Reform Before Recapitalization

In response to last week’s New York Times article on the GSEs, a number of housing finance experts have come forward to point out the many problems with the Times’ false narrative.

The Times column and other similar pieces contain a number of inaccuracies, regarding both the history and the future of the GSEs.  We speculate this narrative is being driven by those who stand to gain windfall profits from recapitalizing and releasing Fannie and Freddie from conservatorship.

A recent Wall Street Journal editorial sheds light on possible motives behind the false narrative: “The hedge funds claim they are committed to a long-term fight to see the companies recapitalized and set free, and have filed lawsuits to that effect. But they undoubtedly have also earned millions from the gyrations in Fannie and Freddie’s thinly traded shares as the penny-stock enthusiasts pile in.”

The Wall Street Journal editorial is a must-read.

MBA has long advocated for thoughtful GSE reform that will truly protect taxpayers and benefit small lenders and consumers. Simply put – recap and release without reform could re-open the door once again to preferred pricing and special deals for the largest lenders and leave the smallest lenders with a competitive disadvantage. So, let’s first focus on the reforms that will keep the playing field level before addressing the needs of the investors.

The New York Times published a subsequent op-ed this week from Mark Zandi and Jim Parrott further detailing the need to first engage in fundamental reform to prevent repeating mistakes of the past.

Effective GSE reform that protects taxpayers and the stability of the financial system would require several changes from the current state of GSE conservatorship. First, reduce the risk to the taxpayer by having the explicit guarantee back only the mortgage securities and not corporate entities. Second, encourage private capital in the secondary mortgage market which would take up front, first loss, risk in transactions, but demand that this be accessible to lenders regardless of size and transparent to all participants in the market. To ensure a robust supply of affordable rental housing, maintain the GSEs’ multifamily programs. Finally, the industry and consumer advocates should work together to develop clear policies regarding how the GSEs should meet affordable housing needs in a more efficient manner.

A rush to recap and release the GSEs without any meaningful reform does nothing to improve the stability of the housing finance system.