Since the collapse of the housing market and the 2008 government takeover of Fannie Mae and Freddie Mac, Congress has done nothing to address the future of the two failed housing finance giants. But that could change Tuesday, when the Senate Banking Committee will consider a new proposal for housing finance reform recently released by the Bipartisan Policy Center.
You would think that getting the U.S. housing finance system right would be a critical priority for Washington lawmakers. After all, the housing market by some estimates constitutes a fifth of our national economy. Right now, Fannie and Freddie back about two thirds of all mortgages in the U.S and manage roughly $5 trillion of mortgage debt. But for close to five years, these secondary market companies have languished in conservatorship, while the national attention has been focused elsewhere.
There are likely multiple causes for the inaction. To begin with, Fannie and Freddie are a political hot potato, in part due to a barrage of misinformation about their roles in the foreclosure crisis. What's more, as the housing market recovers, Fannie and Freddie are no longer drawing money from the Treasury, but are returning money to it. And Congress has discovered that raising the guarantee fee charged by the companies is a handy piggybank to dip into when needing to pay for the costs of unrelated legislation such as the payroll tax cut.
Also constraining quick action on reform is the fact that Fannie and Freddie are complex financial institutions, and reengineering the housing finance system of the future is no small feat. Add to that the political posturing by the nation's largest financial firms due to the tens of billions of dollars of potential annual earnings at stake, and it is clear why deciding the fate of Fannie and Freddie may be as difficult for Congress as is reaching a deal to avoid the sequester.
Nevertheless, the Senate hearing comes at a time when we can see a bipartisan consensus on a way forward for the secondary mortgage market. The Bipartisan Policy Center's housing recommendations reflect broad agreement that the 30-year, fixed-rate mortgage is the gold standard for a safe and sustainable mortgage market. The report also found consensus around the critical need for a reformed multifamily finance system to meet the demand for affordable rentals, and the need for the system to provide access to safe and affordable mortgages for all creditworthy borrowers, including those of low and moderate income.
Perhaps most important, the bipartisan plan recognizes the need for the government to retain a guarantor role in the core GSE-supported portion of the market. At this point, the Bipartisan Policy Center's reform plan is one of 19 proposals that call for some explicit government support for the segment of the market traditionally served by the GSEs, while only a few outlier plans propose no government role beyond the Federal Housing Administration.
In the absence of Congressional action on reform, the Federal Housing Finance Agency, the agency charged with managing Fannie and Freddie while they remain in government conservatorship, is essentially revamping the system on its own. For example, just last week, FHFA Acting Director Edward DeMarco put forward a plan to create a brand-new corporation to merge the securitization operations of Fannie and Freddie.
While this plan makes sense from a purely logistical perspective, it is simply inappropriate that a step this significant for the future of the housing market would move forward without any congressional hearings, public discussions or external input of any kind. As David Stevens, the president of the Mortgage Bankers Association, states, "Proposals of this magnitude need a transparent process to engage with stakeholders, articulate objectives and alternatives, and demonstrate that stakeholder concerns have been evaluated and addressed."
