As momentum builds behind legislation to overhaul Fannie Mae and Freddie Mac, you have to wonder if Congress has learned nothing from the Dodd-Frank Act or the Affordable Care Act.

Both sprawling laws prove the adage that more is not always better.

So perhaps it's time to engage in some counterintuitive thinking about reform of the government-sponsored enterprises.

Maybe we don't need comprehensive legislation reaching into every corner of housing finance. Maybe an incremental, see-what-works approach would be more effective.

(To see more posts from Barb Rehm's Blog, click here.)

I'm not arguing against legislation -- it's definitely needed. Government-run conservatorships are not long-term solutions.

But perhaps this time it would make more sense to dip a toe into reform rather than drown the market with unpredictable changes.

And let's not forget that progress is being made

After stabilizing Fannie and Freddie and making sure the secondary mortgage market continues to function, the Federal Housing Finance Agency set about laying a foundation for the future.

The agency is aligning operations of the two enterprises, most notably by building a single securitization platform that both companies will use. It's also forcing Fannie and Freddie to shrink their portfolios and trying to entice the private sector to take over some of the market by raising the GSEs' guarantee fees.

But the time is coming for the FHFA to make bigger decisions – decisions that will curtail lawmakers' options.
In an Oct. 24 speech, the FHFA's acting director, Ed DeMarco, made that clear: "[A]s the length of the conservatorships increase, that task [of leaving options open] becomes more difficult, and FHFA will have to make decisions on future operations."

DeMarco noted the FHFA "will soon establish multiyear targets for Fannie Mae and Freddie Mac to further achieve the three strategic goals of building for the future, contracting the footprint, and maintaining market liquidity and borrower assistance." He promised to "build upon the accomplishments of the past two years while accelerating progress towards achieving each strategic goal."

(Of course the FHFA's future is in doubt, too, as the Senate prepares to vote on DeMarco's successor, Rep. Mel Watt, D-N.C. DeMarco is a career government official who has run FHFA since August 2009.)

In his speech, DeMarco made it clear FHFA will continue to raise guarantee fees and will reduce the size of loan that the GSEs may buy. (An announcement on conforming loan limits is expected in late November but won't take effect until late Spring.)

DeMarco didn't say it, but pressure is building not only to merge the platforms but to merge the enterprises' securities. Freddie's debt has long been viewed as inferior to Fannie's and the gap is widening.

So Congress ought to take over from FHFA and build on its progress. Lawmakers could tackle some near-term goals without necessarily deciding on the big endgame question of how large a role the government should play in housing finance.

Everyone agrees we need to get more private-sector capital in front of the government's guarantee and that's happening with some risk-sharing deals both Fannie and Freddie have made.

But we could improve on that by forcing the risk-sharing on the front end, by requiring lenders to eat the first X percent of loss. That's in the Corker-Warner bill and endorsed by the Mortgage Bankers Association. 

Lenders could buy insurance against possible losses on the loans they sell to the GSEs or do some sort of structured finance product that moves that risk away from the government and into the hands of private investors.

Taking a go-slow approach would ensure that the parts of the mortgage market that work – for instance, the liquidity provided by securitization – wouldn't be disrupted by the uncertainty that comes with big, new complex laws.

Ultimate decisions like whether to keep some form of Fannie and Freddie or eliminate them as Republican Rep. Jeb Hensarling's bill would do could be put off while some basic market reforms are put in place.

"You don't have to tell Hensarling he's wrong, you just have to tell Hensarling, 'not now,' " is how one veteran of GSE reform put it. "There is a lot of agreement about what should happen first. The disagreements get more pronounced the more definitive you are about the destination."

Congress should act before urgency gives way to complacency; some folks have already decided GSE reform either won't happen or isn't necessary.

A source who has been at this since the early 1980s dismissed my questions about GSE reform, arguing Congress won't pass any legislation now that Fannie and Freddie are making money again. Since the GSEs turn over their profits to the government, lawmakers won't want to stop that gravy train, especially in these deficit-obsessed times.

But that's shortsighted.

The GSEs don't have any capital and they don't have any way to build it. Fannie and Freddie are stuck in time and policymakers must continue to transition the mortgage market back into private hands.

The incremental approach is working. So let's take some more fingers out of the dike, not open the floodgates.