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21 » VISIT US ONLINE @ DSNEWS.COM GOP VICTORIES PUT SPOTLIGHT ON GSE REFORM Now that the Republicans will have a major- ity in both the House and the Senate and a Republican-led Senate Banking Committee in January, it has been widely speculated that GSE reform will be near the top of their to-do list. Richard Shelby, R-Alabama, incoming chair of the Senate Banking, Housing, and Urban Affairs Committee, is a longtime proponent of reform- ing the conservatorship model. But to say the Republicans have an uphill battle ahead where GSE reform is concerned may be an understatement. e president has the power of the veto pen and while both sides have vowed to work to- gether on areas that they can disagree, the extent to which he would support major Republican led legislation remains to be seen. Further, a consensus on what a good plan for reform would look like has also yet to materialize. e mere use of the phrase "GSE reform" trig- gers many questions that will need to be answered before such a gargantuan task can be undertaken: How much and exactly what type of reform is necessary? Should Fannie Mae and Freddie Mac be consolidated into one GSE or be eliminated altogether? Or should they be left alone? What, if anything, is going to replace the GSEs? e question some might be asking is: Why is GSE reform necessary? It's clear from examin- ing statistics that the housing industry is far from returning to its pre-recession levels of normalcy. In fact, the headline on the Wells Fargo Economics Group October Housing Data Wrap Up is "Hous- ing recovery remains in slow motion," citing mini- mal growth in both home sales and home prices. e federal government took Fannie Mae and Freddie Mac under conservatorship in Sep- tember 2008 and now enjoys billions in profits from the two GSEs that are being diverted into the U.S. Department of Treasury since 2012. To provide an idea of just how profitable GSEs are, Freddie Mac's net worth stood at $5.2 billion as of September 30. Proponents of GSE reform say the status quo isn't working for investors, who they say assume all the risk with the loans purchased by Fannie Mae and Freddie Mac. When these loans go bad, it's the investors who take the hit. Not only that, some key officials such as Federal Housing Finance Agency Director Mel Watt have recently suggested lowering the conventional down payment from 20 percent to 3 percent in order to expand mortgage access to lower-income, yet apparently still credit-worthy borrowers. Watt said the FHFA and the two GSEs are working together to find that balance where lenders can relax their lending standards and still manage their risk effectively. According to some, the answer may lie not necessarily in eliminating both GSEs, but merging them into one entity. Washington, D.C.-based attorney Stephen Blumenthal, former deputy director and acting director of the former Office of Federal Housing Enterprise Oversight, makes the case that Fannie Mae and Freddie Mac could be consolidated into one entity. Blumenthal asserts that the expense it takes to run two GSEs is "sim- ply unacceptable" given the number of duplicative and operational procedures (mainly overhead costs such as employee compensation and compliance) for which the GSEs have to weather the expense in order to stay in business. e two GSEs already work together on some issues. Recently, Fannie Mae and Freddie Mac created a corporate entity they jointly own that will operate the Common Securitization Platform, which is a secondary market infra- structure that will issue mortgage-backed securi- ties for both GSEs and also handle back office and administrative functions for both. Most importantly, however, Blumenthal claims that a merger would achieve the goal of the conservatorship. "e goal of the conservatorship is to con- serve the assets of the corporations, and a merger is entirely consistent with that goal," Blumenthal wrote in recent a commentary. But the new congress may have other ideas. Sen. Bob Corker, R-Tennessee, created S.1217 in June 2013 that called for eliminating Fannie Mae and Freddie Mac and replacing them with a private insurance company known as the Federal Mortgage Insurance Corporation (FMIC). Senate Banking Committee Chairman Tim Johnson, D-South Dakota, and Ranking Member Mike Crapo, R-Idaho, would add on to the plan and make it their own. Like the earlier plan, this one also includes eliminating the GSEs over a five-year period and establishing the FMIC with a few additional changes. But the likelihood of any GSE reform bill pass- ing in its current form is low. Conservatives are not excited about the prospect of creating another giant government entity the way that Johnson-Crapo does. Liberals believe that the bill does too little to help struggling homeowners. And members of both parties are dubious of giving up the billions of dollars in profits that are swept into the Treasury because of the conservatorship. e Congressional Budget Office (CBO) released a report in early September estimating that eliminating the two GSEs and replac- ing them with the FMIC would reduce direct government spending by about $60 billion in a 10-year period from 2015 to 2024. Can we really expect to see any significant movement, which includes GSE reform, now that Republicans have a majority in both the House and the Senate? At least one research group says no. Qorvis MSL Group released a report titled "2014 Mid- term Election Analysis: Expect Little Change." And why can we expect little change? "e reason is simple," the report stated. "e same types of stalemates that have typified legislating in Washington either will continue or possibly even intensify over the next two years." We are already in 2016 election season after all. e Republican majority in the Senate (as- suming any proposed changes reach the Senate floor) is only 52 to 43, with more seats yet to be decided. at means if the Republicans want changes, they will need some Democrats to get on board in order to achieve the 67 votes that will override a possible presidential veto. Regardless, it is clear that some type of re- form is possible, although it is unlikely. If anyone can push GSE reform faster, Richard Shelby may have the motivation to do it. Time will tell.

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