Fannie Mae’s Game Changing Announcement
August 31, 2015
Fannie Mae last week announced a significant new product, HomeReadyTM,
designed to expand the company’s ability to provide financing for low
and moderate income borrowers. HomeReady builds on the company’s
historical family of low-down payment mortgage products with flexible
underwriting features, starting with Community Home BuyersTM
in 1993 and continuing through the My Community Mortgage® product. It is
available to borrowers with incomes at or below 80 percent of their
Area Median Income (AMI) or borrowers of any income living in designated
The product adds underwriting flexibilities and caps risk-based fees
for loans above 80 percent LTV with borrower credit scores of 680 at 150
basis points, less than for similar non-HomeReady loans. It also
requires only 25 percent MI cover on HomeReady loans with LTV’s above 90
percent. These should make Fannie Mae mortgages more competitive for
the targeted low wealth and LMI borrowers and enable lenders to make
more loans to these borrowers with a secondary market execution.
But the really game-changing features of HomeReady are its adoption
of a standardized consumer education requirement and the incorporation
of the product into Fannie Mae’s Desktop Underwriter® (DU) automated
underwriting system while offering unlimited lender access to the
product. With the first Fannie Mae has established a new standard that
will affect the entire housing education and counseling industry. With
the second it has broken a long-standing tradition of offering
HomeReady’s antecedents in only limited quantities as part of individual
lender contracts. By promising that DU® will flag loans that qualify
for HomeReady even if the lender does not specify them as such, and by
offering them without volume limits, Fannie Mae has brought a flexible
low down payment loan into its mainstream business in an unprecedented
Fannie has been a supporter of homeownership education and counseling
since the beginning of its community lending business in the early
1990’s. Both Community Home Buyer and My Community Mortgage required
borrowers to certify they had received housing counseling (although this
requirement was briefly suspended for MCM in the mid-2000’s). While at
first this requirement could only be fulfilled through a HUD-certified
counseling agency, years of pressure from lenders and mortgage insurers
led Fannie to broaden the requirement to permit these other actors and
other methods in the mortgage process to provide it. Given the
self-interested nature of these players, and the increasing pressure to
increase the velocity and efficiency of mortgage originations, these
products’ counseling requirement became less standardized and, according
to some, less comprehensive and meaningful at the products aged.
HomeReady requires that the borrower complete an on-line homeownership education course offered through a platform called Framework®.
It requires borrowers to complete the course and to foot a $75 fee for
it. While Fannie is encouraging consumers to also consult certified
housing counselors (who would receive 20 percent of the fee if they
refer a borrower to Framework) this will not be required. Framework is
sponsored by the Housing Partnership Network (HPN) and the Minnesota Homeownership Center
and meets the requirements of the HUD Housing Counseling Program and
the National Industry Standards for Homeownership Education and
By picking one platform that is accessible to any consumer with
online access in order to obtain HomeReady’s flexibilities and pricing,
Fannie has reset the table for the future of homeownership education and
counseling. Fannie has neatly cut through a decades-long debate about
how to incorporate education into the loan process by adopting it. The
education and counseling industry will have to adjust to this standard
now. Efforts to further refine or expand the use of classroom or face
to face counseling will have to start with the premise that targeted
consumers will use the Framework curriculum and certification.
DU and Community Lending
The announced availability of HomeReady through DU without contract
limits is a huge paradigm shift. If the product actually succeeds in
qualifying more LMI borrowers it means its growth will be hindered only
by effective demand, while MCM and Community Home Buyer were constrained
by budgeted supply.
If the biggest story in mortgage underwriting in the late 1990’s and
early 2000’s was the introduction and widespread adoption of automated
underwriting, one of the biggest in 2015 will be Fannie’s decision to
make their new HomeReady product available on the platform. MCM was
offered only through manual underwriting until 2006. This required
lenders to pull these loans out of their newly developed default
business processes, which slowed its adoption. Moreover, lenders only
could access it through individual contract provisions and for fixed
amounts specified in them. As described in last week’s announcement,
this is not the case with HomeReady.
