Any Fannie, Freddie Changes Require Care, Experts Say
June 25, 2018
Any change the federal government makes to Fannie Mae and Freddie Mac must be carefully thought through to ensure there’s no disruption to the availability of safe, affordable mortgage financing, experts from around the country said at a forum hosted by the National Association of REALTORS® on Friday.
NAR hosted the forum to bring views from all sides of the debate to help clarify what needs to be done once the federal government turns it attention to reform of the secondary mortgage market.
Fannie and Freddie account for the bulk of the home mortgage financing sector today, and deciding when and how to reform them remains one of the federal government’s unfinished pieces of business stemming from the financial crisis 10 years ago.
The two companies were placed under federal conservatorship during the crisis to help shore up their finances and revamp how they operate after they suffered heavy losses. The companies have since stabilized and repaid the infusion of money they received, and are now contributing revenue to the federal government, but there remains a need to ensure they’re on a sustainable long-term path if they’re not replaced with other entities.
Experts at the forum, including private sector executives in the mortgage, finance, and capital markets sectors; academics; and the public policy arena agreed that any changes must be thoughtful and gradual to avoid disrupting a market that’s responsible for 20 percent of the nation’s economy. They differed on how to encourage more private-sector participation in the mortgage-backed securities market, which enables lenders to sell the home loans they make so they can turn around and make more loans rather than keep their capital tied up in portfolio loans.
Pat Lawler, an adjunct scholar at the American Enterprise Institute, called for gradually reducing the market share of Fannie and Freddie by, among other things, lowering the maximum conforming loan limit over time. Others, including Andrew Davidson of Andrew Davidson & Company, a risk analytics company for residential mortgage-backed securities, supported tinkering with the companies as little as possible since the system is working as well as it ever has.
Speakers credited credit risk transfers, or CRTs, as a market innovation that enables Fannie and Freddie to get credit risk off their books in a way that is attractive to private investors looking to participate in the mortgage market.
CRTs and other innovations have helped stabilize the finance market while giving the private sector mortgage market opportunities without them having to get back into the kind of private-label securities market that boomed prior to the financial meltdown a decade ago.
NAR’s position is that the federal government must stay in the market with an explicit guarantee of safe, affordable, well-underwritten mortgages to ensure the availability of adequate loan funds in good markets and bad. At the same time, private participation in the market should be encouraged.
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Updated: March 22, 2019