The voices of Urban Institute's researchers and staff
January 22, 2014

GSE reform legislation? Yes, sir.

January 22, 2014

For anyone who thinks the Obama administration may be giving up on housing finance reform, think again. Today, in a speech to the ABS Vegas 2014 Conference, Treasury Counselor Michael Stegman said flatly, “The administration is still firmly committed to comprehensive housing finance reform.”

Why? Because it’s bad public policy to continue domination of the market by a “taxpayer-backed duopoly”; because current Fannie and Freddie earnings are unsustainable; and because the current system is “not the best framework for broadening the availability of mortgage credit over the longer term,” he explained.

Stegman made clear that the legislation needs to include a full faith and credit catastrophic government guarantee standing behind private capital to maintain market liquidity and to preserve “broad access to the 30-year fixed rate mortgage,” and that “creditworthy borrowers in all geographies, with varying income levels must have access to the system.” Urban Institute President Sarah Wartell, Mark Zandi, Phill Swagel, and I came to a similar conclusion seven months ago.

Referencing current administration discussions with the Senate Banking Committee, Stegman pointed out that separating securitizers and insurers is important to get past a too-big-to-fail situation and that capital requirements for insurers must be established so that “they are available during downturns when capital markets investors withdraw from the marketplace.” Which leads to the obvious question: Why set in place a system that allows capital markets executions that are not backed by diversified, well-capitalized insurers in the first place? In the paper referenced above, my colleagues and I rejected a capital markets execution in part because it was far too complex to effectively regulate and in part for the reason Stegman cites—capital will flee just when it’s most needed.

Stegman also emphasized the administration’s concern with what has reportedly been the major holdup in seeing a new proposal from the leadership of the Senate Banking Committee—the problem of transition from the existing system to a new one.

Here, he made clear the administration’s desire for equalization of pricing of Fannie and Freddie securities, continued work on the common securitization platform, attention to preserving the GSEs’ role in affordable rental housing, and ramping up GSE risk-sharing transactions during a five-year transition. A new element was his suggestion that “a number of new guarantors” be up and running before termination of the GSEs’ authority to do new business.

Outside of the legislative arena, Stegman made clear the administration’s position that Home Affordable Refinance Program (HARP) cut-off date not be extended, stating instead a preference for “refinancing legislation,” although it is not clear what legislation they have in mind. But does his statement that “we will seek to ensure that neither the source of one’s mortgage nor who owns the credit risk should determine a borrower’s eligibility for refinancing or mortgage assistance” mean perhaps we will see some long-awaited movement toward principal reduction loan modifications at Fannie and Freddie? That would be nice.

And finally, there was a note of frustration—which undoubtedly was not lost on the audience—with progress on the structures needed to bring back a vibrant private label securities market. Stegman essentially announced that since the industry had not been able to get to “yes,” Treasury was taking over as convener. We wish them well.

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