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Blog: GSE reform is coming with or without Congress


There was a hearing last week on Capitol Hill about housing-finance reform and the future of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This was notable not because anything is close to happening on that front, but because it has been a dead issue in 2018 for Congress.

The chief executives and top lobbyists from some of the largest mortgage and housing-trade groups in the country were called before the House Financial Services Committee this past Friday. Most of them repeated what has been said for years — that it is crucial for Congress to pass a legislative solution that will end the 10-year status quo that has essentially left the federal government as planner, overseer and direct backer of all loans purchased by Fannie and Freddie, which comprise about half of the U.S. mortgage market.

calabriaNext year, possibly, Congress may find a way to negotiate through a minefield of competing interests and pass a law that reforms the system and sets a path to end the government’s control of the GSEs. Something else is going to happen first, however, that could change the landscape much more quickly: the Federal Housing Finance Agency (FHFA) is getting new leadership in January.

FHFA Director Mel Watt will be leaving in early January. His term may end even before the government reopens due to a budget impasse and battle over President Donald Trump’s desired wall along the Mexican border. On Jan. 7, the current comptroller of the currency, Joseph Otting, will take over as acting FHFA director.

The bigger change will come later next year, though, when Watt’s permanent successor takes over the agency for a full five-year term. In terms of the impact on the mortgage industry, that person will likely become the nation’s most important federal regulator for years to come.

The White House has signaled that Mark Calabria, the chief economist for Vice President Mike Pence, will be nominated for the permanent FHFA director's role. On first glance, this should scare small nonbank lenders who make a living by originating loans that are sold to Fannie and Freddie. Calabria has written extensively about the mortgage market, where he has been a critic of 30-year, fixed-rated mortgages and a system built on loan securitizations, which has enabled nonbank lenders to thrive.

Calabria has been widely endorsed by trade groups for his knowledge and experience, however. Experts say that, as a regulator, Calabria will have to implement policies that may differ substantially from his identify as a conservative economist and think-tank scholar.

One person who recently weighed in on the matter was Jim Parrott, a nonresident scholar at the Urban Institute. In a paper published last week, Parrott wrote, “The most important question in housing policy heading into the new year has nothing to do with interest rates, housing supply, or home sales. It’s what kind of director of the Federal Housing Finance Agency (FHFA) Mark Calabria will be.”

Like other experts, however, Parrott believes that Calabria the regulator will have to put his ideological positions in a box. Most likely, the new director will look for ways to reduce the size of Fannie's and Freddie’s footprint, but without severely limiting access to credit that would dry up demand for mortgages, hurting the housing market and overall economy. Also, Parrott wrote, Calabria has to contend with the reality that if he restricts access to GSE loans, their borrowers may simply be shuffled over to the Federal Housing Administration, a federally backed insurance program that conservatives like even less for its looser lending standards.

Calabria would most likely make incremental changes to reduce the size of the GSEs on the margins of their business, such as lowering maximum loan amounts to encourage more large-balance loans go to the private market, or "disrupting" the GSEs' cash-out refinance business. 

“He will have to contend with the practical reality that these institutions are too economically and politically embedded in our system to be easily wished away,” Parrott wrote.

“Add to this a softening economy and a presidential election in which the economy will play center stage, and we should expect him to move more incrementally than dramatically, focusing on ways to reduce the centrality of Fannie and Freddie in the system rather than eliminate them altogether,” Parrott wrote. 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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  1. Posted: Aug 20, 2018  23:49 ET
    By: ramsey benjamin | standardloandfirm
    1. 0


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