Jim Davis is editor of Scotsman Guide Residential Edition.
Reach him at (800) 297-6061 or firstname.lastname@example.org.
Chief economist, Moody’s Analytics
By Jim Davis
Mark Zandi is chief economist of
Moody’s Analytics where he directs
economic research. Moody’s Analytics, a subsidiary of Moody’s Corp.,
is a leading provider of economic
research, data and analytical tools.
He is a cofounder of Economy.com,
which Moody’s purchased in 2005.
Zandi is on the board of directors
of MGIC, the nation’s largest private
mortgage insurance company, and
is lead director of the Reinvestment
Fund, a large community redevelopment investment fund that makes
investments in disadvantaged
How to get Freddie Mac, Fannie Mae
out of government conservatorship
Over such a contentious issue, there actually seems to be some consensus: The 10-year limbo of conservatorship
for government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae should end. The way from point A
to point B seems less clear, however. We asked the chief economist of Moody’s Analytics, Mark Zandi, for his
thoughts on potential reform options. “Well, I am partial to the one that I proposed,” Zandi said with a laugh.
Zandi and several co-authors suggested as part of a series of papers on the reform issue that the GSEs should
be merged into a single government corporation with private shareholders that would be mandated to transfer
“non-catastrophic credit risk” to the private sector. “I’m also less enamored with the idea of just privatizing these
guys, sending them out into the wild as a duopoly,” Zandi said. “That didn’t work too well in the past, and I don’t
think it would work well for us in the future.” Zandi also sees merit in the effort to open up the system to multiple
guarantors. That proposal failed twice in the legislative process.
Are you surprised that GSE reform appears dead this year?
Surprised no, disappointed yes. I always knew it was a longshot just given the complexity of GSE reform and the
difficult political environment.
What are the chances that reform will actually take place next year?
I’d say they’re low. We’ll have to see what happens on the other side of the mid-term elections and what’s the
political backdrop. I think the political environment still will be very, very difficult. My guess is that you don’t get
something as complicated as GSE reform through the legislative process unless there’s some kind of crisis. It’s
very hard to get Congress to agree to something as complex as this. It’s not like the system is dysfunctional. It’s
working. Reforms are being made. It’s not standing still. It’s not like the machine is broken, and we have to do
something or otherwise people won’t get mortgages.
What are the chances that the Trump administration will step in and act unilaterally?
I think there will be administrative reform where the Trump administration works with the new [Federal Housing
Finance Agency, or FHFA] director. One, they will continue to expand the credit-risk transfer process. It’s mostly
capital-market focused. I think they will be more focused on getting institutional capital into the risk-transfer
process. Second, [a priority will be] making sure the common securitization platform is hitting its goals and
moving toward a single security for Fannie and Freddie. And third, I think they will probably do some things to
pull back the GSEs’ footprint.
There has been some talk about lowering their loan limits maybe, but I think probably not. There’s been some
talk of pulling back on some of the types of lending the GSEs do around cash-out refinancing, multifamily lending and investor loans, [as well as] increasing guarantee fees — [and] particularly loan-level pricing adjustments
to reduce the cross subsidy in the system. There has been some outside talk of actually privatizing the GSEs
administratively. I think that’s a very heavy lift and won’t happen.
What advice would you give lawmakers or the administration?
If I were them, I would work at reducing the centrality of Fannie and Freddie in the system. That means really
focus on [credit-risk transfer] and require them to offload more risk, particularly to institutional-based sources
of capital. They’re going to need reinsurers and private mortgage insurers to play a bigger role in the system.
The common securitization platform should be a real focus, also adding new functionality and putting the
automated underwriting system onto the platform so more people can see it and use it. I would work toward
greater transparency. Right now, they’re very opaque [as] to how they think about their capital, implicit capital
and return on capital, and what it all means for pricing. They can set the cross subsidy in the system without
much oversight. They can set capital standards higher or lower for other players in the system like the [mortgage
insurance] companies or reinsurers or capital markets. It’s unclear whether their pricing is appropriate in the
context of the tax law changes.
I would strongly encourage the next director and the Treasury to work on improving the transparency of the
two entities [Fannie and Freddie], because I think that would reduce their centrality to the system. If I were
the new FHFA director, I would focus on that internally, making them less central and then easing the way for
future reform. n