MBA Calls for Major Overhaul of Fannie and Freddie

Fannie Mae | GoRion Blog

Fannie Mae and Freddie Mac should be privately-owned utilities with returns to shareholders stipulated by regulators, according to proposals put forward by the Mortgage Bankers Association.

The Mortgage Bankers Association (MBA) has wasted no time in pushing the Trump administration to resolve one of the thorniest issues since the financial crisis – overhauling Fannie Mae and Freddie Mac.

MBA, a D.C.-based trade group, released multiple proposals during Trump’s first 100 days in office calling on the Republican-led Congress to reform the government-sponsored enterprises. Under MBA’s plan, the government would continue to guarantee mortgage-backed securities while no longer propping up the companies themselves. This would effectively turn Fannie and Freddie into shareholder-owned utilities that would face competition from new companies.[1]

By wrapping mortgages into securities and providing investors a guarantee against default, the conservatorship has been credited with making affordable mortgages available to the market. The government’s decision on the fate of Fannie and Freddie will therefore have a major impact on the $14 trillion U.S. mortgage market, which has slowly regained momentum since the financial crisis.

MBA’s plan would preserve Fannie and Freddie as financial institutions, which would subject them to more stringent capital requirements and oversight by the Federal Reserve. This in turn would pave the way for increased competition in the mortgage-backed security market.

In 2016, the GSEs accounted for 41% of total MBS issuances. Since the financial crisis, they’ve have maintained at least 35% share of the MBS market.[2] Under their present structure, the GSEs are required to pay profits to the U.S. Treasury. This means they operate with razor-thin private capital buffers, which puts them at risk of requiring another bailout.[3]

The Trump administration has prioritized financial reform, but this may not translate into a complete overhaul of the housing finance system, according to congressional staffers cited in a Reuters article back in March.[4] Sources within the Republican administration say the president is looking at other avenues to fix housing financing, including allowing the institutions to rebuild capital. Fannie and Freddie will see their capital buffers reduced to zero by 2018.[5]

MBA’s proposal echoes sentiment within the Trump administration and elsewhere that the government should retain a pivotal role in the securitization business. Under the MBA plan, a Fannie-Freddie utility would focus on securitization and managing credit risk, leaving the private market to spearhead other aspects of the industry.

At present, however, there doesn’t seem to be much appetite for mortgage finance reform, as the Trump administration turns its attention to healthcare and tax.

Elsewhere on the regulatory front, President Trump is on his way to a broad dismantling of the Dodd-Frank Wall Street Reform and Consumer Protection Act. He has already signed multiple executive orders on the matter, including one that reduces the number of existing government regulations.

[1] Joe Light (April 20, 2017). “Fannie-Freddie Plan Would Create Utilities, Add Competitors.” Bloomberg.

[2] Freddie Mac (March 2017). Freddie Mac Update.

[3] Alistair Gray (January 31, 2017). “Trump administration urged to overhaul Fannie and Freddie.” Financial Times.

[4] Amanda Becker (March 22, 2017). “Fannie, Freddie revamp plan unlikely this year, dividends in focus.” Reuters.

[5] Brena Swanson (March 22, 2017). “Trump administration starts from scratch on Fannie, Freddie reform.” Housing Wire.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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