GSE Reform Policy Issues

Abstract

There is a widespread policy consensus that the U.S. government should be playing a smaller role in residential mortgage finance and that Fannie Mae and Freddie Mac should be wound down and eventually shuttered. But the issue of how extensive the federal government’s role should be—in essence, whether it should have a role in backstopping the bulk of the mortgage market—has eluded consensus, and the post September 2008 status quo has persisted. This panel discussion summary starts with a section by Professor Lawrence White that briefly provides background on this issue; summarizes the current status of the GSEs and the major pieces of legislation that have been introduced in the Congress to address these issues; and offers a set of important questions that ought to be asked about housing and housing finance policy more generally. Adam LaVier starts with some of the current impediments to housing finance policy reform in Washington; poses the question of whether legislative action is necessary; discusses the measures that might move policy forward in the Senate, House, and Obama administration; suggests what the Federal Housing Finance Authority (FHFA) might do in the near term under its new director Mel Watt; and presents four possible end-game scenarios. Then, Laurie Goodman makes a case that while a consensus is slowly emerging on what a future housing finance system ought to look like, GSE reform is a long way off. It is easier to agree on themes and much harder to agree on the specific structural, risk-sharing, and operational details and how to get from here to there. As a result, she considers GSE reform unlikely before the 2016 election. She believes four “plumbing” issues need to be resolved: 1) What does the transition look like? 2) Should insurance be provided by guarantors only or a combination of guarantors and the capital markets? 3) What does the ultimate structure look like? 4) Is mortgage insurance separate from the guarantor function? Finally, Andrew Davidson notes that while a broad consensus is developing that home buyers seeking financing would be best served by a system in which mortgage-backed securities had an explicit government wrap with private capital standing in front of that wrap, there is little consensus on the nature of the entities that would provide the private capital and the role of the government in providing standards and regulating the suppliers of private capital. He thinks cooperatives may be the best form of organization to deliver private capital, stability, standardization, and risk sharing to the mortgage securitization process. The existing GSEs could be transformed into originator-owned cooperatives with little disruption to the mortgage finance system.