Ending the conservatorship of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac is seen by many politicians and housing stakeholders as the final unresolved issue from the financial crisis of 2007–2008. The GSEs’ market power has only increased in the years after they went into conservatorship, and the federal government’s involvement in home finance has strengthened. This is according to new data and commentary from the Terwilliger Center and its Advisory Committee.
“A serious debate over the GSEs’ future is long overdue. Fannie Mae and Freddie Mac were never meant to stay in conservatorship indefinitely,” said Hugh Frater, Board Member of BPC and Chairman of Vessel Technologies. “With housing more unaffordable than ever, now is the time to unlock the GSEs’ innovation capabilities and improve their efficiency. Policymakers must resist kneejerk opposition to changing the status quo and focus on reforms in the long-term interest of taxpayers and homebuyers alike. BPC’s framework offers a clear, practical set of guardrails as the Trump administration and others weigh the path forward.“
Understanding the roles of the GSEs in both single-family and multifamily mortgage markets, ensuring affordable mortgage credit, lowering taxpayer risk, considering how ending conservatorship will affect consumers in the housing finance system, and promoting market stability are all important parts of any exit plan the Trump administration is considering.
Transitioning Out of Conservatorship: What Does This Mean?
Since the publication of the 2013 study, Housing America‘s Future: New Directions for National Policy, by the BPC Housing Commission, the Bipartisan Policy Center has been attempting to provide a bipartisan route forward for comprehensive housing finance reform. Building on this background, The Terwilliger Center presented the following ideas while acknowledging the realities of the GSEs’ nearly 17-year conservatorship. Taking into account the substantial political and economic obstacles involved, the organizations goal is to offer a transparent, bipartisan framework for a careful transition out of conservatorship.
“Since the GSEs entered conservatorship, the Federal Housing Finance Agency has transformed how they operate and are supervised—yet Congress hasn’t advanced serious reform in years,” said Egbert Perry, Chairman and CEO of The Integral Group, LLC. “There’s a strong case for ending conservatorship, but doing so requires a thoughtful, coordinated plan. The private sector, in particular, needs clarity about what’s next. BPC’s principles reflect a consensus that can help guide the administration through the tough technical decisions ahead.”
Following years of discussion over the future of the GSEs, some important areas of bipartisan agreement have surfaced, and these principles represent some of them. BPC will keep an eye on any proposed modifications to the GSEs and evaluate how they might affect markets, affordability, and housing policy.
The Seven Principles:
- A reformed housing finance system should promote the uninterrupted and broad availability of affordable mortgage credit, while reducing the federal government’s exposure, shrinking its footprint, and protecting American taxpayers.
- The federal government conferred substantial benefits on the GSEs before conservatorship, and these benefits should not continue out of conservatorship without adequate taxpayer compensation.
- Extending mortgage credit and absorbing a preponderance of the risk is a role that private capital can and should continue to play for the vast majority of loans originated.
- There must be a clear, institutionalized structure for the government to expand its catastrophic credit-risk role temporarily and flexibly during severe economic downturns.
- To ensure the continued safety and soundness of our housing finance system and that the GSEs are operating within their charter-granted mission, the GSEs must have a strong prudential regulator, robust capital standards, and clarified market structures that reflect a post-conservatorship evaluation of the appropriateness of the many market-changing reforms implemented during the GSEs’ conservatorship.
- Because of the size and importance of the GSEs to both the single-family and multifamily mortgage markets, as well as the broader financial system, an orderly exit from conservatorship requires a well-conceived plan with a clearly communicated timeline and steps that give investors, borrowers, taxpayers, and other stakeholders confidence.
- To optimally provide liquidity, stability, and affordability to the mortgage market, reform should further a coordinated housing finance policy and contemplate the appropriate roles and responsibilities of the different government entities that support the housing finance system, ensuring that the government does not crowd out the private sector from market segments where it can efficiently supply adequate capital.
“With speculation rising about the GSEs’ future, BPC has developed a set of principles for consideration in any exit strategy,” said Henry Cisneros, Board Chair of BPC and Former Secretary of the U.S. Department of Housing and Urban Development (HUD). “They reassert that housing finance reform is both important and possible if it aligns with longstanding bipartisan priorities like preserving access to affordable single-family and multifamily mortgage credit, protecting taxpayers, and maintaining a stable housing market and a strong economy.“
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