The inconvenient truth for GSE reform plans

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WASHINGTON — Congress once again appears interested in housing finance reform, but once again the political obstacles to upending the current system might be too difficult to avoid.

Senate Banking Committee Chairman Mike Crapo has scheduled two days of hearings later this month on the subject, following his release of a legislative outline last month that would turn Fannie Mae and Freddie Mac into private guarantors and position Ginnie Mae as a government backstop.

But despite bipartisan consensus that the status quo is unsustainable with Fannie and Freddie in federal control, lawmakers must still grapple with whether transitioning to a new system will make it any harder for consumers to own a home.

“It’s a politically risky proposition for lawmakers who see the risks of tinkering with the housing and mortgage markets and they don’t see the political benefit for doing so," said Brian Gardner, director of Washington research at KBW. "You have two markets that are a significant part of American life that seem to be operating relatively well.”

Crapo's outline swung attention back to Congress' role in reforming the government-sponsored enterprises after speculation that the Trump administration might try releasing Fannie and Freddie from conservatorship. Acting Federal Housing Finance Director Joseph Otting reportedly predicted an ambitious administration plan, but Mark Calabria — the pending nominee to run the FHFA for the long term — told senators he would defer to Congress' role.

Crapo's plan resembles other legislative proposals that envision Ginnie Mae as providing an explicit government guarantee for the mortgage market. Yet many Democrats have shied from supporting such ideas, raising concerns about the effect on Fannie and Freddie's affordable housing goals, among other things.

"The closer these proposals get to reality, the more of a focus there will be on how does this impact the average American," said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition. "When you look at the impact, it shows that the cost of mortgages will go up. Housing, certainly home ownership, will become less affordable."

Similar to debates about health care reform, Van Tol said policymakers may balk at a GSE plan that looks good on paper but risks hurting people who benefit from the current system.

"In the case of health care, many people accepted that we had the health care system we had," he said. Recent GSE reform proposals have focused on, " 'Let's completely change the system,' " but "I think the debate will begin to look at what we already have."

"Maybe some of the moderates will be focused around stability and protecting the taxpayer, and I think some of the progressives will look at how we put a dent in this affordable housing issue,” Van Tol said.

Some said Crapo's focus on GSE reform and the plan he proposed offer hope that lawmakers will get serious about reform.

“What Crapo has put out and the hearings that he is going to have are a great step. … I think you have a few really great champions and the chances of something happening are better than they have been for a while,” said Andy Winkler, a senior policy analyst for housing at the Bipartisan Policy Center. “It’s technically super difficult and there is so, so much at stake if it goes wrong.”

But as the two parties each move further away from the center, agreeing on a bipartisan consensus plan for reforming housing finance will get even harder.

"The problem is that the bipartisan middle is not strong or broad enough to overcome objections from those on both the right and left who are not on board with the consensus proposal," said Aaron Klein, economic studies fellow at the Brookings Institution. "As America itself and its representatives in Congress move further from the middle and more toward the ideological poles, the political prospects for legislative reform dim."

Compounding the obstacles to a reform plan is that the current housing finance system doesn't appear in trouble to the consumer on the street.

“I think that we are talking about trying to remake 15% of GDP in a politically contentious environment when the fundamentals of the system actually work,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “The dirty little secret is that the GSEs work.”

Ed Mills, a policy analyst with Raymond James, noted that Fannie and Freddie's conservatorships are not broadly known or understood.

“Potential homeowners are getting loans, the government is making money,” Mills said. “If you take a step back and didn’t realize they are in conservatorship, things are working out pretty well.”

Gardner said even many lawmakers may ultimately be comfortable with the status quo rather than a broad overhaul.

“What does it mean for the availability and the price of the 30-year mortgage? If those questions can’t be answered clearly and succinctly and ease lawmakers' anxiety about the downfall, then the default position is to do nothing, and that’s why we are here,” he said.

“You are dealing with a number of lawmakers who don’t remember Fannie and Freddie back in the old days. … All they see is a mortgage and housing finance system that seems to be working well. Their constituents are not complaining."

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