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[Pulse] Op-ed: The next steps for GSEs

Policymakers, handle this with care

Joseph Otting, the acting director of the Federal Housing Finance Agency, the regulator and conservator of Fannie Mae and Freddie Mac, has put the nation’s housing finance system on edge with comments suggesting that the administration is weeks away from releasing a plan to bring the two institutions out of conservatorship.

Coming without the normal engagement with stakeholders on the Hill, among consumer groups and in the industry, and against a backdrop of longstanding deference to Congress on the issue, the announcement caught most entirely off guard.

Shareholders in the two companies were elated at prospect of a windfall, and indeed shares in both shot up on the news, but others in the housing finance system were rattled by the injection of uncertainty into a market that is already showing signs of tightening.

The confusion is understandable. The administration has publicly called for moving to a multi-guarantor system with an explicit guarantee on securities issued through the channel, which would require legislation.

Yet rumors have long swirled that at least some in the administration favor instead releasing the duopoly administratively into something like the system we had prior to the crisis.

And then they have nominated someone to run the FHFA who has a long history of skepticism of both securitization and government support in the housing finance system, which would appear inconsistent with both of these paths.

So, if indeed they are weeks away from a plan, there is absolutely no way to know what it might entail, leaving stakeholders to project onto the future whatever their hopes and fears might lead them to.

It would be more perplexing than frustrating if it did not threaten to affect an increasingly fragile housing and mortgage market. Market participants are seeing their originations level off and their defaults inching upward, and watching anxiously as the risk of a trade war and rising rates threaten to create even stronger headwinds.

The notion that they might also see a sudden move toward a dramatic restructuring of the mortgage market, in a direction over which they have had no say and have no way to anticipate, will eventually push many into a defensive position, which is precisely what the market does not need right now.

The administration needs to clarify its position, and sooner rather than later. Do they still think Congress should chart a bipartisan path of reform, or will they chart their own course? Are they OK with a too-big-to-fail duopoly or see addressing that risk as central to any viable reform effort? What do they envision the role of government to be? Do they support cross-subsidy in order to expand access to homeownership or not?

While there are ranges of reasonable answers to all of these questions, leaving them unanswered is becoming increasingly untenable, particularly now that Acting Director Otting has signaled that they are close to moving forward on reform.

Signaling movement in the absence of any clear sense of direction comes at too high a cost for a market that shouldn’t have to bear it.

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