Magazine article American Banker

What Republicans' Election Win Means for Housing Reform

Magazine article American Banker

What Republicans' Election Win Means for Housing Reform

Article excerpt

Byline: Christopher Whalen

With the November election in the rearview mirror, some observers believe that Republicans' new control of both the House and Senate will make reform of the federal housing agencies more likely. This view is a bit optimistic for several reasons.

First, there is no pressing political catalyst for reforming the federal housing agencies. Both Fannie Mae and Freddie Mac operate just fine under government conservatorship. Members of both political parties are content with the current arrangement, whereby the Treasury Department receives most of the net income from both government-sponsored entities. Moreover, most reform proposals start with the false assumption that the GSEs need to be recapitalized to perform their function. But as long as the GSEs have the backing of the U.S. taxpayer, they do not need to retain any capital, as I noted in an earlier article for American Banker, "How Much Capital Does a GSE Need?".

The second reason that GSE reform is unlikely to move forward is that the House and the Senate continue to have a dramatic "conflict of visions," to borrow the title of Thomas Sowell's wonderful book, over the direction of reform.

Rep. Jeb Hensarling, the Republican chairman of the House Financial Services Committee, wants to eliminate Fannie and Freddie, leaving only the Federal Housing Administration to support housing. Were the House Republican vision realized, home mortgage lending in the U.S. would plummet, even below the anemic $1 trillion in new originations for 2014. The to-be-announced or "TBA" market, which allows mortgage lenders to hedge their interest rate risk, would disappear. Even Republicans who strongly oppose the idea of a government-supported housing market recognize that this approach is not feasible. Indeed, Hensarling's proposal would probably never pass in the House.

The Senate, on the other hand, seems inclined to combine the GSEs into a new federally-backed mortgage guarantor that would be funded by the mortgage industry and at least in part by private investors. The proposals floated in the Senate over the past several years represent an incremental change that leaves the prime mortgage market dominated by the largest Wall Street banks. Were the Senate proposals to become law, the mortgage market would likely continue to move sideways in terms of origination volumes and consumer access to credit.

Moreover, both the House and Senate visions for the private sector's role in the housing market are largely at odds with reality. To listen to members of the House and their allies who reside in conservative think tanks, you might believe that private investors are prepared shoulder the credit and market risk of single-family mortgages. …

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