This material is for discussion purposes only and has not been approved by
the Housing Committee, Federal Committee or Board of Directors.
The Administration is expected to release their Government Sponsored
Enterprise (GSE) reform recommendations as early as the end of January/
early February of 2010. In response to this, NAR Leadership at their
November business meetings in San Diego adopted policy recommendations from
their GSE Presidential Advisory Group (PAG).
Action: Optional, C.A.R. Housing Committee leadership
and Federal Committee leadership in December took the position that C.A.R.
support NAR’s GSE policy and principles. This action was taken so
that C.A.R. may prepare to give input to Congress on this issue prior to
the Administration’s recommendations and prepare for the February lobbying
Prior to this, C.A.R.’s GSE policy was limited to supporting a strong
secondary market to maintain an affordable and stable flow of capital to
the nation’s housing market. C.A.R. had never addressed the issue of
what structure the GSEs should take, and leadership and staff lacked
sufficient policy direction to respond to Congressional inquiries.
1. Take no action, which would make the position taken by Committee
leadership C.A.R. policy
2. Amend the position taken by Committee leadership
In September of 2008, the federal government fearing that the Government
Sponsored Enterprises of Fannie Mae and Freddie Mac were on the verge of
becoming insolvent placed them into conservatorship and named their
regulator, the Federal Housing Finance Agency (FHFA) as their
conservator. Because Fannie and Freddie own or guarantee
approximately 6 trillion dollars in mortgages and are financing
approximately sixty-percent of the current housing market, their future is
of the greatest importance to California REALTORS®.
Some of the questions Congress will be forced to address when discussing
the future of Fannie and Freddie include:
• Can the GSEs continue in a quasi private/ public forms?
• Should the GSEs be restructured in a manner that more closely
resembles a public utility company?
• Should the GSEs be turned into completely private companies with no
• Should the government permanently take over the GSEs?
• Does the market need both Fannie and Freddie? Or can they be
• Are Fannie and Freddie salvageable? Or do they need to be eliminated
and an entirely new entity created?
• What role should the government play in the future of the nation’s
• What role should the GSEs play in promoting “affordable
• Is the current manner in which capital is brought to the mortgage
market the most efficient way of doing it? Should the U.S. look to
drastically change how capital moves from investors to lenders by other
financial instruments such as covered bonds?
Different Proposals Considered by NAR: A. Purely
Private Secondary Market (no market-specific regulations)
• Desocialized risk
• Market discipline, preventing excessive risk taking/undue
• Product offerings shaped by market demand
• Vulnerable to cyclicality, volatility, and credit crunches
• Lack of standardization and liquidity
• Consumer protection issues
• Even possible?
B. Public Function (Solely public secondary market)
• Government control over the level of risk
• Affordability/access due to high US government credit rating
• Fewer cyclicality problems due to “buyer of last resort”
• Easy mortgage product standardization
• Socialized credit risk
• Politicized underwriting
• Little incentive for innovation
• Problems with agility—responsiveness to market challenges
C. Cooperative (Co-op of financial institutions guaranteeing MBS)
• Strong controls and limited risk taking because of participant
• Cost advantage over private-label MBS due to economies of
• Self-regulatory body, potentially leading to standardization,
• Free-rider problem—individual members issue riskier loans
• Requires premiums and reserving
• Provides incomplete guarantee to investors
• Inability to temper cyclicality in housing finance
• Raises antitrust concerns
D. Risk Retention: Skin-in-the-Game Securitization (Require originators to
retain interest in MBS)
• Already exists, to some degree
• Limits laundering to credit risk by mortgage originators
• Either incompatible with goals of mortgage securitization or
requires the retention of large amounts of risk, limiting market size
o What is the proper amount of skin in the game? Any amount of skin in
the game may be too much for some
• Risks recreating the asset-liability mismatch
• Lack of incentives for uniformity so without regulation, difficult
for investors to evaluate potentially heterogeneous MBS
E. Risk Retention: Covered Bonds (Financing through secured bonds)
• Alleviates the incentive to sell “lemons” into the secondary
• Better underwriting to the extent that the bonds are recourse
• Reliance on financial institutions to evaluate risk of mortgage
• Potential conflicts with deposit insurance
• Interest rate risk for depositories due to asset-liability
• Reduced lending capacity
• Without regulation, difficult for investors to evaluate potentially
heterogeneous covered bonds
F. Federal MBS Insurance (Federal guarantee of timely payment of MBS
• Maintenance of countercyclical liquidity
• Insurance against erosion in underwriting standards
• Part of a potential insurance and underwriting regulation
• Socialization of credit risk
• Requires (potentially politicized) premiums and reserving
• Inconsistent with risk-based pricing of mortgages
• Can the federal government engage in good insurance underwriting?
