Housing finance reform is needed now

Introduction of the “Jumpstart GSE Reform Act,” draft legislation by the bipartisan team of Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.), and clear interest by the leaders of the Senate Banking and House Financial Services Committees all signal that policymakers from across the political spectrum recognize the importance of designing a new architecture for our nation’s housing finance system.
 
To contribute to this effort, the Bipartisan Policy Center’s Housing Commission has proposed a comprehensive plan to wind down Fannie Mae and Freddie Mac over a multiyear transition period and encourage a far greater role for the private sector in bearing mortgage credit risk.

The commission concluded that today’s government-dominated system is unsustainable over the long term and that a new system, where a diverse set of private actors bear credit risk, will more effectively support America’s housing.  
 
{mosads}Over the past year, we have talked to numerous investors in the capital markets and private mortgage insurers. They have told us that private capital is ready to take on more risk.  They do, however, cite key obstacles. First, the federal government now has crowded out virtually all other insurers; second, regulatory uncertainty has led to a cautious approach to mortgage financing that supports only the lowest-risk borrowers; finally, the specifics of a new housing finance system are unresolved. To encourage greater private-sector risk-taking, we must remove these obstacles. 
 
While supporting a more robust role for private capital, the commission’s plan also recognizes that a limited federal insurance backstop in the secondary market for mortgage-backed securities is necessary to promote mortgage liquidity.  Contrary to assertions that the private sector can do it alone, our nation’s banks simply do not have enough capital on their balance sheets to serve as the exclusive source of mortgage credit.  They need access to the secondary market – a market that is global in scope – to preserve affordable, long-term, fixed-rate mortgage financing here at home. 
 
Experience tells us that most investors in the secondary market require a government insurance backstop as a condition of their investment.  Without this guarantee, they will shift their investments elsewhere, and would-be homeowners will have far less access to affordable mortgages.
 
The commission acknowledges the mistakes of the past and rejects the “GSE model” of privatized gains and socialized losses.  That is why the limited government backstop we propose is explicit, fully funded through premium collections charged to mortgage borrowers, triggered only after private capital in what we call the “predominant loss” position has been fully exhausted, and covers only payment of principal and interest on the securities in the secondary market. Under the commission’s approach, there will be no bailouts of the entities issuing these securities or their shareholders or debt holders.  
 
In this way, the BPC plan promotes the goal of ensuring that consumers have uninterrupted access to affordable mortgage credit, while reducing the government’s dominant role and protecting the taxpayer. The commission’s 21 members, who represent both political parties and hold diverse ideological views, support this plan – proof that bipartisan consensus on this complex subject is possible.    
 
The upside to reforming housing finance reform is great:  A strong, stable mortgage finance system will help millions of American families achieve their dream of homeownership.  Reform is also a necessary precondition for the deeper, more lasting economic recovery that has been so elusive.
 
The return to profitability by Fannie Mae and Freddie Mac should not lull us back to inaction.  Lest we forget, we are approaching the fifth anniversary of conservatorship, a milestone that is both embarrassing and illustrative of our inability to reach consensus.
 
So let us hope we are indeed witnessing a “momentum shift” moment in the housing finance reform debate.  The clock is ticking, and it is time to create a new system that can support the mortgage credit needs of America’s working families today and well into the future.
 
Retsinas and Couch are members of the Bipartisan Policy Center’s Housing Commission. Retsinas served as FHA Commissioner in the Clinton administration and Couch, counsel at Bradley Arant Boult Cummings LLP, served as Ginnie Mae President in the George W. Bush administration.