This material is for discussion purposes only and has not been approved by
the Housing Committee, Federal Committee or Board of Directors.
Issue: 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).
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 trip.
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.
Options: 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
Status/Summary: 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 housing”?
*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 caution
· 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” function
· 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 risk
· Cost advantage over private-label MBS due to economies of scale
· Self-regulatory body, potentially leading to standardization, etc.
· 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 market
· 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 mismatch
· 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 package
· 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 bottom”
· 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 overall
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 Ssructure 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
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 MBS
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 housing.
11. The corporations should price loan products based on risk. Housing
affordability goals will assure that the corporations serve a full range of
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 market
2. Seek to ensure affordable mortgage rates for qualified borrowers.
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 securities.
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.
 NAR’s Responsible 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
sell the home (with limited exceptions for borrowers with significant