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Congress Should Move to Reform Fannie and Freddie

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William C. Dudley, president of the Federal Reserve Bank of New York, in a recent speech to the National Association for Business Economics, identified five factors that have hampered the economic recovery in the U. S.:  monetary policy; global economic problems, particularly in Europe; the aging of the American population; the shortcomings of fiscal policymakers and the overhang of mortgage debt.

While coverage of Dudley's speech centered on his courage in arguing that the Fed should have done more in the early days of the crisis, what struck me about his list is that only two factors are really within Congress's control: the overhang of mortgage debt and the shortcomings of fiscal policymakers. 

Economists estimate that housing comprises a quarter of the entire economy. Twenty-three percent of the nation's mortgaged homes (around 10.7 million properties) are underwater for more than their current market value, according to Core Logic data. Late stage delinquencies total an additional two million properties and 3.6 million more units are at "immediate serious risk."

Meanwhile of the fifty-five million outstanding mortgages in America, another ten million are likely to default, according to Amherst Securities. And, because of tightening of underwriting standards, the Mortgage Bankers Association estimates that 20% of all current homeowners would no longer qualify for the mortgages they have now.

While hindsight is always 20/20, we in Congress can and should work to reform Fannie and Freddie. 

While there have been some small bills that nibbled around the edges of GSE reform, none of these made it out of the House Financial Services Committee, and Republicans in the Senate have flat out refused to act on reform for the past two years. 

October marks the fifth year of Fannie and Freddie being placed under conservatorship. They are out of intensive care, but they, along with the Federal Housing Administration, now control over 95% of the mortgage finance market. Prior to 2008, they controlled just over half. 

If we can hasten the re-entry of private capital to the mortgage finance market, we will stabilize prices, help put a real floor in place in the housing market, help increase demand and put the sector on the path to growth. And a healthier, more robust market for new and existing homes will ripple throughout the economy.  

A realistic fix has to focus on establishing the rules and utilizing the real-world data. It also involves elements that are market-driven, regulatory-driven and legislatively-driven. 

Congress must:

  1. Clarify recourse risk for originators and underwriters, make servicing standards and guidelines visible to all – servicers, borrowers, and investors – and then enforce those responsibilities. No one wants to play unless they know the rules. And these rules are critical for a functioning housing market. The good news is that the Consumer Financial Protection Bureau is already working on mortgage servicing standards designed to address structural deficiencies that existed in the lead up to the financial crisis. 
  2. Help realign supply and demand in the housing market. Regardless of the recent optimistic housing reports, the supply of single-family homes still dramatically exceeds the demand. The glut of houses could reach 6.2 million over the next six years, which would continue to put severe limits on new housing starts. 
  3. Assist existing homeowners. There are millions of homeowners who would like to refinance and take advantage of historically low interest rates, but they don't qualify under the current GSE underwriting standards. In order to accommodate them, we need smart private capital to come back into the market with risk-based pricing. This will require diligent underwriting oversight, so that investors are confident of what they are buying. A broad rent-to-own program would help to contain foreclosures (and the community blight that often follows) and also enable consumers to rebuild their credit over a few years – and perhaps become homeowners once again.

We cannot expect to climb of out this economic hole if we ignore 25% of the problem.

Troubled properties are an anchor on the entire economy, above and beyond their destabilizing effect on the housing market itself. They weigh heavily on jobs and investments as well. I know this won't be easy. But if we are going to move this country forward, we need to put partisanship aside and make GSE reform a top priority in the 113th Congress.

Carolyn B. Maloney represents New York's 14th Congressional District. She is a senior member of the House Financial Services Committee and Ranking Member of its Subcommittee on Financial Institutions and Consumer Credit.

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Comments (3)
How can congress eliminate the excess supply of housing following the 11 year Fed-fueled and GSE assisted housing boom? Prior to Dodd-Frank and the CFPB, we didn't have uncertainty for recourse risk! Smart private capital won't try to compete with the GSE dominated mortgage market. The massive efforts to date have postponed the housing market adjustment, which still poses a serious threat to the financial system.
Posted by kvillani | Friday, November 02 2012 at 12:19PM ET
I testified before Barney Frank's committee several years ago at a pre-crisis hearing about hedge funds (ironically, Barney was looking into whether hedge funds would cause a crisis, which they did not--it was the banking system he was supposed to be legislating for). It was a real eye-opener into why Congress is so disfunctional: although some committee members stayed and asked good questions and wanted real answers, most of the others used their 3 minute "question" to bloviate about Wall Street, ask a rhetorical question, look serious for the cameras and then leave. Maloney was head-and-shoulders the worst publicity hound at that hearing, with the least interest in getting real feedback, and it was clear from her question that she wouldn't know a hedge fund from a tomato. It is amusing to read "her" column here, given that she probably wouldn't be able to explain how all her suggestions would actually work. My only wonder is that the editors of this fine paper thought it worth posting.
Posted by jazzimundo | Friday, November 02 2012 at 1:03PM ET
Rescind Dodd Frank and get the govt out of the mortgage business. Radical yes... but not as radical as the trillions in undesirable bonds the GSEs are creating and the Fed is buying. Govt subsidized subprime got us into this mess... private subprime will get us out. Banks aren't lending to residential loans (unless they can pass off to GSE) because of uncertainty in underwriting (e.g., "ability to repay") an enormous amount of consumer protection and the inability to charge for the added layers of risk. The obligation of a bank to underwrite a borrowers ability to repay is saddling banks with liability for borrower income fraud. Good job Dodd-Frank ... the consumer is now completely out of harms way... no more loans.
Posted by helvetica1 | Friday, November 02 2012 at 4:43PM ET
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