Here are the ten reasons why the proposed Fannie Mae and Freddie Mac reform is a win for Americans.
1. Preserve What Works
That's the 30-year fixed rate residential mortgage. FNMA and FHLMC are absolutely critical to the housing market. Along with GNMA, they represent close to 90% of residential home loan originations. Qualifying for jumbo loans is a different story. Home buyers have to put 10-20% down on the mortgage, credit score requirements are higher and the borrower needs to have strong reserves. This would eliminate the majority of homeowners, as well as set progress back for minority homeownership.
2. Protect the Taxpayer
Increase private equity which will take precedent over taxpayer liability. This will reduce the risk to the taxpayer and still provide regulation under the new framework.
3. Guarantee Liquidity
Only an explicit government guarantee can protect liquidity during a financial crisis. Without government backing, home loans would dry up. The result would be a housing market with home prices plummeting further than in the 2008 financial crisis – where the government insured liquidity for home loans during the economic crisis. This would lead to a national depression similar to the 1930’s. The next financial crisis may not be mortgage or housing related, but a foreign debt crisis, U.S. federal debt crisis or other possibilities. It’s critical that during these extreme situations, the housing market does not also fall to extreme levels.
4. Minimizing Risk, Mirror Ginnie Mae
The GNMA Model demonstrates the impact of the Federal Government and the private sector working together. It limits the taxpayer’s exposure to risk associated with secondary market transactions. Its strategy is to guarantee a simple pass-through security to lenders rather than buying loans and issue its own securities.
5. Who Benefits
The U.S taxpayer is directly benefiting from Fannie and Freddie earnings over the last four quarters. Fannie Mae’s 2016 net income of 12.3 billion increased from 11.0 billion in 2015. Together, the agencies reported over 20 billion in net income in 2016. These earnings reduced the 2016 US deficit by 20 billion – an advantage to the taxpayer.
6. Multicultural Future of the Housing Market
Improve liquidity for segments of the market that are currently under served. As an example, the coming decades will see rapid growth in minority households, particularly Hispanic. Over 88% of household growth from 2020 to 2030 will be among minorities. In fact, first-time Hispanic homeowners grew at a rate of 51.7% from 2000 to 2010.
7. Competition is Key
Promote a competitive primary market for lenders of all sizes and models. The mortgage market and consumers benefit from a large and diverse base of lenders. Smaller lenders play a key role in strengthening the system for consumers.
The government and private sector roles in the Secondary market need to be rebalanced. Long-term conservatorship is politically and economically unstable.
9. Congress Needs to Act
This will provide political legitimacy and market confidence for a stable, long term solution. Preserving a strong, affordable housing market and the end result will be a sustainable, more vibrant Secondary Mortgage Market.
10. Level the Playing Field
They must provide Structural Requirements or guardrails to govern the framework for the new system; Prudential Standards that protect taxpayers and conduct regulations that maintain transparency. Guardrails like this will ensure a level playing field for market participants.
Click here to read the full whitepaper regarding the MBA’s proposed GSE reform. I’m in full support of the MBA’s recommendations—pleased that in the midst of legislative reform the mortgage industry has a platform to voice what matters. Under the leadership of President and CEO David Stevens, the MBA has brought great leadership to the Mortgage Industry. More specifically, they are great advocates of making the dream of homeownership a reality in a responsible manner.
Written by Mike Downing and John Bergman