The American Bankers Association (ABA) sent a letter to Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan sharing its latest recommendations for the future of Government Sponsored Enterprises. With the Obama Administration due to release their recommendations on GSE reform later this week, the ABA felt it necessary to express their opinions on the steps that government should take in reshaping the housing finance market.
The letter calls for a housing finance market that fosters and encourages a private market with a government role that is limited to ensuring stability and accessibility in the event of market failure. A well-regulated private market should be able to accommodate the bulk of borrowers seeking financing, with the government likely would need to maintain involvement in affordable rental housing and first-time buyer programs.
Even though the ABA supports a restructuring of the GSEs, they also warn that the government needs to continue the federal guarantee of existing GSE debt to maintain stability during the transition period. As government looks at different options, the ABA recommends that the employment of multiple mechanisms are considered including creation of successor GSE entity or entities, creation of a covered bond market and enhancements to the Federal Home Loan Banks to allow them to meet and capitalize their mission of providing liquidity to private market portfolio lenders.
Reaching the goal of reducing government can be achieved through three key mechanisms according to the ABA. First, would be to increase guarantee fees which would help offset losses of the government guarantees while also providing the private market pricing space to compete for with the GSEs for business. Second, would be to reduce the current maximum loan limits of $417,000 overall and $729,750 in high cost areas. Lastly, the GSEs could be instrumental in ensuring that uniform underwriting standards are followed by all market participants.
The end goal of the ABA's recommendations is to foster a housing finance market where less than half of the mortgage finance occurs without federal secondary market guarantees. The vision suggests that the mix could eventually be 10% of direct government guarantees such as FHA and VA, 30% having implicit or explicit government guarantees and the remaining 60% without any form of government guarantees.
Acknowledging that because the bulk of available financing comes from the GSEs and the FHA, the government must be vigilant in navigating the road ahead. "It is therefore imperative that reform must be cautious so as not to inflict further harm on an already fragile housing economy," the letter concluded, "but reform must be deliberate, as the current situation of full federal support is not viable for the long term."