Enabling DU to flag loans that are eligible for HomeReady is another
accelerant that should increase its market penetration. Rather than
manually assess a loan’s eligibility for the increased flexibilities,
lenders should be able to run all loans through DU and get a
recommendation from the system if a loan qualifies. This removes
another process barrier for lenders and should increase consumer access
to the product compared to a non-DU execution, or one that requires the
lender to flag the loan as HomeReady eligible.
Lenders will be able to commingle HomeReady and other loans in MBS
pools and whole loan commitments, another feature that should make using
the product easier and more seamless for lenders.
New Product Features
The HomeReady product adopts a number
of underwriting flexibilities that are designed to increase credit
access for LMI borrowers.
• Non borrower income will be included
in calculating debt to income ratios up from the default limit of 45
percent to as high as 50 percent, which should increase such households’
buying power. Fannie Mae states in its product materials that its
research shows such income is “sticky” and persistent, and as stable as
income that does not include such sources.
• Allows non occupant borrowers, and
rental payments, such as from a basement apartment, and boarder income
can augment the borrower’s qualifying income
• Lower mortgage insurance requirements, though these weren’t specified in the announcement
• Use of nontraditional credit
• Allowing gifts, grants, Community Seconds® and cash-on-hand to be used for down payments
• Allowing manufactured homes and HomeStyle® renovation loans up to 95 percent LTV
Freddie Mac has not announced a comparable product yet. But
historically, Freddie has followed Fannie Mae in such initiatives after
some period of time.
Fannie’s announcement promises further details
through the rest of the year and expects to go live with the product on
DU and accept HomeReady loan deliveries late in 2015.
Love Me Do
September 08, 2013
There has recently been a spate of articles with headlines like “More Evidence Ending Fannie Mae and Freddie Mac is a Mistake,” and “Don’t Kill Fannie Mae.”
It seems the closer Congress actually gets to taking on the mortgage
finance system, the more reasons people find for loving Fannie and
Freddie. This reminds me of my daily struggle to walk the mile home
from the Metro, rather than take the bus. They both get me home, but
walking is healthier. But when I get to the bus stop, the doubts rise
up - it’s hot. It’s hard. I’ll do it tomorrow. Likewise, changing the
mortgage finance system is hard. There are a lot of unknowns.
Congress has an iffy track record trying to legislate new, complicated
financial systems. The old system worked well. The companies are
making money. The crisis is over and we should just go back to the
comfortable way we did things and it’ll all be good.
Fannie and Freddie did produce lots of value for the US housing
economy and homebuyers in general. They standardized the mortgage
process and helped lower costs. They attracted trillions of dollars in
capital into the housing system, keeping it liquid and robust. They
provided stability for housing finance when other financial markets
suffered liquidity crises. Fannie and Freddie achieved these objectives
through charters that mixed a series of benefits with a series of
obligations. After Fannie was privatized in 1968, and Freddie in 1989,
both companies were forced to balance the demands of shareholders with
the public benefit obligations their charters required. Even after they
were taken into conservatorship and funded with billions of public
money to shore up their capital, their structures, brand and expertise
have kept mortgage funds flowing through the worst financial crisis in
What troubles me about these articles is that conflating the
companies with the important outcomes we need in the mortgage system
muddies the water and makes an already difficult public policy challenge
even moreso. Once, affordable consumer access to mortgage credit and
the companies themselves were inextricably intertwined. But their
collapse in 2008 offers a rare and important opportunity to address some
of the uncomfortable problems that really were too hard to deal with
before, when there was no compelling reason to do so and the companies’
combined political muscle made it impractical.
The outcomes Fannie and Freddie were charged with assuring -
liquidity in the mortgage market, standardization and stability through
business cycles, and the broadest possible access for both consumers and
lenders - remain critically important. These must be the touchstones
for whatever path Congress takes.
The rest of this blog looks at some of concerns about the companies
that predate this crisis, and reviews and comments on the arguments that
are appearing in support of returning to them as the system’s anchors.
The Old System Was Not Perfect
• The companies enjoyed the benefits of a federal guarantee but didn’t pay for it.
They did operate under corresponding constraints—they were restricted
to the mortgage business, limited to the US, and they were expected to
operate everywhere in the US at all times, for instance. But the heart
of their business model was leveraging this implicit guarantee. Fannie
engaged in multiple deep dives to explore the benefits of a fully
private alternative, and each time concluded that the charter’s benefits
far outweighed its costs. I assume Freddie did similar research.
