Housing finance system needs updates, not overhaul

Housing finance reform will get its first major Capitol Hill close-up in years Thursday as the Senate Banking Committee resumes its discussion over what to do with Fannie Mae and Freddie Mac. With lawmakers bracing for a major policy undertaking, they can take comfort that they don’t need to start from scratch. The nation’s housing finance system is a fixer-upper — not a complete gut job.

In the first of what is expected to be many hearings on the government-sponsored enterprises, the panel will restart the congressional debate that has been largely dormant since the committee passed the Housing Finance Reform and Taxpayer Protection Act in 2014. Reforming the GSEs is one of the most contentious issues in Washington and cuts across party lines. At stake is the health of a housing market that accounts for more than 20% of the U.S. gross domestic product.

The two central entities at the heart of the market — Fannie and Freddie — support a global market for mortgage-backed securities that exceeds $5 trillion. As a result, policymakers must proceed cautiously. Any disruption or loss of investor confidence could send mortgage interest rates quickly rising, drying up liquidity and making it difficult for Americans to buy, sell or refinance their homes.

Andrew Harrer

Still, policymakers are under pressure to do something about a system now dominated by the federal government and vulnerable to future market failures. Fannie and Freddie are entering their ninth year of federal conservatorship, a period during which they have returned more than $265 billion to the U.S. Treasury — nearly $80 billion more than they received in federal assistance during the Great Recession.

But a more pressing concern than their long-term future is their current financial position. While Fannie and Freddie have returned to profitability, worked through most of their defaulted loans and continued to provide housing-market liquidity under conservatorship, they will end 2017 without a dime in capital unless changes are made to their agreements with Treasury and the Federal Housing Finance Agency. Their continuing to sweep their earnings to the federal government — something no other entity that received federal assistance during the recession was forced to do — puts taxpayers at risk of a draw by one or both GSEs on their $258 billion line from the Treasury.

FHFA Director Mel Watt has repeatedly said, most recently in congressional testimony, that he cannot risk the consequences of such a draw, which would lead to major market disruptions and a loss of confidence in the system. As the GSEs’ safety and soundness regulator, the FHFA would do everything in its power to prevent such an occurrence, he said.

To avoid these and other risks, the Senate Banking Committee and Chairman Mike Crapo, R-Idaho, is right to take up the daunting policy question of what to do about the GSEs. As lawmakers begin to tackle this complex issue, they are charged with protecting taxpayers and maintaining a strong liquid secondary market that can be accessed directly by lenders of all sizes and charter types. But at the same time, they must avoid doing harm to a system that works well and continued to operate during the worst recession in 80 years. Most important, policymakers must avoid consolidating the system into the hands of the largest financial institutions to the detriment of community banks and their borrowers, which represent roughly 20% of the market.

To fully preserve robust community bank lending and promote continuity in the secondary market, Congress should:

• Allow Fannie and Freddie to rebuild their capital buffers to prevent market disruption and protect taxpayers from a bailout.
• Refuse to sell off the GSEs’ assets and technology platforms to the Wall Street institutions or merge them into a single entity, which would limit market choice and stifle innovation.
• Provide equal access to the secondary market on a single-loan basis, so smaller lenders don’t have to sell loans through their megabank competitors and can service loans to preserve customer relationships.
• Preserve the “to be announced” market, which allows lenders to offer interest rate locks while hedging risk.
• Ensure an explicit, paid-for government guarantee of GSE mortgage-backed securities and strong oversight from a single regulator.
• Uphold the rights of current GSE shareholders to ensure the system has continued access to equity capital.

The housing finance GSEs support a massive marketplace and have provided a consistent source of funding for mortgage lending for 80 years. Congress can promote a stable housing market that continues to support the American dream of homeownership not by demolishing these institutions, but by renovating and strengthening the finance system we already have.