July 8: Repent and reform! A collection of current thoughts on changing Fannie & Freddie – maybe next year?

“You can’t swing a dead cat around the room without hitting someone who is talking about ‘disrupting’ or ‘reforming’ something to do with lending.” When I mentioned that to my cat Myrtle this week, you can imagine the reaction. But the truth is exactly that. It seems everyone has a comment on either housing reform or GSE (Government Sponsored Enterprises, namely Freddie Mac and Fannie Mae) reform. New day, new GSE reform proposal.

And you can guess where this subject is on the Congressional priority list, compared to immigration (reform), tax (reform), health care (reform), medical litigation (reform), criminal justice (reform), welfare (reform), election (reform)… my fingers are weary from typing this. Proponents have hope. Critics will tell you Congress can’t agree on anything, and GSE reform is so far down the list the most we can do is talk about it. And those poor employees of Fannie and Freddie: No matter what anyone says, none of their personnel can conjecture on their future. (Try it some time. Ask someone from Fannie or Freddie where they see the Agencies in 6 months, or 6 years!)

But originators should at least know that there is talk at the higher echelons about doing something about Freddie and Fannie. After all, they weren’t built to be strictly run by the government, and backed entirely by the taxpayer. Both have been very profitable for several years, lessening the urgency for Congress to do something about them. Mortgage loan originators should know that no one wants to stop the ability for someone who qualifies to borrow money to buy a home – good news for your borrowers. And even if a GSE plan magically appeared and was approved by Congress and President Trump, it would take many, many years to implement. So, borrowers are safe.

To remind you, Fannie and Freddie are now in the ninth year of a government-run conservatorship that was supposed to be temporary. With the infusion of $187 billion of temporary capital from taxpayers during the 2008-9 financial crisis, the GSEs were stabilized and returned to profitability. With an amendment to the terms of the conservatorship in 2012 that is commonly referred to as the Net Worth Sweep, however, Fannie and Freddie have been required to send their respective earnings and accumulated capital reserves to Treasury each quarter. These dividend payments now exceed an impressive $265 billion but have left Fannie and Freddie with zero reserves against future losses.

Nine years after the government takeovers, there’s again talk of reforming Fannie and Freddie; good luck! Builders, Realtors, bankers, and investors want a strong government guarantee to backstop the $10 trillion mortgage market and keep the popular 30-year fixed rate mortgage. Democrats want money for affordable housing to be part of any fix, and Republicans want neither. Moreover, with healthcare, taxes and trade on the agenda, time is very limited – they’re already yapping about the 2018 elections.

The House Financial Services Committee may take up housing-finance reform after Congress returns from its August recess, according to a key GOP member of the panel. But Rep. Blaine Luetkemeyer, R-MO, who chairs the subcommittee on financial services and consumer credit, told a recent meeting of the Financial Services Roundtable that he doesn’t expect any real movement on housing reform this year.

“I wouldn’t expect anything to happen until next year because this is a very difficult issue and very controversial. There are a lot of different ideas out there,” he said. “We need to make sure that we get everything vetted on this because this has got to be done right, otherwise you’ll screw up the markets, you’ll hurt people’s ability to have access to credit and you hurt the lenders’ ability to help customers and take care of communities.”

The Senate banking committee is poised to hear testimony as lawmakers prepare to address the government’s conservatorship of Fannie Mae and Freddie Mac. While Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., have been working on a bipartisan solution, logistical and political obstacles remain.

The Fed’s Powell says that the current US housing finance system is “unsustainable.”  The US housing finance system continues to put taxpayers at risk in a market dominated by government-backed agencies, Federal Reserve Governor Jerome Powell said this week, calling for further reform of an “unsustainable” situation.

Last month a story in American Banker observed, “One of the chief considerations in reforming the government-sponsored enterprises Fannie Mae and Freddie Mac is the need for capital. If the GSEs exist, they must have adequate capital so taxpayers will never again be compelled to help them meet their financial obligations. If the GSEs were shut down, there would have to be adequate pools of private-sector capital to ensure continued stability and liquidity in the mortgage market.

“The latest entrant in the GSE reform debate addresses these issues and deserves serious consideration by policymakers. “Blueprint for Restoring Safety and Soundness to the GSEs” (created by Moelis & Co.) lays out what some say is a feasible way to raise upward of $180 billion and establish strong regulatory standards so that Fannie and Freddie will never again require a taxpayer-funded bailout.

The Blueprint accepts the reality that large banks, mortgage insurers and other sources of capital cannot replace Fannie and Freddie. Accordingly, rather than try to create a new, elaborate and untested secondary mortgage market architecture, the proposal envisions using the current de-risked, slimmed-down and better-regulated GSEs with strong capital reserves appropriate for the post-financial-crisis era.

“The Blueprint envisions the U.S. Treasury retaining these receipts and then raising an additional $75 to $100 billion through the Treasury’s exercise of the warrants it holds for 79.9% of common stock of Fannie and Freddie. There is strong precedent for this based on how Treasury dealt with AIG and Ally Financial. With retained earnings, financial support from existing shareholders and sales of new stock into the markets, the Blueprint lays out a realistic path to raise up to $180 billion in core capital to support Fannie and Freddie going forward and to scale back the government’s support.

“The Blueprint also includes a three-pronged approach to establish minimum capital requirements that are approximately four times the GSEs’ pre-crisis requirements and are consistent with rules under which other large financial institutions operate because of post-crisis law and regulation. The Blueprint also applies the single most important lesson of the financial crisis: All financial institutions need capital and systemically important ones need even more capital, so taxpayers are protected from bailouts.”

