By John Battaglia and William RoehrenbeckIn a speech last summer, then-Federal Reserve Governor (and now Chairman) Jerome Powell said that the next few years may be the “last best chance” to perform a critical overhaul of the nation’s housing finance system, including the government sponsored enterprises Fannie Mae and Freddie Mac.
There’s been talk in Congress that 2018 may be the year.
As 2017 drew to a close, Senate Banking Committee Chairman Mike Crapo (R-Idaho) expressed optimism that GSE reform could move before the midterm elections this year. And recently, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) announced that he will press for a GSE reform effort that includes a continued role for the federal government providing a limited, fully priced guarantee.
The GSEs entered federal conservatorship at the height of the financial crisis in 2008. While that was the necessary step to take at a time when our economy was deeply troubled and American homeowners were struggling, conditions on the ground are very different today. We’re going on nine consecutive years of economic growth and are nearing full employment. Our banking system is stronger and better capitalized than ever before. That’s why the time is now for Congress to make much-needed changes to ensure the continued viability of the housing industry. Nine years of conservatorship is more than enough.
GSE reform doesn’t need to be extreme—but it has to be comprehensive. Smart, deliberative reform should ensure that there is adequate, targeted liquidity in the housing market and that banks of all sizes and in all communities can continue to access the secondary market, so that they in turn can meet the mortgage needs of their customers.
Fannie and Freddie currently play an important role in the housing market. Critically, they undergird the 30-year fixed-rate mortgage that Americans have come to value and rely on, and it is important that they or their successors continue to do so in the future.
Any plan to reform the GSEs should allow them to continue supporting primary market activities, though they must do so strictly within the confines of their secondary market roles. Access to the secondary market through the GSEs should be available to all segments of the primary market, and must include the preservation of the “to be announced” market and maintain the “cash window” which allows loans to be sold on an individual basis, as well as the flexibility for lenders to sell loans and servicing right to the GSEs, or sell loans and retain the servicing. Affordable housing goals undertaken by the GSEs should also be delivered through and driven by the primary market, and must be coordinated with CRA and other requirements already imposed on banks.
Strong regulation of the GSEs will be critical to ensure that they remain within their defined roles and are serving the primary market equitably. The regulatory framework around Fannie and Freddie (or their successors) should include the establishment of sound, fair underwriting standards based on and consistent with those required in the primary market.
To help mitigate taxpayer risk, the GSEs must be adequately capitalized to ensure that they can withstand downturns in the market. Credit risk transfer programs that have been introduced over the years should be continued and expanded—and they must ensure that credit risk is truly transferred in a permanent fashion. GSE reform must also take into account the role of the Federal Home Loan Banks, and take care not to harm the traditional advance businesses of the FHLBs or access to advances by their members.
Importantly, mortgage backed securities issued by the GSEs or their successors should carry an explicit, fully priced and fully transparent guarantee from the federal government. However, steps must be taken to ensure that taxpayers are buffered against losses through credit risk transfers and private capital obligations, with taxpayers compensated for the remaining risks they bear in providing that guarantee. Fees necessary to support the guarantee must be equitably and transparently charged, so that they reflect the true cost of the guarantee—and only that cost.
Without legislative action, we run the risk of repeating the mistakes of the past, or worse, facing new ones that could put both the mortgage markets and American taxpayers at risk. If this is indeed our “last best chance” to retool the housing finance system in the U.S., we must ensure that the result of Congress’ effort is a secondary market that is strong, liquid and standing at the ready to support America’s banks as they work to make homeownership possible for their customers.
John Battaglia is SVP of mortgage operations at The Cooperative Bank in Roslindale, Mass., and chairman of ABA’s Mortgage Markets and Lending Technology Committee. William Roehrenbeck is SVP and managing director, MSR acquisitions, at PNC Bank and chairman of ABA’s GSE Policy Committee.