A plan to reform the mortgage finance industry by replacing Fannie Mae and Freddie Mac with a government-owned corporation offers insights into how presumptive Democratic presidential nominee Hillary Clinton might strengthen the housing market and guard against another financial crisis.
The latest proposal floated by a team of high-profile financial thinkers led by Gene Sperling, former director of the National Economic Council under both Presidents Bill Clinton and Barack Obama and an adviser to Hillary Clinton, would establish a corporation backed by more than $100 billion in investors’ money, according to Bloomberg News.
The first phase of the proposal -- written by Sperling, Jim Parrott, Mark Zandi, Barry Zigas and Lew Ranieri, the granddaddy of mortgage-backed securities -- released in March says: “We are nearly seven years into recovery from a once-in-a-lifetime financial crisis … While much work has been done to address the flaws of this critical part of the nation’s economy, a major step remains: reforming Fannie Mae and Freddie Mac. These two enormously important yet flawed institutions endure in conservatorship while their regulator, the Federal Housing Finance Agency, admirably helps them tread water while pleading for direction from a paralyzed Congress.”
Fannie and Freddie don’t write mortgages; they buy them from lenders, back them and bundle them as securities. Because they play such a crucial role in the U.S. housing market, the government bailed out both government-sponsored enterprises (GSEs) in the financial crisis of 2008 to the tune of about $100 billion each and put them under the control of the Federal Housing Finance Agency.
The main thrust of the plan from Sperling and his colleagues is to merge Fannie and Freddie into a new entity, a government-owned corporation called the National Mortgage Reinsurance Corp. (NMRC), and transfer most of the risk inherent in the current system to private investors.
The NMRC would do pretty much what Fannie and Freddie does now but it “would be required to transfer all non-catastrophic credit risk on the securities that it issues to a broad range of private entities. Its mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee … sufficient to cover any risk that the government takes.”
By selling fixed-dividend securities amounting to about 2.5 percent of some $5 trillion in mortgages, the NMRC would raise about $125 billion in capital, Bloomberg says, providing a safeguard against disruptions in the housing market. In addition, a new mortgage insurance fund would build an even higher financial wall to protect taxpayers in the event of a market downturn.
In order to be more flexible – read, avoid bureaucratic red tape -- the NMRC would be a government-owned corporation, not an agency, the proposal says. Besides selling mortgage securities to private investors and bearing the catastrophic risk of mortgage defaults “at a rate consistent with an economic crisis,” the NMRC would also ensure that “broad access to sustainable mortgage credit for creditworthy borrowers is available in all communities in all economic conditions.”
The proposal rejects the idea of making the NMRC a “privately owned mutual or utility,” saying that would create “a heavily regulated monopoly whose range of business activities, rate of return and market share would be closely prescribed by policymakers.”