Lending

Solving the Fannie and Freddie Puzzle

The nation’s $10 trillion housing finance system needs reform, but there’s little agreement about what reform should look like.

March 05, 2014
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Principles for reform

CUNA supports the creation of an efficient, effective, and fair secondary market with equal access for lenders of all sizes. To this end, CUNA supports these 10 principles for GSE reform:

1. Neutral third party. The secondary market must have a neutral third party with the sole role of providing a conduit to the secondary market. This entity would be independent of any firm that has any other role or business relationship in the mortgage origination and securitization process.

2. Equal access. The secondary market must be open to lenders of all sizes on an equitable basis. Guarantee fees or other premiums should not have any relationship to lender volume.

3. Strong oversight and supervision. The new entities should be subject to appropriate regulatory and supervisory oversight to ensure safety and soundness.

4. Durability. The new system must ensure mortgages will continue to be made to qualified borrowers even during troubled economic times.

5. Financial education. The housing finance system should emphasize consumer education and counseling to make sure borrowers receive appropriate mortgages.

6. Predictable and affordable payments. Consumers should have access to products that provide for predictable, affordable mortgage payments (such as the 30-year, fixed-rate mortgage) to qualified borrowers.

7. Loan limits. The system should apply a reasonable conforming loan limit that takes into consideration local real estate costs in higher-cost areas.

8. Affordable housing. Government support for affordable housing should be a function separate from the responsibilities of the secondary market entities.

9. Mortgage servicing. Credit unions should continue to be able to provide mortgage services to members in a cost-effective, service-oriented manner.

10. Smooth transition. The transition from the current system must be reasonable and orderly.

To minimize market disruption, CUNA suggests that Fannie Mae, Freddie Mac, and the FMIC be allowed to operate simultaneously so all parties can get acquainted with the new system.

“Ideally, market participants will not notice any sudden changes on the day the GSEs are shuttered and the new system takes over,” Bill Hampel, CUNA’s senior vice president/chief economist said during a Senate hearing in November. “The many changes necessary to move from the old to the new system would already have happened gradually during the transition.”

Political incentives for reform

Many in Congress do not want taxpayers to be exposed to future losses if the housing market takes a turn for the worse. They believe private capital should take the first hit in that event.

But with much of GSE profits now going to the federal government as pidends—and in turn reducing federal deficits—there may be little incentive to eliminate this cash cow any time soon.

Moreover, the housing and mortgage markets are a complex and important part of the nation’s economy. Any reform process will not happen quickly.

So despite the recent congressional activity, it could take years before any GSE reform legislation becomes law.

STEVE RICK is CUNA’s senior economist. Contact him at 608-231-4085.

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