Financing is to real estate like oxygen is to life. Fundamental. Indispensable. Profound but true right? Without a functioning, secure, stable and well-capitalized secondary mortgage market, the entire real estate industry doesn’t exist. That is why the debate heating up in Washington, D.C., regarding reforms to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac is so important to all of us. And, as we so painfully learned not long ago, as goes the real estate market, so goes the national economy. Fundamental. Indispensable.
As a split Congress and an unpredictable president try to size up one another Sumo-style, it’s unclear if anything of real substance will pass Congress in the next two years. But the level of attention and recent activity around the subject of GSE reform shows this important issue has legs, which is simultaneously exciting and scary.
GSEs not only buy mortgages, bundle them into securities and sell them to investors; they also set the standards for creditworthy loans in the $5 trillion conventional mortgage market. After the 2008 housing market meltdown left the GSEs in financial trouble, the federal government took them over. Since then, there’s been a great deal of discussion about how to remove the GSEs from government conservatorship and reform how they operate so taxpayers never have to bail them out again. The difficulty is if the federal government financially backs the GSEs, the taxpayer is on the hook. If they don’t, the 30-year fixed-rate mortgage is in jeopardy.
A variety of concepts for how to release and reform the GSEs have been advanced in recent months by powerful committee chairs in both the House and the Senate. And the Trump administration has announced it will soon be unveiling a proposal as well, although it’s unclear if this Treasury Department proposal will require congressional approval or not.
Enter the National Association of REALTORS® (NAR). In the middle of this mounting discourse, NAR hosted a major policy conference in Washington, D.C., in early February on the subject of GSE reform. Over 400 attendees went to the conference, including members of Congress, trade association representatives, financial experts and academic experts. One highlight was a discussion between two past chairs of the House Financial Services Committee, liberal Democrat Barnie Frank and conservative Republican Jeb Hensarling. Their arm-wrestling session was moderated by NAR’s chief lobbyist Shannon McGahn, a former staff director for that House committee.
More important than hosting the conference, NAR released a thought-provoking concept paper that presented a vision for how to release and reform the GSEs. The paper was a collaboration of NAR and Dr. Susan Wachter of the Wharton School at the University of Pennsylvania and Richard Cooperstein of the Andrew Davidson Company.
The paper presents NAR’s blueprint for creating a reliable and affordable source of mortgage capital by re-chartering the GSEs as government-chartered private utilities. This approach would regulate the GSEs like a utility: heavily regulated but open to receive private investment capital. Under this model, the government would regulate overall rates of returns for investors to ensure the funds are adequately capitalized and solvent.
The NAR approach ensures mortgage capital remains available during economic downturns without saddling taxpayers with the full bill if the bottom falls out of the economy again. The NAR plan also takes advantage of new GSE regulations adopted since the Great Recession and, very significantly, the plan would preserve the 30-year fixed-rate mortgage product.
While the final form and timing for major GSE reform is anything but certain, NAR is to be commended for the aggressive leadership role it has assumed during this new session of Congress on this seminal issue. As politics at all levels of government continue to devolve into rhetorical and ideological wars, it’s hard sometimes to remember that contentious politics must, in the end, resolve into compromises on key policies, like GSE reforms, if our markets and economy are to function and flourish. As an association, we need to remember our goal is not to win elections but to win on the key legislative issues that follow. To succeed, we need to be involved in both, and that means we need you. Stay tuned and stay engaged. It’s fundamental and indispensable.