• Benefits to shareholders were obvious, but not as much to borrowers.
The companies did standardize the system, kept mortgages liquid and
brought capital into the system through the full range of business
cycles. Their dominance and standardization shrank margins that
otherwise could have been inflated by other market players. In fact,
some of the rush to invest in private label securities (PLS) that fueled
the housing boom and bust was driven by the higher margins lenders and
securitizers could command for these bonds where Fannie and Freddie were
not active. But disputes over just where their charter benefits ended
up were long-standing and promoted not just by banks hoping to cut into
their markets and margins, but also by economists and government
regulators concerned about private enrichment through the public
• Until Congress insisted in
1992, neither company had a very robust or convincing commitment to
using their market position to extend homeownership opportunities or to
experiment with new products and services that would do so. When they were good -through the Opening Doors Campaign and the Trillion Dollar Commitment
at Fannie Mae, for instance - they were very good. But even more than a
decade after Congress rebalanced their mission vs. shareholder
obligations, there was constant pressure at both companies to minimize
investments in the former and maximize the latter.
• They weren’t immune to failure, and when the country needed them most, they failed the test. Fannie
and Freddie didn’t cause the mortgage crisis. But when the chips were
down and they had to choose between satisfying shareholders clamoring
for growth when PLS was booming and eroding their market share vs.
standing by their chartered purpose to provide a stable anchor for the
mortgage finance system, they picked the shareholders, tried to
recapture market share by moving into riskier market segments, and ended
up requiring billions in taxpayer support. And Fannie had nearly failed
once before in the 1980’s, when it was a portfolio lender and got
caught in a severe squeeze between low-yielding assets and high cost
What Are the Arguments?
The Argument: We Shouldn’t Kill Fannie and Freddie.
They are the best way to deliver the needed results. They worked for
decades. Plenty of large financial institutions failed in the Great
Recession. That crisis is over and we can take our finger off the
“pause” button and get back to the way things were.
There certainly are proposals that
wind down Fannie and Freddie and do not replace them with any system of
government support for the broad market. But while this is a catchy
headline, the current debate is not the all or nothing proposition it
suggests. Most of the proposals that have emerged post-2009 have
focused on disaggregating and reorganizing the functions that Fannie and
Freddie grew to include over more than 70 years. They focus on what
the government must do to preserve public benefits and outcomes, not
preserving structures or specific companies.
This is the path emerging in the Senate Banking Committee through the legislation
introduced by Sens. Corker and Warner and other co-sponsors. It was
repeatedly invoked by House Financial Services Committee members arguing
against Chairman Jeb Hensarling’s PATH Act,
which would kill Fannie and Freddie and not replace it them with
another form of government support. It was the heart of the Bipartisan
Policy Center’s housing commission recommendations in February, 2013. And it was sort of endorsed by President Obama in his August 7, 2013 speech on housing policy.
The Argument: Fannie and Freddie Can Efficiently Provide Market Stability and Liquidity:
Fannie and Freddie have continued to provide liquidity to the markets
under conservatorship, and did so before they failed. Like other
bailed-out financial institutions, they should be allowed to pay back
what they borrowed and move on.
There’s no doubt that they’ve
continued to provide liquidity. But this is because conservatorship has
preserved the key feature of the companies’ charters—a government
guarantee-and kept them running in a form of managed bankruptcy.
There’s broad agreement that
attracting the capital needed for the country’s housing finance needs
will require securitization to tap capital markets. There’s also broad
agreement that some form of government guarantee to rate investors will
be necessary to do this, especially for long term, fixed rate
mortgages. Pre-conservatorship, Fannie and Freddie provided this
guarantee on their securities. As their boosters point out, this system
worked great. Housing finance boomed. Homeownership rates climbed.
Access increased. Why try to fix something that’s not broken?
But the model worked because of the implied guarantee that led
investors to assume that the companies’ mortgage backed securities (MBS)
were “as good as” government securities. When the companies failed in
2008, it turned out the investors were right, getting everything the
companies promised them through billions of dollars in new capital
provided by taxpayers.
