On June 15, 2016, the Penn Wharton Public Policy Initiative and the Penn Institute for Urban Researchorganized two panels at the Capitol Visitors Center in Washington, D.C. on recent proposals that address the U.S. housing finance system. Congress has made few strides towards enacting legislation to reform the current housing finance system in the almost eight years since the U.S. Treasury announced the conservatorship of Fannie Mae and Freddie Mac. Although it is largely agreed upon that conservatorship of the two government-sponsored enterprises (GSEs) must come to an end, policymakers have struggled to reach a consensus on their future construction. This event convened experts from various arteries of the housing industry to discuss two new proposals for reforming the GSEs (Panel 1), which are highlighted in Penn Wharton PPI’s recent Issue Brief “A New Coalescence in the Housing Finance Reform Debate?”, as well as counter-proposals and counter-perspectives on how to move forward (Panel 2). Speakers at the event included:
Susan Wachter (Introduction), Professor of Real Estate and Finance, Wharton School, University of Pennsylvania
Laurie Goodman (Moderator), Director, Housing Finance Policy Center at the Urban Institute
Andrew Davidson, Founder and President, Andrew Davidson & Co. Inc.
Mark Zandi, Chief Economist, Moody’s Analytics
Peter Wallison, Chair, Financial Policy Studies at the American Enterprise Institute
Michael Berman, Principal, Michael Berman Consulting, LLC
Joshua Rosner, Managing Partner, Graham Fisher & Co.
Joseph Tracy (Concluding Remarks), Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York
Highlights from Panel 1:
Andrew Davidson’s Proposal of a Mutual Structure
The GSEs only functions should be “their guarantee and securitization business.”
Risk sharing actions must be encouraged, whether it is by establishing reinsurance and credit risk sharing programs or establishing rules that encourage the use of risk sharing.
The government should guarantee mortgage backed securities through a government wrap. GSEs could then pay a fee to the government to alleviate the cost of the guarantee.
A mutual structure of the GSEs should be established to protect taxpayers from losses while also “limiting the incentives to siphon the benefits of government guarantees to private shareholders.”
Mark Zandi’s Proposal of a Government Corporation
End too big to fail by “putting the core infrastructure of the secondary mortgage market into a government corporation and transfer credit risk to a diverse range of private sector actors.”
Maintain access for borrowers and lenders by requiring the government corporation to meet affordable housing and duty-to-serve mandates.
Protect taxpayers by requiring private capital and a mortgage insurance fund to cover losses.
Promote flexibility and competition by ensuring that every lender has complete access to the system so that pure competition is promoted in the primary market and for the provision of capital.
Ease the transition by ensuring that transition costs are minimal.
Highlights from Panel 2:
Peter Wallison’s Counter-Proposal: Privatize the System
There is no consensus regarding the future of the housing finance system. Groups need to be persuaded that the government should be involved at all in the housing finance system.
Fannie Mae and Freddie Mac should be phased out and the secondary market should be privatized, meaning no government guarantee and no catastrophic backstop.
Affordable housing mandates need to be separate from the housing finance system
Michael Berman’s Counter-Proposal: A Utility with a GNMA Wrap
A system is too big to fail if it would be too big to function, which a government corporation likely would be.
The housing finance system should be controlled by the public as a utility and heavily regulated, like any other municipal GSE.
The secondary market should be mostly privatized, but GNMA wraps could be used to ensure liquidity and homogeneity for the TBA Market, which is where mortgage-backed securities trade.
Joshua Rosner’s Counter-Proposal: A Utility
The recap and release scare (i.e., that Fannie Mae and Freddie Mac would fall back into old practices if salvaged) is without merit because there are new regulations in place. Namely, the 2008 HERA legislation solved most of the problems which led to the crisis, and the two GSEs now have a single regulator instead of two.
Housing finance should be structured as a utility because there would be no interference from Congress and lenders could compete based on services. This would work because Fannie Mae and Freddie Mac would not be able to re-creep into the primary market.
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