Senior fellow, Urban Institute
What’s in store for Fannie and Freddie?
The Urban Institute is a nonprofit organization headquartered in Washington, D.C. that conducts research on
a variety of social and economic policy topics. The Institute’s Housing Finance Policy Center provides data and
analysis about the housing finance system that helps educate the general public as well as government decisionmakers.
Two recent briefs prepared by Jim Parrott, a senior fellow at the Urban Institute, looked at issues surrounding the
government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Specifically, Parrott’s briefs analyzed the
potential effects of the recent fall in GSE profits and some early steps being taken toward GSE reform. We asked
Parrott about his findings.
What impact did the recent fall in GSE profits have on the push for reform?
The GSEs’ big year in 2013 gave many the sense that we simply don’t need to worry about GSE reform.
They are once again enormously profitable, the thinking went, so let’s just clean them up a bit and spin them
back out again. The premise, of course, is false. Many of the revenue streams that have made them so profitable
are winding down in the coming years, leaving them entirely dependent on their guarantee fees for revenues.
And if you were to spin them out, they would face still greater headwinds. For instance, either they would
have to pay a hefty sum for the government’s backstop or they’d have to give it up; and they would be designated by the Financial Stability Oversight Council (FSOC) to be “systemically important financial institutions,”
and thus required to hold a good deal more capital against their risk.
This is not to say that they couldn’t pull it off, only that in doing so they would become very different institutions
than those pining for a return to the past appear to assume. They would become institutions through which
credit is likely more limited and much more expensive.
What is the biggest roadblock preventing GSE reform?
Interestingly, it’s not that we’re missing a broad enough consensus on where to go. I’m fairly confident that the
middle 80 percent of Congress, and the administration, would agree on what the rough path forward is: more
private capital ahead of taxpayer risk; a remote government backstop to ensure widespread access to the 30-year
fixed-rate mortgage; more competition among those insuring credit risk in front of that government backstop;
and so forth. The problem is that Congress appears unable to handle anything of this kind of political and substantive complexity. And it’s a shame, because the moment of consensus will no doubt pass, making the political
lift all the more daunting.
I fear that we may not be brought back to the negotiating table until we’re forced to by another crisis.
Is anything likely to happen on GSE reform any time soon?
Given the bleak prospects of movement in this Congress, our best hope appears to be administrative.
Fortunately, there are some steps that the Federal Housing Finance Agency (FHFA) can take that would help move
us meaningfully down the consensus path. First, FHFA could push the GSEs to experiment with much more sharing of first-loss risk. As almost everyone agrees that we should insulate the taxpayer behind more private capital,
we might as well begin experimenting with the different ways in which to do it, determining which structures are
best for the consumer and which for the market. This will put us in a much better position to legislate on these
key choices once we get there.
Second, FHFA could direct the GSEs to build out a utility-like securitization infrastructure that the entire market
can use. They are currently working on one for use by the GSEs, but if they stop there it will only further entrench
the GSEs’ market dominance. Since we ultimately want more competition in front of the government backstop,
they need to move quickly to a platform that the entire market can use.
These two steps together would put the early pieces into place for an eventual transition to the consensus system
I mentioned: one with the taxpayer’s risk behind more private capital, a more remote government backstop and
more competition in front of that backstop. And it would do so in a way that is less disruptive than legislation
would have been. So I suppose there’s some consolation of the Congressional dysfunction. n
By Will McDermott
Jim Parrott is a senior fellow at the
Urban Institute and owner of Falling
Creek Advisors, which provides
strategic advice on housing finance
issues. Parrott spent several years
as senior adviser at the National
Economic Council, leading the team
of advisers charged with counseling
President Barack Obama and the
cabinet on housing issues. Parrott
was previously a senior adviser to
Secretary Shaun Donovan at the
U.S. Department of Housing and
Urban Development. Reach him at
Will McDermott is editor of Scotsman Guide Residential Edition.
Reach him at (800) 297-6061 or e-mail email@example.com.