Report: Keep GSEs in Conservatorship Until Flawed Charters Are Fixed

January 10, 2019

While talk renews for housing finance reform and removing the government sponsored entities (GSE) from government control, a new report opposes releasing Fannie Mae and Freddie Mac from conservatorship without fixing the critical flaws in their charters.

A new report from Milken Institute titled “A Blueprint for Administrative Reform of the Housing Finance System,” recommends keeping the GSEs in conservatorship—allowing them to retain additional capital—and making incremental reforms focused on curtailing the current footprint of Fannie and Freddie. 

The action steps outlined in paper do not lead to the end of the conservatorship absent legislation because the authors “do not see a viable path by which administrative measures can fix critical flaws in the GSE charters—and fixing these flaws should be viewed as a necessity.”

“Administrative measures can address many of the stumbling blocks to legislative action and thereby set the stage for further reform that includes changes to the GSE charters,” the authors wrote.

The paper points out that the GSEs’ post-crisis success has occurred because of three things:

  1. A protected duopolistic status that impedes entry and competition
  2. Unparalleled access to capital with explicit government backing
  3. A strong economic environment that reflects historically low delinquencies.

“Releasing the GSEs from conservatorship without a plan in place to resolve the charter flaws—most notably, the privatizing of profits and socializing of losses—would be to disregard the lessons of the firms’ failures during the financial crisis,” the paper stated.

Milken Recommendations:

  • REVISE AND COMPLETE THE GSE CAPITAL RULE PROPOSED BY THE FHFA: Because of its importance and complexity, the Federal Housing Finance Agency (FHFA) should follow the practices of other financial regulators by completing the GSE capital rule through an iterative process involving more than a single round of public input.
  • ALLOW THE GSES TO REBUILD RETAINED CAPITAL: The Treasury Department (Treasury) and the FHFA should amend the Preferred Stock Purchase Agreements (PSPAs) to suspend dividend payments to Treasury on a non-accrual basis during the suspension period.
  • COMPLETE THE WORK ON THE UNIFORM MORTGAGE-BACKED SECURITY: The FHFA should finish the work on the uniform mortgage-backed security (UMBS) that will unify the previously separate MBS of Fannie and Freddie.
  • IMPLEMENT TRANSPARENCY ON GSE PRICING: The FHFA should provide full information on the cross-subsidies built into GSE all-in guarantee pricing to allow for a reasoned policy discussion over the future role of the GSEs. A granular understanding of current GSE pricing is needed to inform future reforms.
  • PROVIDE MORE RISK-BASED PRICING OF GUARANTEE FEES, WITH EXPLICIT SUBSIDIES FOR AFFORDABLE HOUSING: Under the current system, low-risk borrowers pay higher guarantee fees to provide a cross-subsidy for higher-risk borrowers. Ultimately this leads to adverse selection for the GSEs, as low-risk borrowers find better deals in loans that end up in private-label securitizations (PLS) or on balance sheets.
  • EVALUATE AND IMPROVE THE EFFECTIVENESS OF AFFORDABLE HOUSING MEASURES: The FHFA should evaluate and refine the GSEs’ affordable housing activities. Changes should include improved targeting so that subsidies go to prudent low-income families rather than to imprudent higher-income families.
  • IMPROVE THE TARGETING OF GSE MULTIFAMILY HOUSING ACTIVITIES: The FHFA should recalibrate current volume caps and exemptions to reduce the GSEs’ dominance in the multifamily financing market and to better support the production and preservation of low- and moderate-income developments.
  • EXPAND THE FUNCTIONALITY OF THE COMMON SECURITIZATION PLATFORM (CSP) AND OPEN ACCESS TO KEY GSE TECHNOLOGIES: The functionality of the CSP should be expanded to facilitate future entry by new participants that can connect to the CSP on an equal footing with Fannie and Freddie in government-guaranteed securitizations. The FHFA should analyze: (i) increasing transparency into GSE data, the Uniform Data Collateral Portal (UCDP), GSE collateral evaluation tools, the GSEs’ automated underwriting systems AUS and other GSE technologies, and (ii) allowing new participants equal access to these items.
  • CREATE A TRANSPARENT PROCESS TO EVALUATE, APPROVE AND MONITOR GSE PILOT PROGRAMS: Innovation has improved the safety and effectiveness of the housing finance system in conservatorship; additional pilot projects could facilitate further innovation.
  • TAILOR THE GSE FOOTPRINT: The FHFA should gradually restrict or eliminate specific product types currently offered by the GSEs that are adequately served by the private sector in good times and bad. As an example, there is no need for Fannie Mae and Freddie Mac to be involved with cash-out refinances and second home financing.
  • IMPROVE THE FUNCTIONALITY OF BUT MAINTAIN THE CONSUMER PROTECTIONS EMBEDDED IN THE ATR/QM RULE: The consumer protections embedded in the ability-to-repay and qualified mortgage rule (ATR/QM rule) should be preserved as a centerpiece of post-financial crisis mortgage reforms, as this instills a critical layer of safety and soundness across the primary and secondary markets.
  • PROVIDE GINNIE MAE AND FHA WITH RESOURCES TO IMPROVE TECHNOLOGY AND OPERATIONS: Ginnie Mae and FHA should each have the necessary funding and operational flexibility to run their programs effectively.
  • STRENGTHEN COORDINATION AMONG COMPONENTS OF THE HOUSING FINANCE ECOSYSTEM: The FHFA can strengthen coordination across government- supported lending channels by making better use of a little-known and under-utilized consultative entity that Congress created when it created the agency in 2008.

ALTA continues to engage with stakeholders during the process. In the past, ALTA has supported the following principles as part of the housing finance reform and restructuring process:

  • Ensure a national mortgage market that provides equal access to credit for all Americans
  • Help consumers with mortgage credit through standardization
  • Lower costs of providing credit to consumers
  • Encourage liquidity through the secondary market
  • Provide market responsive regulation

In addition, ALTA has strongly urged for the preservation of the uniform standards currently provided by the GSEs, including title insurance, in any newly developed housing finance system.

Contact ALTA at 202-296-3671 or