WASHINGTON, Jan. 8, 2019 /PRNewswire/ -- Several key actions can be taken to reform and strengthen the U.S. housing finance system in the absence of federal legislation, according to a new Milken Institute report. In the interim, however, the conservatorship of Fannie Mae and Freddie Mac (GSEs) should continue until Congress passes legislation to resolve critical GSE charter flaws and establish a safer and more effective system.
The Federal Housing Finance Agency (FHFA), Treasury Department, Consumer Financial Protection Bureau (CFPB), and other housing finance agencies can take affirmative steps without legislation to reform the housing finance landscape and reduce barriers to achieving the bipartisan legislation required to finalize the post-crisis housing finance reform effort, according to "A Blueprint for Administrative Reform of the Housing Finance System." The report's recommendations address existing business underway in the conservatorship, as well as other reforms that go beyond determining the future of the GSEs.
"Ending the conservatorship without further reforms would preserve flaws that allow the GSEs to privatize profits and socialize losses," said co-author Eric Kaplan, director of housing finance policy at the Milken Institute Center for Financial Markets. "We need to end the too-big-to-fail GSE duopoly. Implementing our recommendations would help strengthen the housing finance system and pave the way for bipartisan legislation putting in place the last piece of the housing finance reform puzzle."
As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac buy mortgages and package them into securities for sale to investors. The FHFA took the enterprises into conservatorship during the financial crisis as losses pushed the GSEs toward insolvency.
The report recommends measures to strengthen the housing finance system, including greater transparency into and FHFA oversight of GSE activities, more risk-based pricing combined with explicit affordable housing subsidies, and finalizing a GSE capital rule that supports a housing finance system driven by private capital that can survive future downturns and maintain liquidity for creditworthy borrowers throughout the economic cycle. The report also recommends actions for the CFPB to take regarding the ability to repay/qualified mortgage rule and facilitating innovation while maintaining consumer protection.
"A Blueprint for Administrative Reform of the Housing Finance System" was written by Kaplan and Milken Institute senior fellows Michael Stegman, former senior policy advisor for housing at the National Economic Council; Phillip Swagel, professor at the University of Maryland School of Public Policy and former assistant secretary for economic policy at the Treasury Department; and Theodore Tozer, former president of the Government National Mortgage Association (Ginnie Mae).
Other suggested reforms include:
- Expanding the functionality of the Common Securitization Platform and opening access to key GSE technologies to future competitors.
- Reducing or eliminating the GSEs' presence in markets that are adequately served by the private sector, such as second-home financing and most cash-out refinancing.
- Providing Ginnie Mae and FHA with resources to improve technology and operations.
- Making better use of the Federal Housing Finance Oversight Board to strengthen coordination among components of the housing finance ecosystem.
"These recommendations are drawn from deep expertise in our housing finance policy team, who bring decades of government and industry experience along with a commitment to crafting bipartisan solutions by focusing on substantive policy goals and the tools available to achieve them," explains Michael Piwowar, executive director of the Milken Institute Center for Financial Markets and a former commissioner and acting chairman of the Securities and Exchange Commission.
The authors will be engaging with industry and government stakeholders in coming months to advance the recommendations in the report, which can be found online at www.milkeninstitute.org
Contact: Geoffrey Baum, gbaum@milkeninstitute.org
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SOURCE Milken Institute
