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» VISIT US ONLINE @ DSNEWS.COM 19 estimated $7.4 trillion loss in real property equity, for one. e GSE "privatized gains and socialized losses" model remains firmly entrenched in housing, and, along with the mortgage-interest federal tax deduction, has been described as hav- ing evolved into an entitlement. Both ends of our political spectrum agree GSE reform is required to minimize risk in U.S. housing markets. Methodology, however, varies depending upon the perspective of the GSEs, which promoted homeownership by loosening standards at the urging of politicians, or private investment companies, which securitized and sold riskier loans. SUGGESTED ACTIONS Sens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) introduced a bill this past June that would replace the GSEs with federal reinsurance for mortgage-backed securities, similar to FDIC-insured bank deposits. is approach aims to encourage private investors to take first losses on mortgages, knowing there is a backstop in economic downturns. President Obama has endorsed this approach in theory. A government insurance program could assuage the concerns of consumer and trade groups, who prefer the status quo about availabil- ity of mortgages, and the ability and promotion of prospective owners to buy homes, the mission of Fannie and Freddie. Most legal and residential mortgage banking and related professionals and industries advocate a thoughtful approach to reform, which would include some type of government guarantee or insurance. e U.S. housing market includes and affects untold numbers of homeowners and home occupants, who are served by a vast industry of professionals—all of whom value the intrinsic permanency of homeownership and solidarity found in our country based on our private real estate market. While larger lenders may not like the compe- tition of the GSEs' rates, they benefit, as smaller lenders do, by the liquidity and pseudo-govern- ment guarantee offered by the GSEs. Smaller lenders do not want the GSEs to wind down because they cannot compete with the liquidity of the large banks. On the other end of the spectrum are advo- cates of a free market system, with the govern- ment almost completely out of housing finance, except for, FHA/HUD first-time low- to middle-income-buyer mortgages. ey propose winding down the GSEs while legislating the definition of a prime loan that would be the standard for a private finance market. Free market advocates note that the stated purpose of the GSEs, to encourage and expand homeownership, has not been substantially accomplished. Since 1998, when the GSEs increased efforts, ownership only increased from 66 percent to 70 percent, and it is now back down to 1998 levels. When the economic and human expense is added to this paltry result, the GSEs are not sustainable, though Fannie vows to remain viable. ese advocates point to the Western European housing markets, which operate efficiently with very little government involvement, but with respectable percentages of homeownership. Almost everyone agrees that something needs to be done with the GSEs, and almost everyone recognizes that the "something" will be a complex undertaking in our housing and financial markets, which are enmeshed with the GSEs, but we must be up to this task, we must be thoughtful about reform, avoid unintended consequences, and strike a middle ground between growing a private mortgage market and providing a government backstop. ON THE HORIZON While Congress held housing reform sessions during its fall session, the topic is not on the House agenda and therefore is not a legislative focus compared to the current highlight on the debt ceiling and the Affordable Care Act. Hill insiders predict substantive GSE reform will take many years. Financial services company analysts point out the current profit- ability of the GSEs, and as noted previously, community and large banks like the advan- tages they receive, in different ways, from the GSEs' liquidity. In fact, some hedge funds have heavily invested in the GSEs' preferred stock, and two of them, Perry Capital and Fairholme Funds, have sued the United States for devaluation of the stock based upon Treasury changes in agree- ments with the GSEs. e same holding pattern exists for the Protecting American Taxpayers and Homeown- ers (PATH) Act, introduced in the House of Representatives bill rolled out in July, which seeks to return the FHA's market share to first- time, lower-income buyers. e best approach now or in future congressional sessions is to recognize the interplay between GSE and FHA reform and the market shift between them due to reform. Housing market reform is complex, topical, and looming on the horizon, if lessons from our recent history are heeded. Stay tuned for an always evolving and important dialogue on our nation's housing market. Michelle Gilbert Garcia is president and CEO of the Gilbert Garcia Group, a Florida firm specializ- ing in default services, creditor's law, and REO. DS NEWS DIGITAL AVAILABLE NOW DIGITAL.DSNEWS.COM From the latest industry news and trends to in-depth interviews with leading servicing executives and a growing catalog of previous DS News issues, DS News Digital is now free for a limited time as your ultimate on- the-go resource for everything impacting the mortgage default servicing industry.

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