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Corker and Warner at BPC: GSE reform just isn’t going to happen soon

Credit sharing does not take the place of reform

Seven years after Fannie Mae and Freddie Mac were placed into conservatorship, there is still a lack of consensus on how to reform the GSEs.

Two panels hosted by the Bipartisan Policy Center on Tuesday explored GSE reform, including the primary issue of conservatorship and bringing in private capital, with a focus on risk-sharing — specifically “front-end” versus “back end” — and looked more broadly at how to make housing finance more sustainable.

The first panel featured Kevin Chavers, managing director at BlackRock; Bob Ryan, acting deputy director of the division of conservatorship at the Federal Housing Finance Agency; Laurie Goodman, director of the housing finance policy center at the Urban Institute; Mike Fratantoni, chief economist of the Mortgage Bankers Association, and Pat Sinks, CEO of Mortgage Guaranty Insurance Corporation (MTC).

Nic Retsinas, senior lecturer in real estate at Harvard Business School, served as moderator. They focused on risk sharing and the GSEs.

The second, keynote panel featured two of the upper chamber of Congress’ leading housing policy leaders, Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va.

Corker and Warner were authors of Corker-Warner, a housing reform bill that failed in the Senate.

“It’s a tough issue, the most complex issue I’ve worked on in my time in the United State Senate,” Corker said. “There’s a lot of resistance, a lot of inertia. The industry is moving…slowly… in the direction laid out the way we did.”

Warner said bridging the gap between the left and the right on housing policy was a hard chasm to bridge.

“Two things we didn’t fully appreciate in drafting housing policy. One is the strong belief in the House that we ought to get government completely out of the backstop role,” Warner said. “On my side, some of the reluctance came from the progressive groups, thinking the status quo was better than some of the (solutions being considered.)”

Don’t expect any kind of reform anytime soon, Corker said, and that applies to lawmakers' raising concern about the Treasury’s third amendment sweep of GSE profits and shareholder concerns.

“It’s going to be a while. Won’t happen in the next year and four months,” Corker said.

“Some of our (right) wingers are migrating over to this third amendment thing because it makes it easy not to do anything.”

Warner said possible solutions like House Financial Services Committee Chair Jeb Hensarling’s, R-Texas, PATH Act would disrupt markets rather than provide solutions.

Corker said that he believes his "Jumpstart the GSEs" bill currently languishing in the Senate has significant support, though it also has significant opposition.

The opening panel discussed conservatorship and bringing in private capital, with a focus on risk-sharing, specifically “front-end,” to make housing finance more sustainable.

Overall the panelists said that the goal should be to strengthen the housing market, bring more capital, and enhance credit risk transfers.

The big obstacle, it seems, is GSE reform.

 “Legislation on this topic remains elusive, the new word for ‘not happening,’” the introductory speaker said.

Panelists agreed that Fannie/Freddie credit risk sharing is not a replacement for legislative reform.

Panelists said that the current transfer of profits from the GSEs to Treasury may be big for shareholders in the judicial realm, but is a political non-event for Congress and that therefore GSE reform would proceed regardless.

While they argued that credit risk transfer and credit risk sharing are elements of housing policy, GSE reform needs to happen so credit sharing does not take the place of reform.

Ideally, panelists discussed, the focus for policy and reform would be to reduce taxpayer risk, increase transparency for policy makers and the market at large, to create a broad liquid market and make it scalable, and to broaden and deepen investor base for credit risk transfers.

After a deep discussion in the first panel, Retsinas asked panelists what they thought housing policy would look like in a few years.

 “Very similar to what it looks like today,” Chavers said.

Goodman was equal in tone.

“Very similar to what it looks like today with a lot more risk sharing,” she said.

Isaac Boltansky at Compass Point Research & Trading, says he thinks there are other concerns more likely to have impact before any movement is made in GSE reform.

“In our view, commentary from FHFA Acting Deputy Director Bob Ryan and MGIC CEO Pat Sinks during the panel discussion could prove particularly notable for private mortgage insurers, mortgage REITs, and certain mortgage originators hoping to benefit from up-front risk-sharing at the GSEs,” Boltansky says in a client note. “We continue to expect the FHFA to include a mandate for up-front risk-sharing pilots including deeper private mortgage insurance in its 2016 conservatorship scorecard when released in December or January.

“While we believe deeper private mortgage insurance coverage represents a growth opportunity for mortgage insurers, our sense is that the market needs additional timing and pricing clarity before truly pricing-in the potential (e.g. what will the GSE G-Fee concession be?),” Boltansky says.

Video of the event will be available here later today.

Ryan Birtel, founder of Eolith Advisory and formerly with UBS (UBS) and Deutsche Bank (DB), had some insights on Twitter regarding the second panel.

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