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» VISIT US ONLINE @ DSNEWS.COM COVER STORY POINT-COUNTERPOINT We probably won't see any real movement on GSE reform before 2017, and there are four reasons departure from the status quo is unlikely in the near term. First, it's very hard to achieve congressional action in a divided Congress. Second, there's still no consensus plan for GSE reform, and that makes congressional action even more improbable. There are a lot of proposals out there, but I think it's fair to say there's no consensus yet on which plan to implement. REGIONAL SPOTLIGHT According to Laurie Goodman: POINT— COUNTERPOINT Certainly, the GSEs' recent profitability may mean—at least for some people—that there's less of a sense of urgency to reform or replace them. Obviously, when you have a big deficit, as we do here in the United States, every little bit of income helps. The issue is really that the government's housing entities—Fannie, Freddie, the Federal Housing Administration, and the Department of Veterans Affairs—dominate the U.S. housing market with 85 to 90 percent market share. That has to change. There are people working on the issue. Sen. Corker is said to be drawing up a bipartisan bill for GSE reform, and certainly it would be a good start to have some legislation that people can start to work around. Whatever solution takes form, we need to ensure it means we'll have less government involvement in the housing market. I think it would be impossible not to have some level of government participation, but it certainly needs to be less than we have now. In 2006, Fannie and Freddie's combined market share was somewhere around 30 to 35 percent, and that's the kind of ratio we should try to work back toward over time. Unfortunately, I think it will take several years to get anything meaningful through Congress, and then it may take another five to 10 years to BEST PRACTICES According to James B. Lockhart III: implement the solution—it's a long-term process to get back to where we were. The United States has $10 trillion of mortgages outstanding in the singlefamily market and $800 billion or so of multifamily mortgages, and Fannie and Freddie dominate both sectors. It will take a long time to wean the housing market off of that kind of support, but we need to start the process. I don't think there's a private-sector source for the full $10 trillion single-family mortgage market without some sort of government protection for a portion of that. And more and more people are coming to the same idea—that there should be catastrophic government insurance that's explicit, not the implicit insurance that Fannie and Freddie have. This government insurance should only be for a portion of the market, certainly not higherincome borrowers or higher-priced homes. It could come in the form of guaranteeing products packaged as mortgage-backed securities by the successors to Fannie and Freddie, but the key is that these companies have to be regulated. They must have adequate capital, and just like today, they should require significant down payments or at least mortgage insurance so the government-guaranteed securities have first-loss protection. That's easier said than done because it's hard to keep the government's hands out of these situations. Whatever entity is put into this position, it has to be made into an independent agency that has the right to set premiums and has the right to increase or decrease its market share to build countercyclicality. THE BIG PICTURE But with housing's gradual recovery (and Treasury's retooling of their Preferred Stock Purchase Agreements), the GSEs' finances improved dramatically and since Q2 2012, the companies have reported profitable—even record-breaking— quarterly results. Taxpayers have recouped about $132 billion of the $189 billion injected into Fannie and Freddie, and their recompense will help shave an estimated $200 billion off the federal deficit by year-end. With the GSEs now one of the government's biggest revenue-producing investments, is reform still on the agenda? DS News asked two industry heavyweights to put the GSEs' future into perspective: the man tasked with their conservatorship on that fateful day in 2008, James B. Lockhart III, and one of the most highly regarded analysts in the business, Laurie Goodman. Third, the housing recovery is still very fragile, and most people agree it shouldn't be disrupted. That makes it very difficult to cut the government's 86 percent share of the market, though I would argue it is gradually receding and will continue to do so. And fourth, Fannie and Freddie are now profitable because (1) losses are tapering off on the default-ridden 2006–2008 book of business with higher-quality new originations, and (2) guarantee fees (g-fees) have risen considerably. The GSEs' present profitability eliminates any sense of urgency for reform. While these four factors make near-term reform difficult, steps are being taken to bring private capital back to the secondary mortgage market. We're actually seeing investors slowly return now that the GSEs have increased g-fees so considerably. Fannie Mae's g-fees have risen from 28 basis points (bps) in early 2012 to around 53 bps presently—10 bps of that goes to the government and the remainder stays with Fannie. What that's done is led more banks to hold more loans on balance sheets—particularly their highest-quality loans. Because the g-fee calculation makes retaining high-quality loans the better execution choice for banks, we saw the share of bank portfolio originations grow from 9.6 percent in 2011 to 14 percent in 2012. And that ratio was higher in the last two quarters of 2012 than in the first two quarters as the GSEs continued to raise their g-fees. In addition to the g-fee increase, the risksharing transactions on the burner could be potentially significant in bringing private capital back to the market. The GSE conservatorship scorecard requires $30 billion in risk-sharing for each GSE in 2013, and both companies recently released loan-level data to support these transactions. We haven't seen a risk-sharing transaction yet, and it's unlikely they'll reach their $30 billion goals for the year. But certainly, we should see risk-sharing transactions in the near term, and these deals will allow the private sector to take on a much larger role. I expect these steps will help bring private capital back into the market. However, I don't think Congress will move forward with a GSE reform plan within the next four years. While I believe you can't leave the institutions in conservatorship indefinitely—you've got to do something—I don't think there's going to be agreement on a plan during this administration. I expect we'll still be talking about the future of Fannie and Freddie four years from now. INDUSTRY INSIGHTS I t was nearly five years ago on a seemingly inconsequential Sunday in September that the federal government sprang into action to prop up two privately held mortgage powerhouses. Fannie Mae and Freddie Mac were teetering on the brink of insolvency, and their bailout— the biggest in U.S. history—incited opposition from the taxpaying public, lawmakers, and anyone fearful of too much government intervention in the private sector. Insistent cries for reform grew louder and louder as Fannie and Freddie asked for draw after draw from taxpayers' coffers. 65

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