A central conclusion of the BPC Housing Commission was that our housing finance system needs private capital to play a far greater role in bearing mortgage credit risk. Many see risk-sharing experiments being conducted by government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as that opportunity in light of stalled legislative efforts to change the system. On Tuesday, BPC hosted, “Housing Finance Reform: Opportunities and Obstacles of Risk Sharing,” an event that brought together government officials, policymakers, and industry stakeholders to explore exactly what these credit risk transfers mean for the future of housing.
Senators Bob Corker (R-TN) and Mark Warner (D-VA), the authors of bipartisan legislation to reform the housing finance system, reflected at the event about their past work together and ongoing opportunities and frustrations. The comprehensive bill they drafted had envisioned a system where private capital, and not the taxpayers, would be in the “first-loss” position bearing the credit risk should the housing market take a downturn. The senators were cautiously optimistic about the potential of GSE risk-sharing to help support this objective.
The two senators also discussed the Jumpstart GSE Reform Act, which they recently reintroduced, as well as the ongoing effort to develop the Common Securitization Platform and a single security for Fannie and Freddie. While noting these developments as positive, they still cautioned their colleagues about the danger of waiting until a moment of crisis to finally act on more comprehensive housing finance reform. “I can already write the TV ad,” Senator Warner said, in speaking of the prospect of the GSEs requesting future draws from the Treasury Department should the housing market hit some significant turbulence.
An expert panel also endorsed the idea that the GSEs’ risk-sharing transactions were a real opportunity to reduce taxpayer exposure and put the housing finance system on more sustainable footing. In particular, Bob Ryan, acting deputy director of the Division of Conservatorship at the Federal Housing Finance Agency (FHFA), noted that these programs are “not a pilot” but a long-term focus of their conservatorship.
While Deputy Director Ryan noted the $31 billion of credit protection on over $700 billion of unpaid principal balance, other panelists cited a few roadblocks to further expansion. Here are a few key requisites the panelists shared for the continued success and growth of these credit risk transfers:
- They must be scalable, preserve the characteristics of the TBA (To Be Announced) market, and attract a broad, deep investor base.
- Fannie and Freddie must have strong counterparties.
- Legislation is still needed not only for comprehensive reform, but to make technical changes that would broaden private-sector participation in risk-sharing.
- Further experimentation with front-end risk sharing is warranted as it may be more operationally viable.
Like anything, growing the risk-sharing market may have tradeoffs, though most participants were optimistic that it would not adversely affect the ability of borrowers to access mortgage credit on affordable terms.
Summing up the current situation, Senator Corker noted that “industry is moving in the direction we laid out.” Yet ultimately Congress must act to determine where we end up.