Whalen: Future of Fannie, Freddie not the real issue with GSE reform

Analyst explains what housing finance policy should be focused on

Everyone agrees now is the time for GSE reform, including the Trump administration, however how to do it is another story; one years in the telling.

Earlier this year, Treasury Secretary Steven Mnuchin said to expect GSE reform during the next four years.

Many small lenders and affordable housing groups came together to issue a joint GSE reform proposal. The group signed a one-page list of core common reform principles. Many of these same groups also testified before the Senate Thursday, where they told Congress what kind of reform they don’t want to see.

The Mortgage Bankers Association published a 60-page whitepaper earlier this year, giving Congress a roadmap to secondary mortgage market reform.

Now, analyst Christopher Whalen wrote a blog for American Banker, explaining the future of Fannie Mae and Freddie Mac matters very little to housing reform.

Whalen explains it is important Congress remembers these two “failed housing agencies” are of little significance for the greater public interest. As they stand, the two companies greatest role in housing is their government-backed securities, however Whalen explained that responsibility can easily be shifted to Ginnie Mae or the Federal Housing Administration.

From the blog:

For example, the implicit government guarantee for securities issued by Fannie and Freddie is important, but the two corporate entities themselves are irrelevant to the future of housing finance. As any bond investor will confirm, the only reason that the securities issued by Fannie and Freddie have “AAA” ratings is because of the backing of the United States. Whether or not these two GSEs have “capital” is completely irrelevant to investors.

By focusing policy-making on FHA, Congress can encourage the growth of a private secondary mortgage market while still protecting affordable housing and credit risk, the blog states.

From the blog:

Eliminating Fannie and Freddie and consolidating housing finance functions into fewer existing GSEs would, more fundamentally, simplify what has been overly complex system. Part of the reason that a private market for housing finance has not come back since the financial crisis a decade ago is that there are too many GSEs competing for market share. A number of experts have embraced the idea of a single market for government-guaranteed MBS.

However, it must be noted that government-backed mortgage securities is not the only benefit the GSEs bring to the housing market.

In HousingWire Magazine’s July edition, our own Sarah Wheeler wrote the cover story on the many innovations Fannie Mae implemented in the past couple years.

“In the last two years, the company has implemented a user experience strategy, adopted design thinking and accelerated time to market for an innovative array of products,” the article states, referring to Fannie Mae’s many advancements.

Of course, Freddie Mac also brought its own number of new innovations to the market, increasing the ease and efficiency of mortgage lending.

And while the wording “failed housing agencies” may have been a correct description following the crash of the housing market, it hardly pictures the two thriving agencies driving the market today.

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