Since the crisis broad consensus has emerged that any government
guarantee going forward should be explicit and paid for, and apply only
to the securities themselves, not private companies that issue or insure
them. The fees charged for the guarantee would underwrite the
government’s insurance to protect taxpayers from all but the most
calamitous financial donnybrooks.
But if Fannie and Freddie have to give up their most important
feature - the free, implicit support of the US Government - then they
have nothing to offer that any other very large financial institution
could. If the government is going to provide a guarantee to investors
and charge for it, why should just two companies have access to it?
Ginnie Mae offers a federal guarantee of mortgage securities, for which
lenders pay, and many entities issue securities through their execution.
(Of course, other financial
institutions, insurance companies or automobile manufacturers that
required government support during the financial crisis didn’t pay for
that guarantee, either. Two wrongs, though, don’t make a right. The
Dodd Frank Act attempted to deal with the larger problem through its too
big to fail provisions and the so-called Volcker Rule. Whether those
are effective or not is a topic for someone else. One lesson of the
crisis is that no matter what, the government always will bear the tail
risk of any deep and sustained financial crisis or real estate asset
bubble. The challenge is to minimize the likelihood of it happening
again and not be unprepared when it does.)
The Argument: It’s Not Possible to Build a Better Mousetrap.
What Fannie and Freddie did is too complicated to do any other way. It
would add too much uncertainty to the market. It might not work. It’s
fixing something that isn’t broken.
But the crisis did break the model. As government chartered entities
with special privileges and public mission responsibilities, the GSEs
should have been an unbreachable safe harbor from the reckless lending
by private investors and lenders that overran the financial system.
Report after report has documented that they did not start the boom.
But their eroding market share and fears of growing irrelevance led them
to move into riskier loans to claw back share from private label
executions and to remain a favored partner of some of their largest
customers. The inherent conflict between having a franchise from the
government and responsibilities to shareholders in an asset bubble like
the housing boom proved a major contributor to their undoing.
Again, the functions that Fannie and Freddie provided must be
preserved in any new system. But doing that does not require using the
same entities or the same organizational model.
Some have suggested that rather than try to totally reengineer the
system, the government should preserve them by simply exercising its
current rights to 79.9 percent of the companies’ shares and operate them
as a government-owned enterprise. (I described and explored this and other options in a white paper published by CFA in 2010.)
This would rewind the tape back to before 1968, at least
organizationally, when Fannie was part of the government and Freddie
hadn’t been created yet. They’d have a full guarantee. The billions in
profits they are now making would benefit the government. It would
justify the scores of billions of dollars already lent them. There
would be no future conflict between shareholders and the taxpayer.
Management could be paid fairly, but not exorbitantly.
It sounds appealing. But advocates for this approach need to explain
how to get Congress to agree to nationalize the American mortgage
system and raise the government’s debt ceiling by more than $5 trillion
to cover their combined outstanding debt and guarantees. And the result
would not be Fannie and Freddie as we know them today.
A twist on this is to restore them as some kind of utility, devoted
only to providing insurance on securities, presumably with an explicit
government guarantee. This would mean regulating their returns and
business practices and hoping that they wouldn’t gain the upper hand
over their regulator over time. This also could be a path to
maintaining the functions necessary to support affordable mortgage
credit. Utilities typically work when there’s a monopoly provider of a
service and preserving that monopoly is the most efficient way to
provide the service, like electric power. Whether mortgage finance fits
the model is a good question. But a mortgage utility would not be
Fannie and Freddie.
Some others have suggested avoiding
the uncertainty of changing the system by keeping the current
conservatorship going indefinitely. The companies are making billions.
FHFA has its foot on their necks. Consumers are getting mortgages.
There’s an effective government guarantee. Through a kind of “see no
evil, speak no evil” agreement with Congress, their debt isn’t yet on
the government’s balance sheet. But the recent swarm of lawsuits from
the remaining junior preferred and common stockholders suggests that
this is not a tenable option. The longer this goes on, the more credible
these claims are likely to seem.
Finally, some have suggested leaving them intact but making them pay
for their government guarantees, hold higher levels of capital, and
reorganize in some fashion, perhaps as a mutual company owned by
lenders, subject to much closer regulation. This is a kind of “utility
light” concept. The companies may have a future in a system with these
features in some reorganized form. Unwinding them in their current form
wouldn’t foreclose this. But if the government shifts to charging for a
guarantee of securities, what is the compelling argument that only two,
specially chartered entities or two reorganized into one should be
entitled to take advantage of it? And the resulting companies wouldn’t
be the Fannie and Freddie that we know today.
