Obama GSE Report Favors Public-Private Hybrid

By Robert Freedman, Senior Editor, REALTOR® Magazine

The Obama administration puts the emphasis on privatization with a federal backstop as it outlines alternatives for replacing Fannie Mae and Freddie Mac. NAR wants to be sure affordable 30-year, fixed-rate and other safe mortgages remain available. It also expresses concern over a part of the report that could lead to increased fees above what would be affordable for middle-class households.

gseThe Obama administration in its long awaited report to Congress on replacing Fannie Mae and Freddie Mac says it wants to strike a balance between a fully privatized conventional mortgage finance system and a fully nationalized system, and in that spirit outlined three alternative approaches to what should come after the two secondary mortgage market companies go away.

In its report, called “Reforming America’s Housing Finance Market” and released this morning, the administration divides the three options into degrees of privatization:

  • Largely private. The only government involvement being the promotion of mortgage financing for low-income households through FHA, VA, and USDA (rural home ownership).
  • Hybrid with a federal emergency role. Along with the existing roles for FHA, VA, and USDA, the privatized system would be backstopped by a federal mortgage insurance facility that ramps up to scale only in times of credit crisis.
  • Hybrid with full-time federal reinsurance. The otherwise privatized system would include a standing federal catastrophic reinsurer for private guarantors of mortgage-backed securities.

The administration isn’t specific about whether it recommends one of the three approaches or a mix, but the report makes it clear that administration officials are seeking some type of hybrid approach. Full privatization, as outlined in the first option, has the virtue of moving the federal government out of the conventional housing market, but it would likely make it “more difficult for many Americans to afford the traditional pre-payable, 30-year fixed-rate mortgage,” the administration says. That’s a statement that closely parallels what NAR says in its policy position on GSE reform.

The other two options outlined in the plan come with their own risks. The federal emergency option is untested, the administration acknowledges, creating a big unknown about whether the federal facility would be able to scale up in time to avert a crisis, and the catastrophic securities reinsurer of the third option could overly increase the flow of capital to mortgages, diverting it from other productive uses.

Whatever option or variant of the options emerges, NAR’s position is that the continued availability of safe, affordable 30-year and other conventional mortgages is paramount.

The administration can be expected to provide more clarity on its position in the months ahead as Congress ramps up its hearings and the number of reform bills introduced by lawmakers multiply. What’s encouraging about the report, from an NAR perspective, is that it shows an understanding of the reasons the secondary market companies were formed. So it seems likely the administration will seek to retain those benefits (broad access to affordable capital, universally accepted underwriting standards, and so on) in the reforms. Hearings on the future of the GSEs have already begun. A subcommittee of the House Financial Services Committee held its first hearing on reform earlier this week in anticipation of the administration’s report, and more hearings are in the works in both houses of Congress.

Separate from its options for replacing the two government sponsored enterprises, the administration in its report lays out its proposal for near-term steps to shore up the mortgage market and unwind the two companies’ portfolios and gradually phase down their role in the market—with the emphasis on gradual. “These efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers and the housing market,” the report says. Some of the proposals, which call for raising some fees, raise NAR concerns.

Among its near-term recommendations:

  • Require Fannie Mae and Freddie Mac, over a several year phase-in, to price their guarantees as if they were held to the same capital standards as private banks or financial institutions. This would help boost the companies’ reserves while curbing the market advantage over banks they leveraged in the past to expand their share in the securities market.
  • Encourage the two companies to pursue additional credit-loss protection from private insurers and other capital providers, and support increasing the level of private capital ahead of their guarantees by requiring larger down payments by borrowers, perhaps at least 10 percent down.
  • Allow today’s $729,750 high-cost area conventional (and FHA) loan limit to expire in October, in which case the top limit would drop to $625,500, then later adjust the limits as needed.
  • Wind down the companies’ investment portfolio’s by 10 percent a year, something the companies are already doing. This process could even be accelerated in the years ahead as conditions warrant.
  • For FHA, impose a 25 basis point increase in the FHA mortgage insurance premium.

All of these efforts are intended to make it more attractive for private lenders to step in because the competitive advantage of the GSE and FHA would be reduced. The higher GSE guarantee fees and higher FHA insurance premium, as well as the minimum 10-percent down requirement, would make government-backed financing more costly, providing space for private lenders to fill.

From NAR’s perspective, the administration’s effort to open up space for lenders offering non-government-backed products is necessary for a healthy mortgage market, but the use of increased fees  must be limited, otherwise they risk harming middle-class households. “Any proposal for increasing fees and borrowing costs beyond actuarially sound levels will only make it harder for working, middle-class individuals to achieve home ownership, and only the wealthy will be able to achieve the American dream,” NAR President Ron Phipps says.

