Scotsman Guide 11/18/15 – Ending GSE's Conservatorship would Hurt Consumers

Wed Nov 18, 2015 10:30 PDT
A national consumer-advocacy federation says the recent calls from affordable-housing advocates and some mortgage-banking associations to recapitalize and release Fannie Mae and Freddie Mac from government control are misguided.
A “recap-and-release” plan without significant reforms could make mortgages harder to obtain and more expensive for consumers, said Barry Zigas, director of housing policy for the Consumer Federation of America, in a telephone interview.
“The question really is, what are the advantages to be gained, at this moment, to recapitalizing and releasing them from conservatorship,” said Zigas, who is a former senior vice president at Fannie Mae and now leads housing advocacy for the 300-member nonprofit federation.
“So far, I haven’t heard anything more compelling than something might happen sometime in the future,” he added.
Recently, U.S. Treasury and Obama Administration officials said the administration would not consider releasing Fannie and Freddie from conservatorship without reforms to the system, statements that effectively signaled that the status quo will remain until Obama leaves office.
Affordable-housing advocates, civil rights groups and some community-lender associations have since called on the White House to reverse course and introduce a recap-and-release plan.
Zigas said the hedge funds that have invested in Freddie and Fannie stand to profit if the GSEs are released, but it is unclear why some affordable housing groups would support an immediate recap-and-release plan. Groups like the National Community Reinvestment Coalition, the NAACP and Community Mortgage Lenders of America have recently called on the Obama administration to end the conservatorship.
Fannie and Freddie have been in government conservatorship since 2008, and all their profits are taken by the U.S. Treasury. While in conservatorship, however, the GSEs have an explicit government guarantee through their ability to make taxpayer-funded draws on the Treasury.
Zigas argued that if Freddie and Fannie come out of conservatorship now, it could cause a number of problems. The GSEs would emerge as two systematically important institutions, but ones without an explicit government guarantee.
Because they would be thinly capitalized, the GSEs might offer fewer loan products and make moves to restrict credit, and be under pressure to build profits at the expense of affordable-housing initiatives, Zigas said. He also noted that it is unclear if investors would be as willing to load money into mortgage-backed securities without an explicit government guarantee. Thus the market would be less liquid and mortgages could become more expensive for consumers.
“We just don’t know what investors’ attitudes about those risks will  be,” Zigas said. “My point is that right now the companies are operating with all of the constraints of the 2008 charter in terms of their responsibilities for affordable lending and duty to serve, and all of their program authorities that they had when they went into conservatorship, and a very explicit line of credit from the U.S. government.”
Zigas said it is a better plan to keep the GSEs in conservatorship, and resume efforts to reform the system. Despite the political obstacles, he said there is  broad bipartisan agreement on many points.
“To me, the key issue here is, to start with, what are the outcomes that the system needs to generate in order to justify the government’s role?” Zigas said. “My attitude is that if you have an opportunity to re-tune a system and make it better than it ever was before, preserve the things that work and reform the things that need improving, you should do that.”
Community lenders favor recap and release
Banking associations that advocate for taking Fannie and Freddie out of conservatorship and ending the profit sweeps, however, say the status quo makes the GSEs highly unstable.  
 “At the very latest [the GSEs] are going to run out of reserves in 2018,” said Scott Olson, executive director of the Community Home Lenders Association (CHLA). “At that point, that creates an unstable situation both financially and politically…. There could be a lot of pressure on access to credit and the GSEs role in the market. We know that is just a matter of time. “
Olson said Fannie and Freddie would also emerge into a market with much tougher regulations and where most of the risk is shared with private capital. He also said that CHLA and other supporters of recap-and-release also advocate keeping the explicit government guarantee.
“I don’t think anybody is proposing putting them back the way they were,” Olson said.