GSE reform will ensure housing-market stability
Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were put into conservatorship in 2008 as
the housing market and the overall economy began to crash. Nearly a decade later, these two mortgage giants
remain under the government’s control.
Reform is needed to provide a more
stable foundation for the mortgage
market going forward. The Mortgage Bankers Association (MBA) released its recommended approach
to housing-finance reform earlier
this year. The proposal, “GSE Reform: Creating a Sustainable, More
Vibrant Secondary Mortgage Market,” was developed by a commissioned task force of every type of
In evaluating any proposal for GSE
reform, three major objectives must
be balanced: protecting taxpayers,
attracting capital to guarantors, and
ensuring consumers and borrowers
have access to affordable financing.
MBA’s proposal carefully considers
each of these priorities, and we believe achieves that balance.
Of course, many of you reading this are primarily concerned with the impact of housing finance-reform on
the cost to your customer. Although the precise impact on current consumer costs from true housing-finance
reform may be difficult to gauge, we know that attempts to shortcut reform through recapitalizing and releasing
the GSEs from conservatorship would lead to much higher costs for consumers.
The difficulty in arriving at a precise estimate with respect to consumer cost is that several components of
housing-finance reform actively under debate will impact costs, including a full faith and credit guarantee
behind mortgage-backed securities (MBS), guarantor capital requirements, return targets, pricing behavior,
mortgage insurance premiums, affordable-housing fees, the credit box and capital requirements for MBS.
Many of these factors may contribute to somewhat higher consumer costs as the GSEs are reformed to ensure an
overall more stable system. Those increases likely would at least be offset by a move to an explicit government
guarantee of eligible MBS. This is currently the case with Ginnie Mae, the government agency that securitizes
Federal Housing Administration (FHA) and Veterans Administration backed loans.
A primary reason for the higher price on the Ginnie Mae securities relative to Fannie Mae and Freddie Mac’s MBS
is the government’s full faith and credit guarantee on Ginnie loans. Fannie Mae and Freddie Mac and their securities are now explicitly backed by the Treasury through preferred stock purchase agreements, but even the relatively small distinction in this environment leads to a marked difference in price. At a consumer level, this benefit
from investors valuing the explicit guarantee on Ginnie Mae-backed loans can be seen in the spread between
mortgage rates on conventional versus FHA loans, which has ranged from 10 to 40 basis points in recent years.
The spread indicates the magnitude of the potential benefit of moving to an explicit guarantee behind the MBS.
This spread has varied over time due to investor perceptions regarding the relative value of the securities — a value
impacted by differing prepayment speeds, default rates, trading liquidity and other factors. The fact that the conventional conforming market is larger than the Ginnie market may indicate that a conventional MBS with an explicit government guarantee could trade even better than a Ginnie Mae MBS, leading to a further reduction in consumer costs.
Of course, the ultimate benefit to consumers of legislative reform that provides an explicit guarantee is that
the system will be more stable over time, and hence the mortgage market will be available to consumers,
even during severe downturns — a benefit that could be worth the trade-off of modestly higher costs overall.
MBA expects that the lower consumer costs resulting from the explicit guarantee behind the MBS, however, will
largely if not completely offset the higher costs that are a function of more rigorous capital requirements, the
mortgage insurance fund premium and affordable-housing fees. n
Mike Fratantoni is chief economist
and senior vice president of research
and industry technology at the Mortgage Bankers Association (MBA). He
is responsible for overseeing MBA’s
industry surveys, benchmarking studies, economic and mortgage origination forecasts, industry-technology
efforts, and policy-development
research for the single-family and
commercial/multifamily markets. Prior
to joining MBA, Fratantoni worked in
risk management and senior economist roles at Washington Mutual and
Fannie Mae. Reach the MBA at
Source: Mortgage Bankers Association
*All-in rate includes base rate, plus loan-level pricing adjustments/upfront mortgage insurance premium and annual MIP.
For Fannie and Freddie products assumes 97% LTV; for FHA assumes 96.5% LTV.
Comparison of FHA and GSE Loan Pricing by Credit Score*