Policy Analysts Propose Merger of Freddie Mac and Fannie Mae

Debt Collection  •  Mortgage  •  Regulation

HomeIn a March 23, 2016 proposal titled “A More Promising Road to GSE Reform“, several prominent policy commentators recently outlined their suggested plan for reforming the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), which—according to these analysts—are “two enormously important yet flawed institutions” (the “Proposal”).  The Proposal asserts that reformation of Freddie Mac and Fannie Mae is a major remaining step on our path to recovering from the 2008 financial crisis and ultimately recommends that these institutions be merged to form a single government corporation, which they refer to as the “National Mortgage Reinsurance Corporation” (NMRC).

Under the Proposal, the NMRC would take over Freddie Mac and Fannie Mae’s current operations.  Specifically, “[t]he NMRC would purchase conforming single-family and multifamily mortgage loans from originating lenders or aggregators, and issue securities backed by [those] loans through a single issuing platform that the NMRC owns and operates.”  In addition, the NMRC would continue to “perform master servicing responsibilities on the underlying loans, including setting and enforcing servicing and loan modification policies and practices.”

However, according to the Proposal, key differences between the NMRC and its predecessors include the following: First, the NMRC “would be required to transfer all noncatastrophic credit risk on the securities that it issues”—i.e., risk that does not reach the level of “credit losses comparable to those experienced during the recent housing crash and Great Recession”—”to a broad range of private entities.”  Second, the NMRC’s “mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee, or g-fee, sufficient to cover any risk that the government takes.”  This g-fee would be set by the Federal Housing Finance Agency (FHFA), maintained in a mortgage insurance fund, and would serve the purpose of protecting both the future economy and taxpayers by covering the costs of a possible catastrophic downturn.  Third, although “the NMRC would maintain a modest portfolio with which to manage distressed loans and aggregate single- and multifamily loans,” the NMRC would not be able to “use that portfolio for investment purposes.”  And fourth, “as a government corporation, the NMRC would be motivated by neither profit nor market share, but by a mandate to balance broad access to credit with the safety and soundness of the mortgage market.”

The authors of the Proposal argue that merging Freddie Mac and Fannie Mae into the NMRC will yield a number of important advantages.  For example, the authors posit that the Proposal resolves the “too big to fail” problem by ensuring that “no private institutions become indispensable to [the secondary mortgage market] by controlling its infrastructure.”  In addition, the NMRC resolves this problem by increasing competition in both the primary and secondary market—such as by facilitating equal market access to all lenders and by creating a “larger and deeper market for the NMRC’s credit risk syndication.”  The NMRC is also designed to broaden access for underserved communities.  Specifically, “[t]he NMRC will be required to meet duty-to-serve and affordability goals defined by the FHFA”; will subsidize creditworthy lower wealth borrowers—who may not otherwise be able to afford a mortgage loan—through the use of its g-fees; and “will charge an . . . affordability fee that will be used to fund initiatives to support access and affordability for homeownership and rental housing.”  Finally, the authors argue that the NMRC will be well-equipped to “manage a crisis in the secondary market.”  For example, the Proposal observes that in times of economic stress, private investors in the risk being syndicated by the NMRC may either become unwilling to provide new capital or may require a prohibitively high return—either of which would exacerbate financial stress.  However, the NMRC would be positioned to avoid this issue by having “the authority to scale back the volume of credit risk it syndicates” when required returns breach a predefined threshold.  According to the authors, this will allow the NMRC to mitigate economic crises by capping the g-fee and mortgage rates that borrowers can face.

In light of the Proposal’s extensive recommendations, one major consideration moving forward is whether we can expect such reforms to realistically gain traction in the near future.  According to one Compass Point Research & Trading analyst, congressional action with respect to Freddie Mac and Fannie Mae is currently a remote possibility.  Brian Collins, Housing Experts Float Proposal to Merge GSEs, Am. Bankr. (Mar. 24, 2016).  However, this same analyst suggests that the viability of such reforms may become more plausible under a Hillary Clinton presidency, and a review of Clinton’s policy positions supports this assessment.  For example, Clinton herself has argued that more must be done to prevent a recurrence of the 2008 financial crisis and that “too big to fail” is “still too big a problem.”  Hillary Clinton, My Plan to Prevent the Next Crash, Bloomberg View (Oct. 8, 2015).  Relatedly, Clinton has called for the addition of a fee on risk as a method of preventing another economic crisis.  Id.  Although different from the g-fee described in the Proposal, Clinton’s plan suggests that she may be open to the Proposal’s similar concept.  Finally, Clinton has stated that her administration would “work closely with regulators to make sure that Fannie Mae, Freddie Mac, and the nation’s lenders meet their responsibility to provide lending in communities that have been historically underserved.”  Ben Lane, Hillary Clinton Unveils Sweeping Economic Agenda, Including Major Housing Reforms, HousingWire (Feb. 16, 2016) (internal quotation marks omitted).  And as noted above, expanding access to underserved communities is a top priority of the Proposal.  Given the significant impact the Proposal would have on the housing market and the fact that the Proposal may become increasingly viable in the event of a Clinton presidency, industry participants should continue to keep an eye on these developments as the race for the presidency draws to a close.

 

 

 

 

 

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