The recent calls to keep the companies don’t offer any concrete
suggestions other than noting that their current structure could be
“tweaked.” But the “tweaks” are the heart of the matter. That’s not at
all the same thing as “Save Fannie and Freddie,” which only adds
distraction to an already complicated policy debate.
The Argument: Fannie and Freddie Have Expertise that No One Else Can Replicate
Fannie and Freddie certainly dominated the mortgage securitization
market, and still do today. But the ability to aggregate mortgages,
secure credit enhancements and issue securities is not a magic trick
only a few hundred people at Fannie and Freddie can perform. Lots of
issuers do these functions on their own today through the Ginnie Mae
execution, for instance, and others are doing it, albeit on a very
limited scale, in the so-called jumbo market for loans greater than the
GSEs’ loan limits. We certainly learned that Wall Street can do it with
a vengeance, as they did in the run up to the 2008 crisis. A
government guarantee, or a government chartered guarantor, is not needed
to manufacture the securities. It is needed to attract a sufficiently
deep and stable market of investors for them and to support other
important outcomes for US consumers.
Fannie and Freddie definitely represent a source of deep intellectual
capital and experience that should not be squandered in a reorganized
system. But putting that talent to work doesn’t require it to be
employed by the same companies or in the same structure.
For instance, there are functions at
Fannie and Freddie that can and should be conveyed to government to
enable it to provide a safe and sound guarantee to investors, like a
common securitization platform that could standardize terms and
conditions for MBS going forward. There are a lot of other talents that
will be of high value to any number of new entrants in a properly
structured system. The companies themselves might be able to reorganize
around a reduced set of responsibilities and compete with others in a
new system. But they won’t be Fannie Mae and Freddie Mac in that case.
That’s a really good reason to move forward expeditiously so the
leakage of that talent that’s been going on for the last five years
doesn’t reach a critical point of no return. And it argues for a
careful approach that consolidates the valuable functions that are best
managed in one place, like issuing government guarantees, managing
counterparties, assuring that market participants serve the entire
market in return for access to the guarantee, and standardizing
securities, their pooling and serving standards, for instance, in a
government entity devoted to these utility functions.
The Argument: Only Big Banks and the Creators of the Mortgage Crisis will Benefit From Unwinding Fannie and Freddie.
The GSE’s didn’t cause the crisis (although there remain strong
advocates on the fringe of the debate who still maintain they did). Big
banks were gunning for them for years because they squeezed profit
margins on mortgages through their dominance and advantaged pricing.
Eliminating these specially chartered institutions will throw mortgage
consumers to the wolves.
If nothing is done to replace the functions that Fannie and Freddie
provide, this is likely to be true. But it doesn’t necessarily follow
that life without them has only one outcome or that they are the only
means to prevent it.
A non-Fannie/Freddie future that maintains the essential governmental
functions they provide today would require a system that set high and
consistent standards for assets backing guaranteed securities.
Securitizers and credit enhancers would have to demonstrate service to
the entire country, and to the broadest possible range of credit-worthy
borrowers. This would require good regulation and close oversight,
something that will be needed regardless of how many issuers using
government guarantees there are.
Another strand of this argument is that without the modifying
influence of Fannie and Freddie, big banks will be able to ramp up fees
without limit and all the benefit the GSEs provided to consumers will be
lost. Ironically, recent rates for some jumbo loans have been lower
than for Fannie and Freddie loans. A system that charges for a federal
guarantee will be more costly than the old one which did not charge for
it. That’s just logical. But it’s not clear to me why transparency in
pricing to consumers and competition among credit enhancers battling
over market share while balancing the costs of risk and capital to
mitigate it wouldn’t keep costs under control. Fannie and Freddie
competed aggressively for market share in securities guarantees, one
reason guarantee fees remained low. But they also were able to
subsidize that business with their highly profitable portfolios, and
without guaranteed portfolios it stands to reason that the fees will
rise no matter what.