Should middle-income households get squeezed out of the home sale market by higher fees, the impact would be felt by the broader economy. NAR’s economists estimate that for every 1,000 home sales, 500 jobs are created for the country. So, a drop in home sales would mean a drop in new jobs.

The report also recommends changes to shore up and curb future problems with the Federal Home Loan Banks, increasing regulation of mortgage servicers, implementing changes to international banking capital standards under the BASEL III Capital Accords, and improving coordination between FHA, VA, and USDA (maybe even merging their operations).

Whatever the outcome, the process of revamping the mortgage finance system is now underway, although it can be expected to move very slowly, a process that could take a year or even two to fully play out. The next stage begins next week, when the administration releases its budget proposal for fiscal year 2012.

NAR is watching all of the pieces carefully.  In testimony before Congress and elsewhere, NAR is challenging lawmakers and policymakers to maintain a federal role in our financing system to ensure the availability of safe and affordable mortgage financing in both good times and bad. That will remain the association’s message as the process unfolds in the year ahead.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. Stephanie

    What about those of us who are stuck at the mercy of the loan companies? My house has had a contact pending for 6 months, just to learn recently that they said they knew nothing of the short sale pending meanwhile for 2.5 years I have been stuck in nuetral. No place to live, no credit, can’t buy anything without cash. All because the mortgage company rose my rate to 13% and I could not pay the mortgage after 20 years of paying them. Is this fair? The government needs to step in and take the emphasis off credit reports for a loan(of which mine is full of errors and a nightmare to try to correct). It would be easier to get a new social security number and start over.

  2. I’m worried because all new legislation on both the Federal and State/Local level focuses on increasing the cost of living. I agree fully that the government can play a roll in the mortgage market and that they should only be second fiddle to the private sector but the one thing absolutely nobody proposes is how we the people can get back to generating income. Whats further, the income we make needs to have greater buying power. When I was a child, the average household income in my state was $30,000/yr. Average household was defined as 2 adults and 3 children. Today that amount could not support a single adult. The advent of computers was supposed to cut costs, outsourcing to forien countries was supposed to cut costs but the cost of everything continues to go up. Even in a recession/depression when income and demand goes down prices remain high. (except home prices which only fell to pre bubble levels, a bubble that never should have happened in the first place). The easy way out is to dig deeper into our pockets. The harder way (but more prosperous) is to innovate, create, and be a global economy leader. We are the country that invented the car, discovered how to manipulate electriciy (sorry ancient egyptions, should have kept better records) and brought air travel to the world. Not only do we need to continue to improve those ideas but we need to generate more Earth changing creations. The energy market is virtually untapped. The caveman learned how to burn things to better his life yet that is as far as that technology has gone. Can’t we do better than the caveman?

  3. horace

    If you look at the big picture, of course, Obama wants to cut out the middle class as that will give him the right to penalize the hard working wealthy who has done everything the average individual won’t do. Then it will be the middle class can’t afford the fees, the rich will decide to stop working as it is senseless because they will be penalized. Obama has exactly what he wants — a socialistic society void of capitalization & all hopes of the American dream gone forever.

  4. Steve Brown

    the administration also wants to further reduce the role of FHA by limiting it to “median income” for the area. that is how state bond money works. increasing MIP, reducing loan limits; income limitations; these changes would be far too much to the only reliable source of financing for much of the country. this would not only further suffocate the housing industry, but put further pressure on unemployement as so much of the economy spins off of housing.

  5. Steve

    Once again as before the Federal Government has messed the real estate market up again. No parties will be punished and new government regulation will follow which will not usually help the honest hard working people who pay their mortgages on time and the feds will once again try to qualify sub market loans to unqualified applicants. Need to look at the past where the banks, s&l had to be re-regulated by a trust where properties bundled and sold off to investor at discounted dollars and then they could approach the home buyer and truly renegoiate a new loan package that would help them and the home owner. Usually this approached changed the mortage, interest and years to pay off as a win, win for all involved.

  6. Geo. J. Donaldson Jr. CRB

    The time for full burial of both Freddie and Fannie has come their dead bodies are stinking up the place. Both institutions were created many years ago and they did their job; times have changed and now they need to be eliminated. In fact, if they had been phased out 10 years ago, the “crash” would have for the most part been greatly avoided.
    Many of the foul tasting loans would not have been made and therefor not bundled and sold. Now the tax payers are the suckers who bail out the very institutions (Freddie & Fannie) who initiated the crash by their ill advised actions.