GSE Financials Show Why We Need Reform

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This week, Freddie Mac announced a quarterly loss of $475 million and Fannie Mae reported a profit of $2 billion. Both companies’ reports fell well short of last year’s numbers, giving opportunity for some to make statements about the risk these two companies create for taxpayers while others asked publicly if the time to recapitalize and release the GSEs from conservatorship has finally arrived. In my view we need to both recognize the risk of remaining in the current state with no capital and an uncertain future but recognize that the call for recapitalization and release is neither politically feasible nor financially-wise.

It has long been my position, and of MBA, that reforming the GSEs is an urgent priority for the future sake of the nation’s housing finance system. As I said in The Wall Street Journal this week, individual consumers and the housing finance system in general could face disruption if reform does not happen. Allowing recapitalization without legislation to structurally reform the GSEs would not address the core concerns from investors and taxpayers.

Proponents of recap and release are ignoring the stated opposition to these concepts from both The White House and the Treasury Department.  Importantly, the Treasury Department is a party to the existing PSPA contract agreement, and would have to agree to any path that ends the GSEs’ conservatorship. As recently as three weeks ago, Antonio Weiss, Senior Advisor to Treasury Secretary Jack Lew reiterated this position, saying that “Recap and release could raise the cost of mortgages for Americans, and potentially expose taxpayers to another painful bailout.”

The White House’s Senior Policy Adviser for Housing, Michael Stegman, also shared the Administration’s take last month at MBA’s 2015 Annual Convention when he reiterated emphatically that it does not support recap and release without extensive legislative reform:

“So, before talking about what we would like to see happen on GSE reform in this Congress, let me first say a word or two about what this Administration does not support. Recapitalizing the GSEs with taxpayer funds and administratively-or legislatively-releasing them from conservatorship with a business model that conflicts with their public mission- in essence turning back the clock to the run up to the crisis- would be both an exercise of bad policy judgment, and poor stewardship of the taxpayers’ interest; willfully recreating the very system that helped do this nation so much harm.”

The question really is, how do we avoid an overreaction to these earning scares, protect the critical role that Fannie Mae and Freddie Mac provide to our housing finance system, and resolve the long term concerns about the structure of the current entities themselves? Simply put, what could true reform that doesn’t disrupt the market look like?  MBA has advocated for specific principles of which any future state must include in order to function properly. They are:

  • Reducing the risk to the taxpayer by having the explicit guarantee back only the mortgage securities and not corporate entities.
  • Creating one single security to insure the greatest market liquidity.
  • Adopting a common securitization platform.
  • Deepening the level of responsible private capital taking first loss risk in transactions, but demand that this be accessible to all lenders large and small and be transparent to all participants in the market.
  • Ensuring a robust supply of affordable rental housing by maintaining the GSEs’ multifamily programs.
  • Finally, the industry and consumer advocates should work to develop clear policies regarding how the GSEs should meet affordable housing needs in a more efficient manner.

Clearly, the status quo is unsustainable. And MBA will continue to work with the Administration and Congress to find ways to improve the secondary mortgage market, including the future of the GSEs. But let’s be clear. Recapitalizing and releasing the GSEs without fundamental reform is, to put it simply, unrealistic.

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