The Argument: Fannie and Freddie Operate a Portfolio, and This Provided Significant Systemic Benefits That Cannot Be Replaced.
The GSEs can buy whole loans directly from originators because they
have portfolios, funded by debt they issue, which carries the same
implicit guarantee as their mortgage securities. Small lenders love the
GSEs’ cash window because it is a competitive alternative to selling
loans to large aggregators, and the GSEs don’t require the originator to
surrender the servicing rights, with their ongoing communication with
the consumer. The cash bid also sets a reference price that limits what
large aggregators can charge originators who either can’t or won’t
securitize the loans on their own.
Preserving access by small
lenders to secondary market capital must be a high priority for reform.
But if the GSEs are stood up again without a guarantee, they won’t have
any particular advantage over any other large lender willing to buy
loans. And if Congress were willing to
extend a guarantee to the portfolios and charge a fee for it in order to
advantage a cash execution for small lenders, how could this benefit
remain restricted to only one or two companies?
The 12 Federal Home Loan Banks are owned by these very same smaller
banks and still have implicitly guaranteed borrowing authority. Maybe
they could be directed to provide this service, since liquidity for home
lending is supposed to be their main purpose, they have no interest in
taking the servicing rights, and there seems no appetite in Congress for
eliminating their implicit guarantee. Or, as is proposed in the
Corker-Warner bill, a cooperative owned by smaller lenders could do the
Finally, many small lenders in today’s market successfully use the
Ginnie Mae guarantee directly to get liquidity. A system with a
government guarantee on securities, but not on entities issuing them,
ought to offer the same opportunity.
Less Smoke, More Fire
Some of the recent essays with the headline “save Fannie and
Freddie,” seem to really be making the point that radical proposals to
simply eliminate the companies without replacing them with something
that sustains the good outcomes they helped provide would be disastrous.
I agree with that point of view. But in that case it would be much
more helpful to focus on what’s needed in the future system and how to
best organize it, rather than stirring things up with headlines about
the entities themselves.
Some others do go further and argue that simply hitting the “reset”
button and restoring the companies themselves is the right path. Some of
these are opportunistic and cynical hedge fund investors in the
companies’ stock who would gain mightily if this happened. Some think
the companies have been unfairly blamed for the system’s failure and
ought to be allowed the same opportunity to pay back what the government
lent them and move on as other mega-finance companies. Others believe
that it is too hard to rebuild a new system, and that some decades of
successful performance should count for something, even after the crisis
and the firms’ collapse.
These boosters have yet to answer the tough questions of how to
actually make the mousetrap better, focus it more clearly on public
benefit, effectively balance the underlying tensions between private
ownership and public purpose and minimize exposure by the taxpayers
except in extraordinary crises. And now that we’ve had one, this is more
important. The more clamor there is for preserving the companies
without addressing these problems, the more focused the discussion will
become on the companies and their conflicts and controversial
structures, rather than their functions, and the less productive it will
The collapse of Fannie and Freddie is really too good a crisis to
waste, as Rahm Emmanuel might put it. Creating a durable system that
will support reasonable access to sustainable mortgage credit for rental
and ownership housing is critical for the nation’s economic and social
It’s easier to take the bus, but I hope we’ll get out and walk this time.
Hot Time, Summer in the City
June 23, 2013
The midsummer solstice has brought Washington, DC not only the predictable onslaught of heat and humidity and the “super-est” of 3 “super moons” this year, but also a freshening of interest in tackling long-term reform of the U.S. mortgage finance system. Trade groups, interest groups, Wall Street investors and many others have promoted various designs to replace Fannie Mae and Freddie Mac. But only recently have these efforts begun to coalesce around specific features with evident support among influential Members of Congress.
In February, 2013, the Bipartisan Policy Center’s housing commission on which I served issued its report on critical housing policy issues. It proposed a system in which a new government owned corporation would provide catastrophic credit insurance for qualified mortgage insurance bonds. This guarantee would stand behind a deep layer of private risk-bearing capital, and come into play only if those private guarantors failed to honor their obligations to investors. The proposal resembled in many ways how Ginnie Mae (Government National Mortgage Association) works today. But instead of relying on the Federal Housing Administration (FHA) to provide the underlying credit guarantee on the mortgages in the securities, the BPC proposal would rely on private capital to take on this risk. As the transition to this new system is completed, Fannie Mae and Freddie Mac would be wound down. The proposed insurance would be available both for homeownership and for rental housing finance, with some slight differences in details.
