"Real Reform" of the GSEs

CRE Finance World, Summer 2013

“Real Reform” of the GSEs our-and-a-half years after Fannie Mae and Freddie Mac were placed into conservatorship by President Bush, the government-sponsored enterprises (GSEs) have started generating billions in profits and are on a clear path to returning every penny taxpayers invested to keep them afloat. Fannie Mae earned $7.6 billion in the final quarter of 2012, bringing its annual profit to an all-time record of $17.2 billion. Meanwhile, Freddie Mac earned $11 billion in 2012. To put these profits in context, the combined $28.2 billion from Fannie and Freddie is 33% of the total 2013 federal government spending cuts implemented by Sequestration. At a time when Congress cannot agree on any spending cuts or tax increases, $20 to $30 billion per year changes the debate over the future of Fannie Mae and Freddie Mac from one focused on the federal government’s role in housing, to one focused on the federal government’s fiscal soundness. With this in mind, Congress must be tempted to continue benefitting from the Fannie/Freddie financial windfall and simply keep the GSEs in a never-ending spin cycle of reform debate. They cannot! It is time for Congress to put a plan in place that provides our housing and mortgage markets with liquidity, certainty and plenty of private capital. Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee, thinks Fannie and Freddie’s profitability should add urgency to efforts to revamp the companies. In an April 2 statement reacting to the release of Fannie Mae’s annual report, Corker said, “I’m glad Fannie Mae is showing an increase in income, but we have to remember that this is largely because we have crowded out private capital and made Fannie or Freddie the only viable execution option for new loans. . .We must focus now on building a more sustainable 21st century system of housing finance that restores the private mortgage market after years of government dominance.” Senator Corker is correct to push for reform, but he must be reminded that “years of government dominance” is only since the financial crisis hit in 2008. In fact, in 2006, Fannie Mae and Freddie Mac’s market share was only 40% — fully 60% of the mortgage backed securities being sold to investors were from private issuers such as banks, investment banks, and private mortgage companies. CRE Finance World Summer 2013 26 The House Financial Services Committee is widely divided on the future of Fannie and Freddie. Republicans, led by Representative Jeb Hensarling, think Fannie and Freddie should go away. Democrats, led by Representative Maxine Waters, think Fannie and Freddie guaranteeing 90% of single family residential loans in America is perfectly fine. They are both wrong. Republicans are too quick to forget that Fannie and Freddie did exactly what they were designed to do during the financial crisis — they provided liquidity to the market, they allowed homeowners to stay in their homes, and they allowed the Federal Government to stabilize the banking sector without concern for the multi-trillion dollar mortgage market. TARP would not have been the success it was if stabilizing the mortgage markets had been part of the equation. Similarly, Democrats are too quick to think that an affordable mortgage is an American birthright. Both sides of the aisle need to focus on bringing realistic reforms to Fannie and Freddie that improve our mortgage finance system. So how do we save the system while putting private capital ahead of taxpayer dollars? There are plenty of proposals for the role the Federal Government should play going forward. One that should be quickly dismissed is the Federal Government providing nothing but a catastrophic guarantee in times of crisis. As we saw with TARP, banks were given billions to prop-up their balance sheets yet they didn’t lend it. The mortgage origination network, technology systems, risk management practices, and people of Fannie Mae and Freddie Mac are what allow for the mortgage market to work and provide stability in both good times and bad. The fix for Fannie Mae and Freddie Mac is not to wind them down, nor leave them be, but to require private capital to invest alongside government capital to ensure that the people who originate loans suffer first when the loan goes bad, not last. Risk retention is fundamental to sound underwriting and a long-term, functioning mortgage market. The lobbying machines for realtors, banks, and mortgage bankers are likely to say that originators don’t have the capital to retain risk and that risk retention will slow down the flow of capital and hurt their business models. Too bad! If we want a U.S. mortgage finance system that truly works, where a robust market with a significant government role provides liquidity, stability F Willy Walker Chairman, President & CEO Walker & Dunlop, LLC


CRE Finance World, Summer 2013
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