More than a decade ago, the U.S. economy saw its greatest fall since the Great Depression – and it came at the hands of the housing industry.
Its consequences were sweeping. Families lost their homes, parents lost their jobs and America lost its trust in the banking system.
In an attempt to soften the fall, former President George W. Bush signed an order to bail out mortgage giants Fannie Mae and Freddie Mac, creating the phrase “too big to fail.”
Originally, the U.S. Department of the Treasury bailed out Freddie Mac for $71.3 billion and Fannie Mae for $116.1 billion.
Since then, the government-sponsored enterprises have more than paid back their debts to American taxpayers. As of the fourth quarter of 2018, Freddie Mac has paid $116.5 billion back to the Treasury, and Fannie Mae paid made payments totaling $175.8 billion.
“More than 10 years ago, Fannie Mae and Freddie Mac both failed,” former head of the Federal Housing Finance Agency Ed DeMarco said in an interview with HousingWire. “Their losses exhausted their capital and then consumed roughly $190 billion in direct taxpayer support just to remain solvent. More than that, the GSE model embodied in their special charters failed.”
“Yet only Congress can change those charters,” DeMarco, who is now president of the Housing Policy Council, said. “Thus, it remains necessary for Congress to act. And it is urgent that Congress acts because further delay maintains the uncertainty and market distortions posed by the conservatorships and permits the systemic and taxpayer risk embedded in these two companies to continue growing.”
And it appears the administration might be listening.
Trump calls for reform
In March, President Donald Trump began officially calling for an end to the conservatorship of Fannie Mae and Freddie Mac.
A statement released by the White House said that Fannie Mae and Freddie Mac have grown in size and reach, yet face no competition from the private sector, and that the U.S. Department of Housing and Urban Development programs are exposed to too much risk while relying on outdated processes.
In the announcement, Trump called for reform that “promote[s] competition in the housing finance market and create[s] a system that encourages sustainable homeownership and protects taxpayers against bailouts.”
In a memorandum, Trump tasked HUD and the U.S. Department of the Treasury with drafting proposals for reform, with the Treasury detailing Fannie and Freddie plans while HUD lays out a plan for the housing finance agencies it oversees.
Specifically, Trump’s order will direct the “relevant agencies to develop a reform plan for the housing finance system.” The reforms will “aim to end the conservatorship of Fannie Mae and Freddie Mac and improve regulatory oversight over them.”
The White House also stressed that the administration will work with Congress to create a comprehensive plan for housing finance reform.
Absent concrete details for change, most groups in the housing space applauded the president’s move as an official step forward to instigating long-awaited change.
And, thus far, it appears they’re all ready to work together to make it happen.
Treasury Secretary Steven Mnuchin was among the first to respond.
“I look forward to working with FHFA, HUD, Congress and other stakeholders to address the need for housing finance reform as laid out by President Trump’s Presidential Memorandum,” Mnuchin said. “We support a system that provides for access to lending for hardworking Americans, while also protecting taxpayers from risk. An effective and efficient federal housing finance system will also meaningfully contribute to economic growth.”
Other members of the housing industry weighed in, full of hope, and willing to work with the administration on any needed reform. They quickly offered their insights, advice and willingness to help to the administration.
It’s not “GSE reform”
But reform of the government-sponsored enterprises already happened.
Or so says former Fannie Mae CEO Timothy Mayopoulos.
Mayopoulos served at the mortgage giant for more than 10 years before moving on to become the president at Blend, leading its go-to market and corporate support functions and serving on the board of directors.
In an interview with HousingWire, Mayopoulos explained that over the past 10 years, the GSEs had already seen reform. And indeed they did – opening access to credit, serving the underserved markets and much more. Now what is needed, Mayopoulos argued, is housing finance reform.
“Reform of the government-sponsored enterprises has already happened,” he said. “What people are really talking about is housing finance system reform. It is often frustrating to me that policy makers often don’t acknowledge that Fannie Mae and Freddie Mac are fundamentally different organizations today than they were 10 years ago, before the crisis.”
He explained that over the past 10 years, mortgage lenders have been very well served through changes from Fannie Mae and Freddie Mac.
Some of the accomplishments from the GSEs over the last 10 years include:
- Expanding access to credit
- Lowering systematic risk
- Standardizing pricing
- Distributing credit risk to provide capital
“There’s been a huge focus on innovation, really with both companies promoting digital lending, relying on data as opposed to paper,” Mayopoulos said. “And that’s promoted an immense amount of transparency across the system.”
He reminded us that GSE reform has already taken place – what’s needed now is housing finance reform.
“There’s been enormous GSE reform over the last 10 years,” he said. “What we’re really talking about is: Is there going to be housing finance system reform, either led by the administration or led by Congress.”