The BPC proposal itself drew on a series of earlier proposals from a wide range of groups, including the Mortgage Finance Working Group convened by the Center for American Progress, the Mortgage Bankers Association, the Financial Services Roundtable’s Housing Policy Council, NYU’s Furman Center, and quite a few others. The BPC report was distinguished, however, by its focusing not on the creation of specified and approved entities to issue securities and take a first loss credit position with a government guarantee to a system that would focus on private risk-bearing credit enhancers and many issuers who would purchase the private risk insurance as well as the government’s.
The BPC housing commission’s report was highlighted in a Senate Banking Committee hearing in March featuring commission co-chair and former Senator/HUD Secretary Mel Martinez. It drew significant interest and positive comments from a number of Senators, most notably Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA). Rumors began to swirl that these two were collaborating on a draft proposal to implement the basic housing commission recommendations.
Then just last week, a new paper released by the Milken Institute, Moody’s Analytics, and the Urban Institute called for a proposal like the BPC’s – disaggregating the issuance and credit insurance functions, with a catastrophic government guarantee paid for through mortgage fees—with a few important and valuable additional details, especially around the use of a common, government owned mortgage securities issuance platform, and in the creation and funding of a so-called “Market Access Fund” to help provide mortgage credit to underserved and hard-to-serve communities and families. Authored by a bipartisan quartet of policy experts, the report is another infusion of energy into the discussion. On the other hand, unlike the BPC report, it lacks any specific recommendations for rental housing finance.
Now it seems as though an actual proposal sponsored by Corker, Warner and perhaps four or more bipartisan colleagues will be put forward the week of June 24, 2013. Senate Banking Committee Chair Tim Johnson (D-SD) and Ranking Minority Member Mike Crapo (R-ID) have indicated that their first priority is to put the FHA on a firmer footing and that this work will precede any committee consideration of broader mortgage finance reform. But the release of a Corker-Warner will be hard to ignore, especially if its additional co-sponsors include other Banking Committee members.
The majority leadership in the House Financial Services Committee seems likely to continue to promote the “full privatization” of the mortgage market, with no ongoing federal support like that promoted by the BPC, Corker Warner, and others. But there also are rumblings that a bipartisan proposal introduced in the last Congress by Reps. John Campbell (R-CA) and Gary C. Peters (D-MI) could quickly become the offer around which the committee’s majority coalesces. I noted at the time it was introduced that this bill and another introduced around the same time by Reps. Gary G. Miller and Carolyn McCarthy (D-NY) provided an intriguing counterweight to the relatively extreme position espoused by HFSC Chairman Jeb Hensarling (R-TX) and Rep. Scott Garrett (R-NJ), chairman of the subcommittee on Capital Markets and GSEs. If and when the Corker-Warner proposal surfaces and seems to draw support, it’s possible that one of these bipartisan alternatives could add further momentum in the House.
Still silent since releasing its own White Paper in February, 2011 is the Obama Administration. There has been no further elucidation of the Administration’s position since its succinct summary of the post-crash mortgage finance landscape. There are rumors, of course, that the staff drafting Corker-Warner has been consulting regularly with Treasury officials, and that while it doesn’t represent Administration views, the possible proposal may reflect at least some perspectives that the parties would share. There is also speculation that no firm proposal will emerge from the Administration until the Senate has disposed of – one way or another – the pending nomination of Rep. Mel Watt (D-NC) to be the Federal Housing Finance Agency’s Director. An actual proposal could force the nominee to navigate a minefield of detailed questions about any Administration proposal and provide putative reasons to reject his candidacy. Hence the reluctance to issue anything further till the nomination process is concluded.
While there is more consensus on the substance of a future structure than sometimes is obvious, it is by no means unamimous, as evidenced by this Heritage Foundation pre-emptive strike against Corker-Warner.
So the summer starts with a fresh burst of energy. And almost certainly, controversy. It’s still unclear if it will it provide more questions or more answers to the vexing question of, “what will replace Fannie and Freddie?”