Hall of Fame New York Yankee catcher Yogi Berra said it best: “it’s like déjà vu all over again.” He was talking about a game where Mickey Mantle and Roger Maris hit back-to-back home runs during the 1961 season. Both players were vying to beat Babe Ruth’s record of 60 home runs hit in a single season (Maris would go on to beat it when he hit his 61st home run in the final game of the season). The release from conservatorship of Fannie Mae and Freddie Mac, whatever it is, isn’t that. That’s not to say it isn’t needed, it’s just that after more than a dozen years of trying, we’ve seen this movie before, and it has never ended particularly well. GSE reform – the effort to restructure and ultimately release the two Government Sponsored Enterprises (Fannie Mae and Freddie Mac) – has – eluded some of the smartest minds in Washington. Sometimes with a bang, like with the collapse of the Johnson-Crapo bill, and sometimes with a whimper, as with various attempts during the Obama and Trump administrations to reimagine the secondary mortgage market. Will it do so again? We will see. After all, Maris and Mantle both nearly did it in the same year.
The one thing I know, is that I am not nearly as confident as I was when five years ago, the Urban Institute’s Laurie Goodman cautioned me that GSE reform “will not happen in my professional lifetime.” My response was to bet her the pudding of her choice at the retirement home that it will. Thankfully, neither of us has retired yet, so there is still a chance I will win that bet. I just wouldn’t make it again.
GSE reform’s best prospects were during the first Trump administration, when Secretary of the Treasury Steven Mnuchin established it as one of his top priorities. Mnuchin was uniquely qualified to lead such an effort, having managed the mortgage backed securities desk at Goldman Sachs, and having led a major bank that made mortgages and sold them to Fannie Mae and Freddie Mac. But the job had a different agenda, and despite two willing and able partners in Joseph Otting and Mark Calabria at the helm of the Federal Housing Finance Agency (FHFA), nothing happened. Calabria gave it the most concerted effort during his tenure, and had as a Senate staffer written most of the current governing legislation of the GSEs, the Housing and Economic Recovery Act (HERA) of 2008. Like Michael Barr and Michael Stegman in the Obama administration, it came to no avail.
We too often dismiss what a significant accomplishment HERA was. HERA’s reforms were a bipartisan product that successfully created FHFA and provided the statutory framework for the new regulator, as well as the Treasury Department, to place and manage the GSEs in conservatorship and move them out of insolvency.
Today, Fannie Mae and Freddie Mac remain under the conservatorship of FHFA, owned and controlled through billions of dollars’ worth of stock warrants held by the U.S. Treasury. One of the more popular models for GSE reform is the “utility model” where the two entities are run as quasi-private government-owned utilities. That’s basically what we have now. But that approach is by no means widely held.
The Biden administration never made a serious attempt at GSE reform, informed by 12 years of failure in the previous three terms and kept busy with a pandemic, recession, and inflation. Rumors abound that the new Trump administration will try again. If they do, NHC stands ready to help, as despite the lack of a crisis to serve as an action forcing event, responsible GSE reform still makes a lot of sense.
Getting it wrong, however, can be catastrophic, putting at risk the stability of the entire mortgage finance market along with the future of the 30-year fixed rate mortgage outside of the government-run Federal Housing Administration mortgage program. That’s because the GSEs’ play the critical role of maintaining a liquid market for the 30-year fixed rate, fully-amortizing and prepayable mortgage during all economic conditions. Without them, mortgage credit availability would rise and fall with changes in economic conditions, exacerbating existing shortages of affordable mortgage when it is needed most and placing the management of interest rate risk in the hands of consumers, those least able to manage it.
In 2019, NHC convened a broad group of stakeholders to develop a plan to reform the GSEs under HERA, rather than create an entirely new mortgage finance system to replace them. The approach we recommended began with administrative reform under HERA, followed by release from conservatorship under tight supervision by FHFA, and ultimately, the simple reform of the few remaining issues by Congress once the market had fully adjusted to the administrative changes and the GSEs were adequately recapitalized.
I encourage anyone considering GSE reform to read the report, as it covers a wide range of issues that have to be addressed, and the risks of getting them wrong. Having worked on nearly every major reform initiative in a wide range of capacities since 2006, I am not optimistic that this is the moment to complete these efforts, but I have no doubt that the moment will come. If we do it now, however, it won’t be on the wrong end of another major economic disaster. The 2008 bill was called the Housing and Economic Recovery Act for a reason. Regarding a crisis of that magnitude, I hope we never again have to experience déjà vu all over again.