STEVENS: Resisting the seduction of housing speculation

Despite the recent revival of Fannie and Freddie, the market still needs reform

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Capitol Hill has been awash recently with various ways to reform Fannie Mae and Freddie Mac, the government-sponsored enterprises, or GSEs. From Corker-Warner in the Senate to Financial Services Committee Chairman Jeb Hensarling’s Path Act in the House, there has been no shortage of ideas when it comes to determining the future of the secondary-mortgage market and the government’s role in housing.

This substantive debate about housing reform by Washington stakeholders comes on the heels of the GSEs making substantial profits and, as a result, private investors (namely, hedge funds) jockeying to benefit by buying large amounts of stock in both companies. Despite the intent and hope of these investors, reform of the GSE model is still needed now more than ever to ensure a healthy future for the real estate markets. The notion that long-term transformation should be avoided because a select few in the private sector have placed a bet on Washington’s inability to come together on substantive reform is foolhardy at best.

When the government was forced to put the GSEs into government conservatorship in 2008 or face unspeakable global economic meltdown, not many would have expected that five years later we’d still be discussing the preservation of all aspects of the failed GSE model. With nearly 90 percent of newly originated loans backed by either one of the GSEs or by the Federal Housing Administration (FHA), this current model of government dominance of the mortgage market is ultimately unsustainable.

Let’s face it: whether by congressional action or through the Federal Housing Finance Agency’s ongoing efforts to shrink Fannie and Freddie, change is inevitable.

A successful secondary-mortgage market needs to produce a more stable and competitive system for all lenders. Transition to an improved system must retain and redeploy key aspects of the GSEs’ existing infrastructures, including certain operational functions, systems, people and business processes that have proven essential to smooth operation.

Specifically included in this new system must be an explicit government guarantee for mortgage securities, backed by a well-defined class of high-quality, single-family and multifamily mortgages; protection for taxpayers through deep credit enhancement that puts private capital in a first-loss position, with no institution too big to fail; and fair and transparent guarantee fees to create an FDIC-like federal insurance fund to serve as a backstop in the event of catastrophic losses.

There also must be a realization that in order to prevent disruptions to the day-to-day business activities of lenders and to ensure a fair, competitive and efficient secondary-mortgage market that ultimately benefits consumers, any new proposal must be carefully phased in.

All this discussion of reform should not discount what Congress and the Obama administration have done to protect consumers and provide more transparency in real estate finance transactions. The Dodd-Frank Act was successful in ending the abusive era of no documentation, no down payment and unsustainable products, as well as eliminating troublesome and predatory subprime lending from the system.

There are still concerns, though. Uncertainty and conflicting regulations continue to plague the real estate finance system. As a result, hardworking families who saved for years to afford a down payment still cannot obtain a loan, credit is tight unless you are a high-income earner with an immaculate credit history, and the American dream of homeownership is quickly becoming a hope rather than reality for millions of middle-class families.

Reform is often met with skepticism. However, we are at a critical juncture in our nation’s history. We’ve braved this last recession with great alacrity and are well positioned for what lies ahead. As we forge onward, let us create an economy and real estate finance system that protects taxpayers, consumers and investors, and offers the dream of prosperity for decades to come.

David H. Stevens is president and CEO of the Mortgage Bankers Association.

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