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Government sponsored enterprise (GSE) reform has been widely touted as unfinished business as a holdover from the 2008-2009 financial crisis. The issue is once again being discussed in Washington.

Fannie Mae and Freddie Mac

The 2008-2009 financial crisis exposed a huge weakness in the secondary mortgage market that resulted in a nearly $187 billion bailout for housing finance agencies Fannie Mae and Freddie Mac, according to CNN Money. The two government sponsored enterprises were put into a "temporary" government conservatorship that includes annual funding and oversight that is now in its ninth year. Now that the housing market and the economy are back on solid footing — and both agencies are operating at a profit — the government is once again facing the formidable task of how to restructure Fannie Mae and Freddie Mac.

Both GSEs share a core mission of enhancing availability of credit for housing. In the early 1980s, Fannie Mae and Freddie Mac stepped into a new realm. They helped to facilitate the development of the securitization market for home mortgages by purchasing and bundling mortgage loans that were sold to investors as mortgage-backed securities. After the housing bubble burst, both GSEs were caught in the backlash and slammed by a wave of bad mortgages. Government intervention was key to bringing liquidity back to the market when lending had virtually ground to a halt. But easing the country's reliance on Fannie Mae and Freddie Mac will be no easy task. Fannie Mae and Freddie Mac now own or guarantee nearly $10 trillion in single and multifamily housing loans — nearly half of the U.S. mortgage market, according to the American Bankers Association.

Reform on the Horizon

There is widespread agreement that Congress does need to come up with a plan to downsize the GSEs' sizable role in the housing finance market. Treasury Secretary Steven Mnuchin has said that government sponsored enterprise reform is a priority of the Trump administration, and there is a newly released GSE recapitalization plan that is supported by major Wall Street firms, as noted by the National Multifamily Housing Council.

However, exactly what reforms will look like, how a transition will be implemented and when it will take place still remains uncertain at this point. Reform proposals that have been floated in recent years vary widely from eliminating the agencies all together to expanding their reach as it relates to affordable housing.

The Goal of Reform

What does GSE reform mean for consumers? Homebuyers and borrowers may be concerned with higher costs and access to mortgage financing. In the wake of the Great Recession, common complaints have been bigger down payments, more costly regulation and higher fees that add to the overall cost of borrowing. Tighter credit requirements also have made it more difficult for borrowers to qualify for loans.

The fundamental objective for reform is to establish a strong secondary mortgage market that will provide liquidity and access to mortgage credit to both single and multifamily borrowers in both up and down economic cycles. Another priority of reforms will likely focus on expanding affordability and access to underserved borrowers. The lending community also supports giving banks access to secondary market financing, which also makes sure that government entities aren't in competition with the private market.

Downsizing the Role of Government

In a July 2017 speech at the American Enterprise Institute in Washington, Federal Reserve Governor Jerome Powell tackled the issue of housing finance reform head on. "While reforms have addressed some of the problems of the pre-crisis system, there is broad agreement that the job is far from done," he said. "The status quo may feel comfortable today, but it is also unsustainable. Today, the federal government's role in housing finance is even greater than it was before the crisis." Powell also noted in his speech that he supports GSE reform that attracts private capital to provide liquidity, reduce risk to taxpayers and create a more competitive environment.

It's important to note that there have been reforms to the "old system" that have been made. In 2008, Congress passed the Housing and Economic Recovery Act, which created the Federal Housing Finance Agency to oversee Fannie Mae and Freddie Mac. New regulations also have been put in place to improve mortgage underwriting and reduce bad loans. In addition, Powell noted that the retained mortgage portfolios of the two GSEs have declined to about half the size they were pre-recession.

Ultimately, GSE reform is in the hands of Congress. The steady recovery in the housing market and economy could provide some needed traction to introduce additional reforms. GSE reform is also becoming a bigger priority because of a rapidly approaching deadline. The current mandate that provides funding for both Fannie Mae and Freddie Mac will expire on Dec. 31, 2017. Congress will then decide whether to move forward with reforms or vote to extend funding while maintaining the status quo.

The good news is that borrowers still have access to mortgages at historically low rates, and the uncertainty of what lies ahead for GSE reform emphasizes the importance of working with a good financial partner to help navigate that changing financing landscape.

To learn more, reach out to Janette O’Brien and team at Janette_O' or the KeyBank Knowledge Center for more insights on commercial real estate.