Update on GSE Reform

Five years after being placed in conservatorship, Fannie Mae and Freddie Mac continue to play a central role in the US mortgage market.  Conservatorship is by definition a temporary environment. These two companies simply cannot stay in this form  indefinitely.  However, there has been a recent increase in activity in Washington that suggests there may be movement toward defining the future of the two GSEs:

• Comprehensive GSE reform bills have been introduced in Congress in recent months, with the House Financial Services and Senate Banking Committees having taken or committed to action on reform.
• The President gave a major speech on housing finance reform, where he once again noted the Administration’s intention to wind down Fannie and Freddie.

MBA has been engaged with all of the players in this debate, providing technical support to inform their thinking, and advocating for certain critical features that will be necessary in any future secondary market structure. Moreover, MBA has been vocally advocating for transition steps that can be put in place to improve efficiency and lower costs in the secondary market for single-family loans, regardless of the exact form for the end state to be specified by Congress. MBA’s Board of Directors, Residential and Commercial Boards of Governors, and MBA’s Task Force on Secondary Market Reform have all been actively shaping our evolving policy, strategy and tactics on this important topic.

With this letter, I want to update you regarding the content and nature of the debate in Washington, how we see this effort evolving over time, and how a potential transition to a new structure might impact your business and the marketplace going forward. Rest assured, MBA understands the reliance of the industry on a well-functioning secondary market, and will advocate for policies that minimize disruptions to that market.While there is much talk of  “eliminating” the GSEs, MBA has consistently reminded all participants in this debate that any transition to a new system must retain and redeploy key aspects of their existing  infrastructures, including certain operational functions, systems, and business processes, regardless of the final form or structure of the federally-supported secondary market. It is critical that we prevent unnecessary disruptions to the day-to-day business activities of the mortgage market.  With those guiding     principles in mind, the attached summary provides an update of the legislative and regulatory state of play as we head into a busy fall full of hearings and debate on GSE reform.

For a lender operating in today’s challenging environment, I understand that these GSE reform conversations can be maddeningly abstract at times, and positively infuriating at others.  How can such dramatic changes be contemplated at a time the industry is struggling to handle Dodd-Frank related regulatory changes and a still recovering housing market?  Do folks in Washington understand how important it is for a lender to have a competitive secondary market outlet? I have said both publicly and     privately that we need to recognize the facts on the ground — there is little appetite in Congress or in the Administration for keeping the GSEs  in their current form, with their current charters and an implicit  uarantee.  Knowing that a more fundamental reform of the secondary market is likely, MBA has been actively engaged in conversations with all     players regarding the direction of such a reform. From the beginning, MBA has supported the need for additional private first-loss     capital, but backed by an explicit federal backstop paid for by guarantee fees. Whether that comes from re-casting the GSEs in     their current legal form, or winding down the GSEs and replacing them with a new entity or entities is a political call Congress will make.

However, we think common sense dictates that the key “plumbing” and connectivity between the GSEs and lenders must be utilized in a future system — either by     transfer or sale to the new entity or entities, or staying with a re-formed GSE-like structure.  A thoughtful transition plan must leverage     existing assets in a new system that promotes access to multiple entities, ensures old behaviors never return, creates a level playing field, requires     adequate capital and provides taxpayer protection. Certain GSE assets –     such as historical performance data, analytic tools, software, forms, and     business processes – should be considered public goods as a result of the taxpayer bailout, and should thus be made available for the benefit of the public.  We should leverage the infrastructure and systems of both GSEs to the greatest extent possible to ensure both single-family and multifamily housing have continuous liquidity to provide ample housing to communities.We recognize that for lenders, successful GSE reform would result in both a more stable and more competitive system with greater protections for the taxpayer, and also be a system that would work very much like the old GSE model in terms of day-to-day operations, systems, and contact with key personnel.  It is  essential that any new system also needs to be accessible by lenders of all sizes operating a variety of business models—a robust and competitive marketplaces benefits everyone, including borrowers, taxpayers, and our industry.

We think such a transition is achievable, and will continue to work toward that end.  I will continue to keep you updated.

David H. Stevens
President & CEO
Mortgage Bankers Association