Much to the surprise of many pundits, the recently signed Financial Reform Bill did not outline guidelines for regulators to begin crafting the future of Fannie Mae, Freddie Mac, and Ginnie Mae. Although this was viewed as an oversight by most, it was the right move because it will allow our political and financial leadership to focus on FIXING THE BROKEN HOUSING FINANCE SYSTEM
In April, Treasury outlined their "Housing Finance Reform" objectives. The administration's proposals will be designed to achieve four objectives.
- Mortgage credit should be available and distributed on an efficient basis to a wide range of borrowers.
- A well-functioning housing market should provide affordable housing options, both ownership and rental, for low and moderate-income households.
- Consumers should have access to mortgage products that are easily understood.
- The system should distribute the credit and interest rate risk in an efficient and transparent manner that minimizes risk to the broader economic system an does not generate excess volatility or instability.
At the same time, the Obama Administration released questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy.
- How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?
- What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?
- Should the government approach differ across different segments of the market, and if so, how?
- How should the current organization of the housing finance system be improved?
- How should the housing finance system support sound market practices?
- What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?
- Do housing finance systems in other countries offer insights that can help inform US reform choices?
This was just posted on the White House Blog...
Moving Forward on Housing Finance Reform
by Jeffrey A. Goldstein, Under Secretary for Domestic Finance at the U.S. Treasury Department
The housing industry is of vital importance to our country's future. It is a key sector of our economy, supporting millions of jobs in construction, manufacturing, real estate, finance, and other industries. Moreover, for many Americans, their home is their largest financial investment.
That is why the Obama Administration is strongly committed to responsibly reforming our nation's broken system of housing finance, including Fannie Mae and Freddie Mac. And that is why it is so important that we get the reforms right.
Work on this issue is well under way, as the Obama Administration continues to develop a comprehensive reform proposal for delivery to Congress by January 2011. Earlier this year, Secretaries Geithner and Donovan testified before Congress, outlining the principles that will guide the Administration's housing finance reform efforts. In April, the Treasury Department and the Department of Housing and Urban Development issued related questions for public comment, which have received over 300 responses from a broad cross-section of stakeholders. To read the responses, go HERE and HERE
That commitment to public engagement will continue. Today, the Administration is announcing that it will hold on August 17 a Conference on the Future of Housing Finance at the U.S. Treasury Department in Washington, D.C. This event will bring together leading academic experts, consumer and community organizations, industry groups, market participants, and other stakeholders for an open discussion about housing finance reform.
As we continue moving forward, it is critical to maintain an open, productive public dialogue about how best to address a housing finance system that everyone – across both sides of the aisle – agrees is in clear need of reform. To help inform this debate, it is useful to offer some context about the Administration's efforts to date in this area and the current state of our nation's housing finance system.
Stabilizing the Housing Market
In September 2008, the Bush Administration put Fannie Mae and Freddie Mac into conservatorship and began injecting taxpayer funds into those firms in order to keep them afloat. When President Obama took office in January 2009, he inherited not only this conservatorship arrangement, but also a mortgage market and economy in free-fall.
From the beginning, the Obama Administration has made clear that the current structure of the government's role in the housing finance market is unsustainable and unacceptable. Fundamental reform was clearly needed. But abrupt change or an uncertain reform process in the midst of the financial crisis could have destabilized an already fragile housing industry and made it even more difficult for Americans to buy a home or refinance a mortgage. Continuing to provide financial support to Fannie Mae and Freddie Mac was the right decision then for the mortgage market and for our economic recovery – and it has played a critical role in stabilizing the housing industry during a period of crisis. Even today, private capital has not yet fully returned to this market. Fannie Mae, Freddie Mac, and other government entities guarantee more than 90 percent of newly originated mortgages. They are practically the only game in town.
Fannie and Freddie under Conservatorship
During their two years in conservatorship, Fannie Mae and Freddie Mac have been tightly supervised and regulated. Fannie and Freddie have made significant progress in improving the credit quality of their new obligations. Since 2008, FICO scores and loan-to-value ratios – both of which are key measures of how likely a borrower is to default – are meaningfully better on new mortgages. Fannie and Freddie have also increased their guarantee fees and risk-adjusted their pricing.