G. Public Utility (Privately owned monopoly regulated by government)
• Helps prevent excessive credit risk through profit regulation
• Monopoly status and profit regulation stop “race to the
• Countercyclical financing if utility has portfolio holdings
• Managerial rent-seeking—little incentive to control costs
• Politicization of profit regulation
• Risk of (political)geographic cross-subsidization
• Socialization of risks through implicit government guarantee
• Potential funding difficulties
NAR Position: While NAR has now officially adopted
policy recommendations, these recommendations were based on nine principles
that guided both the GSE PAG and NAR staff. This is important because
even if Congress decides not to reform the GSE’s in a manner similar to
NAR’s recommendations, the nine principles can still guide NAR on what
criteria any recommended GSE reform must meet.
At the NAR 2009 November business meetings, NAR Leadership approved the
following GSE PAG’s recommendations.
THE NATIONAL ASSOCIATION OF REALTORS® RECOMMENDATIONS
FOR RESTRUCTURING THE GOVERNMENT SPONSORED ENTERPRISES
Fannie Mae and Freddie Mac should be converted into
government-chartered, non-profit corporations. The corporations
should ensure that the flow of capital continues to enter the mortgage
market regardless of the state of the housing or mortgage markets or
The non-profit corporations should take the best components from the
current GSEs, and import improvements from other secondary market
models. The current GSEs, Fannie Mae and Freddie Mac, are best
positioned to become non-profit government corporations because of their
existing infrastructure. The transition from the existing GSEs to
government non-profit corporations will be as smooth and seamless as
possible, ensuring a continual flow of capital to the secondary market,
which will be critical during any period of transition.
Unlike a federal agency, the new government non-profit corporations
will function as self-sustaining organizations, without needing annual
appropriations from Congress and without a profit motive. NAR
believes that any organization with a private profit and public loss
structure, as the GSEs are presently structured, is inherently flawed.
Elements and Future Structure of the Proposed Government Non-Profit
The following elements should be incorporated in the new government
non-profit corporations to ensure that the problems that caused the GSEs’
collapse do not arise again.
1. The government must clearly, and explicitly, guarantee the business
of this entity. Taxpayer risk should be mitigated through the use of
mortgage insurance on loan products with a loan to value ratio of 80
percent or higher and MBS guarantee fees. Only if these two insurance
pools prove to be insufficient in some future economic crisis would the
federal taxpayer be called upon to make good on the MBSs.
2. The new entity’s mission must be consistent with NAR’s Principles
for Ensuring a Strong, Robust Financing Environment for Homeownership and
3. There must be strong oversight of the corporations by the Federal
Housing Finance Agency (FHFA), including the providing of timely reports to
allow for continual evaluation of its performance.
4. The governance structure should provide for a Chief Executive
Officer to oversee daily operations, a Board of Directors with practical
expertise to ensure effective and efficient operation, and an advisory
board comprised of industry participants and consumer representatives to
provide the organization, and its management, with real-time, front-line
information regarding the corporation’s effectiveness and advice on the
operation of the corporations.
