The former Acting Director of the Federal Housing Finance Agency, Ed DeMarco, who oversaw the government putting the GSEs into conservatorship, says now it’s time for taxpayers to be free of backstopping mortgages.
DeMarco shares his thoughts in an opinion piece in the Wall Street Journal entitled "Put Fannie and Freddie Out of Taxpayers' Misery."
Here's DeMarco, in his own words:
Seven years later, fundamental problems with the system—especially the roles of Fannie Mae and Freddie Mac—remain unreformed. If today’s presidential candidates want to engage in a policy debate that affects the lives of nearly all Americans, this is it.
The good news is that broad consensus exists on two core changes that could be implemented now:
First, taxpayers shouldn’t be left holding the bag for mortgage defaults. Instead, private capital needs to be brought back into this system. In 2013 the Federal Housing Finance Agency (FHFA) began the process of shifting mortgage credit risk from taxpayers to private markets. The agency directed Fannie and Freddie to sell some portion of the mortgage credit risk they assume when they issue mortgage-backed securities.
These transactions disperse mortgage credit risk among a broad array of investors who knowingly and willingly take on this risk and its rewards. This builds liquidity in the market and reduces systemic and taxpayer risk. Market demand for these deals has been strong and new approaches to selling credit risk keep emerging, thereby broadening the range of market participants.
Congress should pass legislation making sure that within four years all securitizations involve enough risk transfer so that taxpayers are left with credit risk only in catastrophic circumstances. Lawmakers can then decide whether to stop there, as in some current legislative proposals, or move the remaining risk away from taxpayers.
Second, housing-finance reforms being developed under the FHFA’s direction should accommodate firms beyond Fannie and Freddie. One reason for the conservatorships in 2008 was that the country lacked a viable secondary market without them. The common securitization platform introduced by FHFA in 2012 will fix that by creating the operational infrastructure for other firms to issue mortgage-backed securities equivalent to Fannie and Freddie’s. That will enable Congress to end the conservatorships and replace the Fannie-Freddie model.
DeMarco also supports the bill to end the proposed $3 million pay hikes for the CEO's of Fannie and Freddie, writing:
Congress should also act now to avoid increasing taxpayers’ costs and risk. That means, to begin with, the recent sixfold increase in CEO pay at Fannie and Freddie should be reversed. Being CEO of a company in government conservatorship isn’t the same as running an independent financial institution, and CEO pay should reflect that.