The losses that the federal government has had to backstop are virtually all attributable to bad loans that Fannie and Freddie took on between 2005 and 2007 – during the height of the housing bubble. Unfortunately, we still need to manage the continuing consequences of those poor credit choices.
Of course, none of these facts eliminate the need to take a hard and comprehensive look at long-term solutions for our nation's system of housing finance. But they do offer important context about the numbers behind the headlines on Fannie Mae and Freddie Mac.
The size, importance, and complexity of the housing finance market all compel us to craft its reform with great care:
- The U.S. mortgage market is the second largest securities market in the world, after U.S. Treasuries.
- Fannie Mae and Freddie Mac currently guarantee more than $5 trillion in mortgages and hold a total of $1.6 trillion in agency loans and other securities in their portfolios.
- Fannie Mae and Freddie Mac are only one part of a broader housing finance system that includes the Federal Housing Administration, Ginnie Mae, the FHLBanks, other government programs, and a significant private sector role in originating, funding, and servicing mortgage loans.
- For decades, Fannie Mae and Freddie Mac privatized their profits while ultimately putting taxpayers at risk for losses. This type of "heads private shareholders win, tails taxpayers lose" system of misaligned incentives makes no sense for the nation.
Housing finance reform needs to address these and other complex issues responsibly. That is why the Obama Administration is committed to an open and inclusive public dialogue about the future of U.S. housing finance. Given the importance of this task, we want to hear the best ideas from all sides of the debate. Working together with our colleagues in Congress, we believe that this is the right path forward to achieve responsible reform.
Plain and Simple: the Administration is making it known that it's time to focus on fixing housing. I don't read their announcement as anything more than an FYI though. More "wait and see"...
In the meantime, we have discussed Housing Finance Reform in detail. Below is some background content for your educational enjoyment....
We must focus on three R's: Reform, Reorganize, and Reassure. READ MORE
- Reform: requires that action be taken to reform FHA and Ginnie Mae. (FULL STORY)
- Reorganize: there is an important role for the GSEs in the US housing finance industry of the future - just not in their current form. Fannie Mae and Freddie Mac and merge them into a single organization that combines the best of each organization.
- Reassure: the community of investors world-wide that the US housing finance industry has been reset on a solid foundation. This is accomplished only when all three legs of the stool are rebuilt and reset - because only then will the requisite level of investor confidence - and in turn private capital - return to the industry as a replacement for the trillions of dollars that are today coming from the US Treasury.
One of Washington’s most respected voices in housing policy says that the Congress should focus its reform on several things, including continued liquidity and stability for long-term, fixed-rate, sustainable mortgages and affordable rental homes. Here are five questions that must be answered about the reformed housing finance system. READ MORE
- Will it support the availability of long-term, fixed rate mortgages for consumers?
- Will it offer access to capital by as wide a variety of institutions as possible, from small community banks and credit unions to large money center institutions?
- Will it foster and spread innovation in mortgage products to insure that helpful and sound new products can be made available widely in the marketplace?
- Will it fulfill a significant duty to serve under-served populations and communities?
- Will it provide financing both for affordable single family homeownership and rental housing?
GSEs Able to Bypass Bureaucracy on Road to Resolution: While lawmakers will no doubt be able to legislate away some of the risk of the same crisis happening again in the future, we need to be prepared to deal with the next one when it does come. The intervention and ongoing recovery of the GSEs over the past year and a half may have taught us something. Maybe it’s the fact that a quasi-governmental organization is far less encumbered and therefore more effective, even in conservatorship, at crisis management and resolution than a federal agency? Fact is, Fannie Mae and Freddie Mac are not subject to and hamstrung by Federal Acquisition Regulations (FAR) and federal appropriations and budgeting.Ambiguous and urgent problems don’t wait for federal procurement practices that could take many months to approve a required service provider. READ MORE
Housing’s image certainly is as battered as it’s ever been. Responsibility for this last recession is rightfully borne by a mortgage market on steroids that was too often lacking in common sense. Thankfully most of us have done our penance and confessed our sins over the past two years. It’s time to begin having the pride and courage to begin again reminding others of the fundamental value of housing to the economy and the democracy. READ MORE
Here we go....