The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that the Treasury Department present a plan for reforming Fannie Mae and Freddie Mac by the end of January 2011. On February 11, 2011, Obama Administration released its proposal for restructuring the housing finance system: Reforming America's Housing Finance Market, A Report to Congress. The proposal offers three options for restructuring the secondary mortgage market:
- full privatization,
- a guarantee mechanism that would step up during times of crisis, and
- a privatized system with a federal catastrophic reinsurance if private capital proved to be insufficient.
The proposal also favors higher downpayments for GSE and FHA mortgages, lower GSE and FHA loan limits, and higher GSE guarantee fees (g-fees) and FHA premiums, which the Obama Administration believes are appropriate changes to give sufficient incentive for the private sector to resume making mortgages without FHA or GSE involvement.
NAR has serious concerns with the Administration proposals. Since the release of the Obama Administration's housing finance reform report, Congress has begun serious discussions regarding the future of the GSEs, as well as the need for overall reform of the U.S. housing finance system. As of August 4, 2011, the Senate Banking Committee and the House Financial Services Committee have held several hearings on housing finance reform, and 11 House bills and 1 Senate bill have introduced. However, with the exception of H.R. 940, the "U.S. Covered Bond Act of 2011, none of the introduced bills appears to be moving toward enactment because the housing industry, as well as, a majority of the Members of Congress are seeking a viable, comprehensive approach to housing finance reform that will ensure all qualified homebuyers have equal access to affordable mortgage capital.
Due to the focus on a comprehensive approach to housing finance reform, NAR and many housing industry experts believe that no substantive reform will be enacted prior to the 2012 elections.
Current Legislation/Regulation (bill number or regulation)
Since the release of the Obama Administration's housing finance reform report, Congress has begun serious discussions regarding the future of the GSEs, as well as the need for overall reform of the U.S. housing finance system. The Senate Banking Committee and the House Financial Services Committee have held several hearings on housing finance reform, and 22 House bills and 3 Senate bills have been introduced so far during the 112th Congress.
Tony Hutchinson, firstname.lastname@example.org, 202-383-1120
NAR supports restructuring the secondary mortgage market to ensure a reliable source of mortgage lending for consumers, in all types of markets, to avoid major disruption to the nation’s economy that would result from the total collapse of the mortgage market. Restructuring is necessary in response to the failure of Fannie Mae and Freddie Mac and the government conservatorship that began in September 2008.
- An efficient and adequately regulated secondary market is essential to providing affordable mortgages to consumers. The secondary market, where mortgages are securitized and/or combined into bonds, is an important and reliable source of capital for lenders and therefore for consumers. Without a secondary market, mortgage interest rates would be unnecessarily higher and unaffordable for many Americans. In addition, an inadequate secondary market would impede both recovery in housing and the overall economic recovery.
- We cannot have a restoration of the old GSEs with private profits and taxpayer loss system. The current GSEs (Fannie Mae and Freddie Mac) should be replaced with government-chartered, non-shareholder owned entities that are subject to sufficient regulations on product, revenue generation and usage, and retained portfolio practices in a way that ensures they can accomplish their mission and protect the taxpayer.
- Reforms should ensure a strong, efficient financing environment for homeownership and rental housing. This mission would include providing access to mortgage financing for consumers who have the demonstrated ability to sustain homeownership. Consumers need a steady flow of mortgage funding that, during economic downturns, only government backing can provide.
- The government must clearly, and explicitly, guarantee the issuances of the entities. Taxpayer risk would be mitigated through the use of mortgage insurance on loan products with a loan-to-value ratio higher than 80 percent, or through other fees paid to the government. This is essential to ensure borrowers have access to affordable mortgage credit. Without government backing, consumers will pay much higher mortgage rates and mortgages may at times not be readily available at all—as happened in jumbo and commercial real estate loans.
- The new entities should guarantee or insure a wide range of safe, reliable mortgage products. These mortgage products include 15-year and 30-year fixed rate loans, traditional adjustable-rate mortgages (ARMs), and other products that have stood the test of time and for which American homeowners have demonstrated a strong “ability to repay.”
- Sound and sensible underwriting standards must be established. For additional safety, sound and sensible underwriting standards must be established for loans purchased and securitized in mortgage-backed securities (MBSs), loans purchased for portfolio (to a limited extent), and MBS purchases.
- The entities should price loan products or guarantees based on risk. In addition, the new entities must set standards for the MBS they guarantee that establish transparency and verifiability for loans within the MBSs.
- The reformed entities must have a separate legal identity from the federal government but serve a public purpose. An example of this structure is the Export- Import Bank. Unlike a federal agency, the entities will have considerable political independence and be self-sustaining given the appropriate structure.
- The GSEs should remain politically independent. Political independence of the entities is mandatory for successful operation. CEOs should have fixed terms so they cannot be fired without cause, and they should not be allowed to lobby. Additionally, the entities should be self-funded instead of receiving ongoing appropriations.
- To increase the use of covered bonds, particularly in the commercial real estate arena, the entities should pilot their use in multifamily housing lending. The entities should explore the use of covered bonds as an additional method to provide more mortgage capital for residential housing. The entities should be allowed to pave the way for innovative or alternative finance mechanisms that meet safety criteria.
- There must be strong oversight of the entities. The new entities should be overseen by the Federal Housing Finance Agency (FHFA) or a successor agency that would make timely reports to allow for continual evaluation of the entities’ performance.