5. Political independence of the corporations is mandatory for
successful operation (i.e. the CEOs will have fixed terms so they cannot be
fired without cause, and the corporations will be self funded – no ongoing
6. Sound and sensible underwriting standards must be established for
loans purchased and securitized in MBSs, loans purchased for portfolio, and
7. The corporations will reinvest all excess revenue to accumulate
capital in strong markets to pursue a countercyclical policy in weaker
markets, and to support the secondary market, provide for innovation,
remain mission focused, and maintain their capacity.
8. The organization must set standards for their MBSs that establish
transparency and verifiability for loans within the MBSs that are purchased
or securitized by the non-profit government corporations.
9. The primary purpose of the corporations’ portfolios will be to
support their operations. The portfolios should only be large enough
to support their business needs and when necessary because of insufficient
private investment, and only to the extent needed, ensure a stable supply
of capital consistent with market conditions.
10. The corporations’ mission will focus on ensuring housing
affordability for the under-served segment of the population, which
includes ensuring housing affordability in multifamily rental
11. The corporations should price loan products based on risk.
Housing affordability goals will assure that the corporations serve a full
range of borrowers.
12. For commercial real estate, and as an additional way to provide more
mortgage capital for residential housing, covered bonds should be explored
as an option by both banks and the new corporations to encourage the
piloting of niche initiatives (such as the commercial green
initiative) and to establish the tool’s viability. An FDIC guarantee
should be considered to enhance the covered bond option.
13. The corporations will be permanent (not expire).
14. Two corporations are required to provide for competition in the
secondary market and avoid the risk a single entity would lose incentive to
innovate and to be efficient.
15. Reform of the credit rating agent is required, to address the inherent
conflict of interest in the current system.
16. The corporations should only purchase and guarantee transparent and
verifiable mortgage loans, and should only purchase derivatives as a last
option in order to manage risk.
As a guide, the GSE PAG utilized an NAR approved principles that are
intended to direct NAR staff on issues dealing with the financing of
property. These principles are:
1. Ensure an active secondary mortgage market by facilitating the
flow of capital into the mortgage market for all types of housing, in all
2. Seek to ensure affordable mortgage rates for qualified
3. Establish: (a) reasonable housing affordability goals so all
qualified borrowers, including low- and moderate-income households,
have an opportunity to realize the dream of homeownership; and (b)
reasonable multifamily rental housing affordability goals to increase the
availability of financing for rental housing. Housing affordability
goals should not provide incentives for the institution that are
inconsistent with sustainable homeownership or rental housing.
4. Require the institution to pass on the advantage of its lower
borrowing costs (and other costs of raising capital) by making mortgages
with lower rates and fees available to qualified borrowers.
5. Ensure mortgage availability throughout the nation.
6. Require sound underwriting standards, consistent with NAR’s
Responsible Lending Principles adopted in May 2005 (see attached).
7. Require the highest standards of transparency and soundness
with respect to disclosure and structuring of mortgage related
8. Ensure there is sufficient capital to support mortgage lending
for all types of housing, in all market conditions.
9. Provide for rigorous oversight.
C.A.R. Policy: C.A.R.’s Housing Committee leadership
and Federal Committee leadership took the position that C.A.R. adopt NAR’s
GSE policy and principles as C.A.R. policy.
While C.A.R. has taken policy positions in the past that would support a
strong secondary market that is able to provide an affordable and stable
flow of capital to the nation’s housing market, including policy that
directly impacts Fannie and Freddie; C.A.R. has never been faced with the
question of what structure the two GSEs should take. In this aspect,
C.A.R.’s does not have clear policy to either support or oppose any
specific proposal, unless that proposal were to threaten the flow of
capital to the housing market.
___________________ 1NAR's Reponsible Lending Policy supports requiring all mortgage
originators to verify the borrower's ability to repay the loan based on all
its terms, including taxes and insurance, without having to refinance or
see the home (with limited exceptions for borrowers with significant