Replies to post #490120 on Fannie Mae-No Politics (FNMA)

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Here's a Fannie-Freddie fix proposal that greases the skids for CongressBY ANDREA RIQUIER | MARKETWATCH - 1:46 PM ET

A group of academics and practitioners have tried to make it as easy as possible for legislators to reform housing finance

As a new Congress settles into Washington, there's some very old business lurking that's not likely to grab its attention any time soon.

Fannie Mae (FNMA) and Freddie Mac (FMCC), the two giant mortgage guarantors, are still under government control, as they have been since the 2008 financial crisis. And despite passing all kinds of milestones since that time -- the 10-year anniversary of the crisis (http://www.marketwatch.com/story/the-regulator-the-whistleblower-and-the-ceo-key-housing-players-reflect- on-the-financial-crisis-10-years-later-2018-09-06), the first post-crisis taxpayer bailout (http://www.marketwatch.com/ story/fannie-mae-to-turn-to-taxpayers-after-65-billion-loss-2018-02-14) -- Congresshas come no closer to finding a permanent fix (http://www.marketwatch.com/story/as-conservatorship-reaches-10th-birthday-another-overhaul-proposal-for- fannie-and-freddie-2018-09-07) for the nation's housing finance system.

Now, a new paper suggests that's okay. It's better to leave Fannie(FNMA) and Freddie(FMCC) in conservatorship, a structure that's worked surprisingly well, its authors argue, while Congress works to find a permanent structure for housing finance that won't replicate the problems that helped get the enterprises into the financial jam in the first place.

That contrasts with many previous reform proposals, which advocate getting the responsibility for the enterprises away from taxpayers as quickly as possible, especially as the long economic expansion seems more and more likely to come to an end.

The paper (https://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Blueprint-Admin-Reform-HF-System- 1.7.2019-v2.pdf), released Tuesday by the Milken Institute Center for Financial Markets, proposes "administrative actions," meaning those that can be accomplished by the Treasury Department and the head of Fannie and Freddie's regulator, to make Congress' job easier, if legislators ever do decide to address housing reform. The administrative fix idea has caught on recently, as the regulator role has passed to someone most housing observers believe will work well with Treasury Secretary Steven Mnuchin(http://www.marketwatch.com/story/home-prices-have-surged-and-so-will-the- governments-share-of-mortgages-2018-11-27).

"Administrative measures can address many of the stumbling blocks to legislative action and thereby set the stage for further reform that includes changes to the GSE charters," the authors note.

Among the steps the authors propose are reviewing how much capital Fannie and Freddie should hold, via another public comment process. They also suggest completing initial work that's been done to unify the process by which Fannie and Freddie each take the mortgages that they buy and package them for bond investors. That may sound wonky, but many housing observers think it's a crucial step for moving toward a single, utility-like entity that underpins the housing finance system, rather than leaving it to two corporations competing recklessly with each other for the biggest share of business.

Read: Congress wouldn't do it, so Fannie and Freddie reformed themselves (http://www.marketwatch.com/story/congress- wouldnt-do-it-so-fannie-and-freddie-reformed-themselves-2017-08-03)

More controversially, the two enterprises should be allowed to hold the capital they produce, rather than remitting it to the Treasury Department. That's a step that seems obvious -- no company can operate indefinitely by sweeping all its profits (http://www.marketwatch.com/story/fannie-mae-ceo-says-its-not-sustainable-to-operate-without-capital-2016-05-05) to another entity -- but the current system has clearly worked well enough for taxpayers that the government hasn't hustled to change it.

Those ideas have been discussed by housing finance participants for years, with varying degrees of support. The authors propose a few newer ones, including making fees that the GSEs charge to lenders more closely tied to how risky the mortgages are. Right now, the authors write, low-risk borrowers pay higher fees in order to help subsidize the broader housing market. But this leads to "adverse selection" for Fannie and Freddie, as loans from lower-risk borrowers wind up being bought by private investors or retained by banks. (It should be noted that the performance of mortgages bought in conservatorship (https://www.calculatedriskblog.com/2018/06/fannie-mae-mortgage-serious-delinquency.html) has been stellar.)

The enterprises' footprint should also be "tailored," the authors say, to no longer include things like cash-out refinances and second-home financing. "The private sector can provide loan products for these purposes, subject to applicable guardrails and consumer protections," they wrote. "There is no need for a government guarantee with the concomitant taxpayer risk for an activity that does not further the societal goal of affordable homeownership."

That's an idea that's made the rounds recently in Washington as something that would gain support from both parties. Liberals like (http://www.marketwatch.com/story/elizabeth-warren-proposes-legislation-for-affordable-housing-crisis- 2018-09-25) the idea of keeping Fannie and Freddie's focus on affordable homeownership for all, while conservatives prefer (http://www.marketwatch.com/story/as-conservatorship-reaches-10th-birthday-another-overhaul-proposal-for-fannie- and-freddie-2018-09-07) that the private sector take over as much of their work as possible.

Also read:House prices have surged, and so will the government's mortgage obligations (http://www.marketwatch.com/ story/home-prices-have-surged-and-so-will-the-governments-share-of-mortgages-2018-11-27)