In the wake of housing crisis, Fannie Mae and Freddie Mac were both placed under conservatorship of the Federal Housing Financing Corporation in 2008, in part to ensure solvency for the for-sale market. In the years since, both agencies have been integral in supporting the growing multifamily segment. That said, there remains an ongoing conversation around the future of Fannie and Freddie under the broader argument of taxpayers’ exposure to mortgage credit risk. There has been little success in reforming the GSEs as some recommendations have been too radical, and legislators have been slow to address the issue.
Reducing Taxpayer Risk
The future of both Fannie and Freddie is a subject contingent on the outcomes of impending political elections as well as the direction leadership steers housing finance in the coming years. Unlike many current issues, there is some form of bipartisan support to wind down both agencies, increase the private sector’s scope in supporting the for-sale market and redirect the public sector to focus efforts in support of the rental market generally.
Most notably, the Bipartisan Policy Center nonprofit think tank offered a series of recommendations on housing policy in a 2013 report. With respect to GSE reform, the group advised that “private sector must play a far greater role in bearing credit risk,” that GSE portfolios should be reduced and GSE pricing structure should be moved “closer to what one might find if private capital were at risk.” Further, the housing commission recommends dissolving the GSEs into a public guarantor role that would only ensure investors will receive “timely payment of principal and interest” on mortgage-backed securities. The dissolution would remove the ability of buying and selling like the current model. Overall, there is interest from all sides to reduce the footprint of GSEs. Within multifamily, the FHFA has installed annual loan limits on mortgage production which were recently lifted from $31 billion to $35 billion based on the size of the multifamily market.
A New Model
More recently in 2016, the Urban Institute and Moody’s Analytics partnered to outline housing policy recommendations in anticipation of the upcoming presidential election. Similar to the earlier Bipartisan Policy Center recommendations, the 2016 joint report conceptualized a government corporation called the National Mortgage Reinsurance Corporation (NMRC) to transfer more risk to the private sector. Within the housing finance system, the NMRC would be responsible for bearing catastrophic credit risk, mortgage securitization and fulfilling the public policy mission. The mechanisms in play to transfer risk to the private sector are complex and deal with the source of capital at a loan level and pool level, including the front end or the back end of mortgage transactions. While GSEs are currently required to report on risk transfer to the FHFA, the joint report’s proposed balance of transferring risk would be apparent when the GSEs broaden their reporting efforts. Further, within high-level goals to maintain checks and balances, a governance system consisting of nine directors would serve to fulfill the government corporation’s mission. Similar to boards in the private sector, there would be a “balance of consumer and shareholder perspectives” and would contain audit, risk, governance, finance and compensation committees.
While GSE reform is an ongoing subject, it is especially popular given that we’re approaching the presidential election. Overall, these recommendations have received support on both sides of the aisle, though the issue remains complex with no immediate action expected on the horizon.