Fannie Mae-No Politics (FNMA)

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Clinton Adviser Co-Authored Plan To Replace Fannie And Freddie

A former Clinton White House staffer recently hired as a consultant to the Hillary Clinton campaign is one of the co-authors of a plan to reform the secondary mortgage market by merging Fannie Mae and Freddy Mac into a single government-owned corporation. Economists have largely responded favorably, but the future of the proposal will depend largely on the outcome of the elections fall.

Gene Sperling, an economist who served as director of the National Economic Council in both the Clinton and Obama administrations, joined the Clinton camp last month. The plan, published in March, proposes to combine Fannie and Freddie into something called the National Mortgage Reinsurance Corp. (NMRC), which would perform the same functions those entities do today. However, “it would be required to transfer all non-catastrophic credit risk on the securities it issues to a broad range of private entities,” according to the report. Mortgage-backed securities would be backed by the U.S. government.

 

No More Too Big To Fail

In the event of a mortgage market catastrophe, the NRMC would be responsible for 3.5 percent of the losses, which it would hold in a mortgage insurance fund. Mortgage insurance would cover the next 2.5 percent and, if necessary, the Federal Housing Finance Authority would step in and recoup losses to the taxpayers after the crisis ended, similar to the way Fannie and Freddie have repaid the money the Treasury invested in them after the last recession.

Economists say a mortgage insurance fund large enough to absorb 3.5 percent of the losses from the recent financial crisis would have been more than sufficient to keep Fannie and Freddie afloat.

As a government corporation, the NMRC would be mandated to balance broad access to credit with the safety and soundness of the mortgage market. No private institutions will be backstopped by the government. The NRMC would also be overseen by the FHFA, as Fannie and Freddie are today.

A similar legislative attempt, the Johnson-Crapo Bill, proposed to replace Fannie Mae and Freddie Mac with one government entity; it failed to pass in 2014.

The recent proposal is similar to Johnson-Crapo, but this approach to the transition is somewhat more simple, said Michael Fratantoni, chief economist of the Mortgage Bankers Association. “You’re not going to have to attract a huge amount of capital to support companies, making the transition easier,” he said.

Sperling’s proposal is “targeted and very well done,” said economist Albert Saiz, associate professor of urban economics and real estate at MIT and director of the MIT Center for Real Estate.

“We need a new system that balances the insurance with some underwriting that is private, to a degree,” Saiz said. “I think this proposal strikes a very nice balance. I especially like that it makes transparent the risks that we are taking as a society and that those risks can be underwritten in an actuarial fashion. Before, it was fuzzy.”

The proposal is a good frame, he said, but a lot depends on the details that have yet to become clear. However, he likes the emphasis on transparency and said it was designed to minimize impact on consumers and not add to the cost of a mortgage. In fact, it could even make them less expensive.

“You could argue that risk was mispriced wildly before the recession and now it’s priced by the government,” Saiz said. “I suspect that as things become transparent, some inefficiencies are going to disappear.”

Designating the NMRC as a government corporation could mitigate any additional costs to obtaining a mortgage, Fratantoni said, adding that “mortgage rates would be similar to what we see in the market today. There are always tradeoffs; many in the industry would think that dealing with a private sector entity might be more flexible.”

One key component of the proposal is creating checks and balances within the structure of the NMRC to safeguard the best interests of the market.

“If you have competing GSEs or secondary market entities, market competition can in some ways influence behavior,” Fratantoni said. “The reliance is upon properly structuring the NMRC with the right leaders and rules. It’s going to be complicated to make sure all relevant voices are heard to make sure the new entity is acting for the good of the market.”

 

Shifting Risk To Private Investors

Finding the right amount of risk to assign private companies while keeping the market stable will be crucial, according to David Min, assistant professor …






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