Government's role in lending - Ending Fannie Mae, Freddie Mac could increase competition

Published on: August 9, 2013


Rob Robertson and Kent Hoover, Memphis Business Journal

On July 24, after a marathon markup session, the House Financial Services Committee approved legislation to wind down Fannie Mae and Freddie Mac over five years and rely on the private sector to provide a secondary market for residential real estate mortgages.
The committee approved the Protecting American Taxpayers and Homeowners Act on a party-line vote. Democrats offered numerous amendments to the bill, but all were defeated.
Besides winding down Fannie Mae and Freddie Mac, the PATH Act would limit the Federal Housing Administration’s role in housing finance to first-time homebuyers and people with low and moderate incomes.

Republicans contend the legislation will increase competition in the mortgage market and give homebuyers more choices on loan products.

"It creates a housing finance system that's designed for hardworking taxpayers so they never again have to bail out corrupt financial government enterprises like Fannie Mae and Freddie Mac, whose top executives engaged in accounting shenanigans to trigger huge bonuses for themselves," said committee chairman Jeb Hensarling, R-Texas.

Local mortgage lenders, along with other groups in the housing industry, have responded with something less than enthusiasm to the lawmakers' efforts. They contend a federal backstop for mortgages such as that now provided by Fannie Mae and Freddie Mac - is needed to keep credit flowing.

"Fannie and Freddie have done very successfully up until 2007-08," says Kent Wunderlich, CEO at Financial Federal Savings Bank in Memphis. "Problems arose, obviously, but I still think that we've got to have some kind of government leadership or sponsorship."

The National Association of Home Builders agrees with House Republicans that private capital should dominate the housing credit market. But federal support will still be needed in emergencies.

"The historical record clearly shows that the private sector is not capable of providing a consistent and adequate supply of housing credit without a federal backstop," said Jerry Howard, CEO of NAHB.

Pat Sandlin, president and CEO of Community Mortgage Corp., was more blunt.

"Eliminating the GSEs wouldn't just devastate the mortgage industry - it would push consumers out of home ownership and cost thousands of jobs as a result," he says, adding that banks simply do not have the capital to fill the void that would be left without the government-sponsored entities.

"GSEs currently back about 85 percent of all new home loans made in America, and the big banks do not have the capital to step up and replace that," he says. "The only way to get private participation because of the risk is yields, and they're not attractive enough to Wall Street right now."

The National Association of Realtors says it supports winding down Fannie Mae and Freddie Mac, and backs the bill's creation of a new entity that would support the secondary mortgage market. Butit opposes the PATH Act because it doesn't include an explicit federal guarantee for mortgages and goes too far in reforming the FHA.

"We believe a government guarantee is necessary to create stability in housing finance markets, and to ensure the continued availability of 30-year fixed rate mortgages for all qualified borrowers - not just those with a high down payment and very high credit score," said NAR president Gary Thomas.

"The PATH Act will jeopardize the ability of American families to purchase a home, as well as the future of the housing industry itself," Thomas contends.

The legislation likely will pass the House, but appears to have no chance in the Senate.

The Senate is considering a different approach to housing finance reform. The Housing Finance Reform and Taxpayer Protection Act, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would wind down Fannie Mae and Freddie Mac, but replace it with a Federal Mortage Insurance Corp. The FMIC would provide insurance on mortgage-backed securities and collect premiums from issuers.

Jim Vogel, director of interest rate strategies at FTN Capital Markets, says Fannie and Freddie were always unpopular with the Bush administration, which wanted to put pressure on them to increase capital and shrink the asset side. But they remained popular in Congress until around 2010.

"There are a lot of people who want them to go away, but they don't necessarily want what they do to stop," Vogel says. "Would the government be able to manage the transitions to something else? The Corker-Warner bill tried to think that through and it could reasonably work."

Wunderlich is skeptical.

"Sen. Corker's bill would do away with Fannie and Freddie and have some sort of government insurance company and some sort of loss sharing in the private sector," he says. "Theoretically that's fine, but what it means is higher costs and high rates for consumers in my opinion. And I just don't think that's going to be good for the economy, especially right now."