Industry Experts Propose New Housing Finance Reform Plan
An independent group of housing industry experts recently released a report proposing a plan for overhauling the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. The proposal was drafted by Jim Parrot of the Urban Institute, mortgage investor Lew Ranieri, former presidential advisor Gene Sperling, Mark Zandi of Moody’s Analytics, and Barry Zigas of the Consumer Federation of America.
The report, entitled “A More Promising Road to GSE Reform,” calls for the GSEs’ single-family and multifamily operations to be merged together into a new government corporation, the National Mortgage Reinsurance Corporation (NMRC). Just as Fannie Mae and Freddie Mac do today, the NMRC would purchase mortgage loans and package them into mortgage-backed securities (MBS) and sell the MBSs to investors. NMRC would charge a guarantee fee (g-fee) for each mortgage it purchases. Unlike the current system, MBSs issued by NMRC would be explicitly backed by the federal government. NMRC would also be expected to enter into syndicated risk-sharing arrangements for all securities it issues that put private investors in a first-loss position.
NMRC would be regulated by the Federal Housing Finance Agency (FHFA). FHFA would be responsible for setting the g-fees for mortgages insured by NMRC and for maintaining a mortgage insurance fund, or MIF, funded by those g-fees, sufficient to cover the costs of a catastrophic downturn. The report envisions NMRC utilizing many of the initiatives FHFA has undertaken since taking the GSEs into conservatorship in 2008, including the development of a Common Securitization Platform for Fannie Mae and Freddie Mac and its mandate that the GSEs increase their use of risk-sharing transactions.
The proposal would also require NMRC to be responsible for supporting affordable housing options. The corporation would be expected to meet the same affordable housing goals and “Duty to Serve” obligations that currently apply to the GSEs. NMRC would charge a 10 basis point surcharge on all loans it insures, to help fund its affordable housing activities. The plan does not mention whether NMRC would be required to make contributions to the Affordable Housing Trust Fund, as Fannie Mae and Freddie Mac currently do.
The key to this plan, the writers contend, is that it will retain the successful aspects of today’s housing finance system while eliminating the factors that hinder it. In addition, because it builds off of the current housing finance reform system, the writers argue it should cause little disruption to the mortgage market. They also say that, because NMRC would be a government corporation, it would be driven by a public mandate “to balance broad access to credit with the safety and soundness of the mortgage market,” instead of profit.
The report concludes with a warning from the writers, who fear that, due to the recent upward trend of home prices and home sales, the mortgage industry will become complacent with the current mortgage finance system. The current system’s situation is very precarious, the report cautions, because the GSEs are unable to build capital. If policymakers wait to enact housing finance reform, the report warns, the process will only become more difficult and complex.