American Banker notes, “To date, many private-sector stakeholders and members of Congress have been resistant to this lesson in the context of Fannie and Freddie. The GSEs’ capital is down to fumes and another draw on public funds could happen in any upcoming fiscal quarter. Nonetheless, Sen. Bob Corker, R-Tenn., who has for years spearheaded efforts to eliminate Fannie and Freddie and replace them with a new housing finance vehicle, dared the GSEs’ conservator, Federal Housing Finance Agency Director Mel Watt, to announce he was going to draw $10 billion on the GSEs’ credit line at Treasury just see how markets would react. Using taxpayer resources and threatening mortgage availability to prove a rhetorical point would be terribly misguided.

“Now that Fannie and Freddie have accelerated the payback to the Treasury of the initial $187 billion and added an additional $80 billion to government coffers, we can build substantial amounts of first-loss private capital, mostly though current GSE shareholders. The Blueprint lays out concrete steps to accomplish this. The plan envisions an explicit government backstop remaining only for truly catastrophic circumstances. But the level of that backstop could be wound down with strong capital reserves, credit risk sharing, more responsible lending practices, and other reforms the FHFA has implemented in recent years. The government would step out of its oversize, everyday role in the mortgage market for good.

“One final feature of this Blueprint is that it can be implemented by the FHFA and Treasury in just four years using existing statutory authority. While Congress has a vital role in developing broader changes to housing finance and regulatory policy, this Blueprint requires no new legislation.”

So after nine long years of Fannie and Freddie twisting slowly in the wind, is it possible that a simple solution, which is easy to understand and implement, is finally at hand? Probably not. One recent plan tells us that senators are considering breaking Fannie & Freddie into pieces.  The proposal by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner would attempt to foster competition in the secondary mortgage market, where loans are packaged into bonds and sold off to investors, said the people.

So we find the government is looking to tackle GSE reform again, Johnson – Crapo from 2014 was simply too complicated, and affordable housing types were against it as well. Sen Mike Warner said: “We have consensus on the importance of the 30-year loan, we have consensus that there needs to be more capital on the front end so in the event of a catastrophic event where the government guarantee kicks in, you’ll have private capital at risk. We’re also thinking of using Ginnie Mae as the wrap. And we’re trying to maintain an active TBA market so there is liquidity and the ability of borrowers to lock in their mortgage rates.” Warner went on to say that GSE reform could happen before financial reform as there is more bipartisan consensus on that.

The lobbying group for most of the private mortgage insurers weighed in. “USMI firmly believes that reform is necessary to put our housing finance system on a more sustainable path so that creditworthy borrowers will have access to prudent and affordable mortgage credit in the future and so that taxpayers are better shielded from housing related credit risks.  For more than 60 years, private mortgage insurance (MI) has played a critical role in providing access to mortgage credit and protecting taxpayers. The 115th Congress and the Trump Administration have a unique opportunity to address this last unfinished reform to truly put America’s housing finance system on a sustainable path. Recently, there have been a number of reform proposals from think tanks, trade associations, and others—each articulating a specific set of principles or visions for the structure of the new future housing finance system, and elements of the transition to a future state.
“This paper, Assessing Proposals to Reform America’s Housing Finance System, seeks to analyze various proposals through the lens of USMI’s housing finance reform principles, with particular attention to the role of private capital to protect against taxpayer risk exposure in the proposed future systems. Several thoughtful legislative proposals for housing finance reform exist, but this paper is restricted to analysis of several of the white papers and reform proposals put forward by think tanks and trade associations. Simply returning to the pre-conservatorship status quo does nothing to strengthen the housing finance system, and USMI looks forward to working with industry and consumer groups, Congress, and the Administration to identify the best reforms to put America’s housing finance system on a sustainable path.  

How about the group that oversees Freddie & Fannie? Federal Housing Finance Agency Director Mel Watt said he will not allow the housing finance enterprises to draw on a line of credit, setting up a showdown with Treasury Secretary Steven Mnuchin as comprehensive reform efforts remain moribund. In May news broke that Treasury Secretary Steven Mnuchin expects Fannie Mae and Freddie Mac to continue making dividend payments to the Treasury Department despite comments from Federal Housing Finance Agency Director Mel Watt that he may suspend them to allow the housing giants to retain enough capital to operate safely. The firm’s zero-capital targets were intended to force Congress to act on housing reform.

A consensus is forming around FNMA/FMCC reform as Mnuchin appeared to endorse the idea of an explicit government backstop for the mortgage market. The WSJ outlined the plan.

The Mortgage Bankers Association discussed what to do with the GSEs. The current situation is untenable, it states, as the GSE’s capital buffer will be gone by the end of the year. The recap and release option without any sort of reform is no solution either. The MBA fears that a more conservative (i.e. someone who wants a smaller Federal role in the mortgage market) FHFA director could be nominated when Mel Watt’s term expires in 2018.

And so nearly a decade after the financial crisis, the housing finance system remains largely structurally unreformed. There have been, with more on the way, several legislative pushes for comprehensive reform after American taxpayers provided $187 billion in bailout assistance to Fannie Mae and Freddie Mac and since both GSEs were placed into conservatorship in 2008, though all comprehensive reform efforts to date have failed to be enacted. I am sure it will be an issue for years to come.

Knock, knock.

Who’s there?


Adore who?

Adore is between us. Open up!

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Does Everyone Want a Job?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman