Magazine article American Banker

Ways to Transition Away from the GSEs

Magazine article American Banker

Ways to Transition Away from the GSEs

Article excerpt

Byline: Kevin Wack

WASHINGTON - With the likelihood of legislation to create a new housing finance system increasingly remote, the government should still take steps to transition away from a system built around Fannie Mae and Freddie Mac, industry representatives said Wednesday.

At a Senate subcommittee hearing, Sen. Jack Reed, D-R.I., said that after decades of bipartisan agreement that the government should support homeownership, old assumptions are being reconsidered. "How do we make a transition? And how do we do it in an effective way?" Reed asked.

Andrew Davidson, whose New York firm provides research to investors in the mortgage market, suggestedencouraging or requiring Fannie and Freddie to attract private capital.

He said Fannie Mae and Freddie Mac could develop a subordinated bond structure. Private investors would take the first-loss position on the government-sponsored enterprises' bonds, either side by side with Fannie and Freddie or, in some cases, ahead of them.

Such an approach, Davidson said, would probably require the approval of the Federal Housing Finance Agency, which regulates Fannie and Freddie.

The FHFA has played an active role in the two companies' decision-making since the federal government became their conservator in 2008. "I think the key factor there is sending the message to FHFA that experimentation is good," Davidson said, "and you don't need to have sort of a sole focus on conservatorship of every dollar today, and that finding the right solution actually adds value to the GSEs over time. …

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