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NAR’s Utility Model for Fannie, Freddie Garners Support

January 15, 2021

Placed under conservatorship in 2008, the government-sponsored enterprises Fannie Mae and Freddie Mac are now at the center of a debate over their future and the next step in their evolution. On Thursday, the National Association of REALTORS® presented a refined version of its own proposal, first released as a white paper in February 2019—that the GSEs should be transformed into mortgage market utilities.

During a webinar Thursday, “The Future of the GSEs Webinar: Readying Fannie and Freddie for the Next Chapter,” NAR brought together policy, academic, and financial experts to discuss new research and to explore the benefits to consumers, taxpayers, and markets of NAR’s market utility option.

A utility would serve the dual objectives of creating competitive outcomes and achieving the charter goals of both Fannie and Freddie to provide liquidity, stability, and affordability to the mortgage market, said Ken Fears, senior policy representative at NAR. Fears is co-author of both the original NAR white paper and the update, titled "GSEs: Their Viability as Public Utilities." 

Susan Wachter—Albert Sussman Professor of Real Estate and Professor of Finance at The Wharton School of the University of Pennsylvania—and Richard Cooperstein, director of alliances and policy at Andrew Davidson & Co., Inc., coauthored both papers and joined Fears for Thursday’s discussion. The new report explores the various aspects of the utility model as a framework for regulating the GSEs and examines how the GSEs have performed during conservatorship. The authors’ conclusion is that the utility model is the best way to lock in the beneficial changes that have been made to the GSEs since the 2008 financial crisis.

Countering concerns that such a model would stifle competition, Fears noted that the GSEs typically comprise only 50% of the mortgage market and that there are currently hundreds of mortgage-backed securities issuers and thousands of credit investors, including the portfolio segment of the market. There’s also government-insured FHA and VA lending.

Fears said, GSEs also maintain infrastructure, curate the GSE MBS and credit risk transfer markets, and maintain market standards, and are countercyclical—meaning that they can counteract the fluctuations in an economic cycle and offer stability.

“Fannie and Freddie have been transitioned from essentially hedge funds in the past and are today companies that are market makers,” he said.

In order to keep this stability and competition going, Fears added, GSEs need to be transformed into a utility—simply leaving matters as is will not be enough. “It’s a false assumption that this boat will keep going in steady waters,” he said. “We need a utility structure to lock down what we currently have that is working.”

More specifically, the GSEs should be structured as systemically important financial market utilities, said Wachter. Such a structure, she stated, promotes competition and private capital investment. SIFMUs can offer scale economies in infrastructure, liquidity, and diversification, she said, and they can create competition that encourages the to-be-announced market (TBA) to efficiently price risk. And SIFMUs compete on service, not price, she said. “There’s no race to the bottom. Everyone isn’t trying to undercut each other,” she stated.

In addition, Wachter said, SIFMUs would include an enhanced regulator that oversees returns, capital, and the mission of the GSEs. This would protect taxpayers and reduce the interest rate and credit risk, she explained.

As to whether future investors will accept the return on equity offered by a GSE utility, Cooperstein said he believed that they will. A utility is likely to offer a lower return on equity than either large banks or real estate investment trusts, he said. Cooperstein argued, however, that the stability offered by a utility could be very attractive to investors. According to the group’s research, which looked at 20 years of the GSEs’ loan-portfolio performance, he said, there was no scenario in which an investor would receive less than a 3% return, and it was more likely to average around 6% to 8%. At the same time, the risk of losing money is low—around 1% to 3%. “Under this model,” he said, “even in 2007 you wouldn’t have lost equity. If you set up the utility properly, you’ll get a good rate of return.”

The release of the new research is timely: On Thursday, the Federal Housing Finance Agency and U.S. Treasury Department announced modifications to the Preferred Stock Purchase Agreement with Fannie Mae and Freddie Mac. The changes will allow the GSEs to retain more of their earnings as important capital rather than passing them directly to the Treasury (which had been required under the original conservatorship agreement in 2008). NAR expressed appreciation for administration efforts to ensure market stability and liquidity during the ongoing pandemic but cited concerns that the changes may limit the enterprises’ ability to serve the overall U.S. housing market, including first-time buyers, those in underserved communities, investor properties, and second-home purchases.

“While we are grateful additional steps were taken, much work remains in this process and we look forward to furthering conversations with Congress and with the current and future administration," said NAR President Charlie Oppler in a Jan. 15 statement.

Through their research and Thursday’s webinar, Fears said he and his fellow authors were hoping to spark dialogue and debate, particularly in the areas of inclusion and affordable housing.

“This event is a kick-off,” he said. “A way to come together to do the deep thinking on what needs to be done going forward. We want to create a broad umbrella group and create opportunities for all.”