operate,” he said.

When Timiraos asked whether they would be willing to address the mortgage interest deduction as a component of government putting its thumb on the scale in housing, both treated it like the third rail it is.

“I’d rather tackle GSEs first,” Delaney said.

The two congressmen discussed the best structure for the role of the government’s guarantee of mortgages, with such options as offloading 10% of exposure and getting price discovery and whatever pricing the market demands to better inform how to structure g-fees, versus the current system.

Timiraos raised the issue of the political barriers to GSE reform: the conservatives don’t like such a heavy government footprint in housing, while the progressives say they worry about the lack of ability to cross-subsidize pools (between higher and lower credit borrowers) and to a lesser extent the effect of benefitting bigger banks at the expense of smaller and community banks.

“Concern for small banks can’t hold up housing reform. This is not the small bank employment act,” said Delaney, whose top donors include Blackrock, JPMorgan Chase & Co., HHC Finance and the American Bankers Association.

The ongoing issue of the plight of GSE shareholders was raised, and both congressmen said that the issue is best left to the courts.

“Any sympathy to this argument that shareholders were mistreated in 2008….and the lawsuits arisen out of the 2012 decision …on profit sweep?” Timiraos asked. “Do you think folks have been mistreated here?”

“The courts are going to determine that. But what we do know is had the federal government not stepped in it would have had a catastrophic impact,” Neugebauer said.

But serious questions have arisen whether the bailout and conservatorship were necessary.

“Is there a deal to be struck with shareholders – legacy or new shareholders…?” Timiraos asked.

“It’s a matter for the courts,” Delaney said. “I do think the claims as related to these interests are the most unsympathetic I’ve seen in my life.”

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