Locking In Progress Toward GSE Reform


In late April, FHFA released its 2018 Scorecard Progress Report for Fannie Mae and Freddie Mac. While it may not have received widespread attention, I found the Progress Report notable in the context of recent discussions around housing finance reform and the path forward for Fannie and Freddie (the GSEs).

The report touches on a number of important reforms that have been made at the GSEs to date. These are reforms that can and should be locked in — in order to set the stage for permanent, comprehensive reform that involves both the Administration and Congress. They include:

  • Credit Risk Transfer (CRT) and Taxpayer Protection. One core reform objective that everyone seems to agree on has been to reduce risk to taxpayers. While there is more to be done, the Progress Report indicates that the GSEs have already initiated a variety of approaches for transferring mortgage credit risk to private capital.In the single-family market, the GSEs have used CRTs to effectively shed approximately $91 billion of credit risk on $2.8 trillion of loans. They have also continued their long-standing, well-established transfer of credit risk to mortgage insurers, to the tune of about $312 billion.In the multifamily market, where both GSEs have been transferring credit risk for many years, the Progress Report indicates the GSEs transferred a portion of credit risk on almost all of their new acquisitions in 2018.
  • Securitization Infrastructure. The Progress Report also highlights the improvement in securitization infrastructure at the GSEs – including the Common Securitization Platform (CSP) and the Uniform Mortgage-Backed Security (UMBS) – designed to lead to a more efficient single-family MBS market. The CSP has been operational for certain Freddie Mac securities for over two years, and it was expanded to support issuance of the UMBS in June. Notably, the Scorecard reflects the longer-term objective for the CSP to be adaptable for use by other participants in the secondary market in the future.
  • Reduced Retained Portfolios. Pre-conservatorship, the GSEs’ retained portfolios served as significant drivers of company earnings, while also exposing the GSEs to substantial credit, asset liquidity, and interest rate risk. Since being placed into conservatorship, the GSEs have dramatically reduced their portfolios to about a quarter of their former size, reducing their risk exposures.

I would also note other positive changes at the GSEs, not explicitly mentioned in the Progress Report, which set the stage for comprehensive reform:

  • Eliminating Volume Discounts. FHFA’s prohibition on the use of volume-based guarantee fees or underwriting standards, which were a serious problem in the GSEs’ pre-conservatorship businesses, is critical to maintaining a level playing field for smaller lenders and ensuring robust competition in the single-family market.Such volume discounts for larger single-family lenders helped drive significant market concentration in the late 1990s and early 2000s, leading to diminished competition that ultimately hurt consumers. Since the companies have been in conservatorship, FHFA has taken steps to eliminate these practices and promote a more level playing field for lenders of all sizes and types. It is vital that any reform efforts incorporate this approach.
  • Capital Requirements and Institutional Readiness. FHFA has proposed a regulatory capital framework for the GSEs that, while still a work in progress, is a starting point based on current statutory capital standards. Appropriate capital standards would establish a measure of the GSEs’ readiness to operate post-conservatorship. We strongly believe that those standards should also encourage competition and foster a level playing field in the single-family and multifamily markets.

As part of ongoing administrative reforms, FHFA should complete the work on the capital rule and incorporate its actions on pricing and underwriting parity into formal rule. But legislative reforms are still needed.

Congress should create an explicit government guaranty on GSE-issued securities to ensure sufficient liquidity throughout the credit cycle. Today, in conservatorship, that guaranty is provided by agreements with the U.S. Treasury. As part of permanent reform, the Treasury agreements should ultimately be replaced by an explicit statutory, and paid-for, guaranty. A path for additional competitors in the secondary market is also a critical element of any future state. Congress should address these elements of reform.

There has never been a better time to pursue housing finance reform. FHFA, the GSEs, and the secondary market are far more ready for the transition to a reformed system than at any point during conservatorship. This progress mentioned above should be locked in as soon as possible to pave the way for Congress to finish the job of comprehensive reform.

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