How will Secondary Market Reform Affect the Home Buyers? No One Knows Yet

How Will Secondary Market Reform Affect the Home Buyers? No One Knows Yet.

Home owners, potential home buyers and those in the Mortgage and Real Estate industry, have been watching closely since the financial crisis to get a sense of where the real estate market is going and when. So far market recovery has been encouraging, with a few blips that have been, or are in the process of being worked out. Nothing is ever perfect, a return to “normal” is all we can hope for. Of course it’s not over yet, but the final stretch is within sight. I’m talking about the impending overhaul of the secondary mortgage market.

The secondary market purchases packets of home loans from lenders. This is essentially how a lender can continue to provide mortgages to the public. According to the MBA, Mortgage Bankers Association, reform of this segment of the mortgage market is the one remaining pieces of unfinished business from the financial crisis.

The secondary market consists of Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA) collectively known as GSE, Government Sponsored Enterprise. These organizations are privately held but backed by the government. They were originally created to reduce the cost of credit and facilitate the flow of mortgage loans, which in turn encourages home ownership. They worked the way they were meant to, until they didn’t.

During the financial crisis it was revealed that ill-advised and faulty mortgages were rampant. It’s even been acknowledged that many of these mortgages were fraudulent. Most of the root issues have been addressed, but what remains is a review and restructure of the roll of GESs and the scope of their autonomy.

The primary objective is to maintain access to affordable home loans for consumers while protecting the housing market and the nation’s tax payers.

Suzanne De Vita of RIS Media has published a comprehensive piece (below) detailing a recent bipartisan session in Washington D.C. It was hosted by the National Association of Realtors (NAR), with the American Bankers Association (ABA), the Mortgage Bankers Association (MBA) and the National Association of Home Builders (NAHB) all weighed in heavily.

GSE Reform: Execs From Financing, Housing Industries Meet in Washington

By Suzanne De Vita

In a continuation of the conversation on GSE reform, executives from the financing and housing industries met in Washington, D.C., bringing to the forefront key priorities for reform, as well as furnishing guidance to policymakers.

The gathering, hosted by the National Association of REALTORS® (NAR), introduced NAR’s housing finance vision, which acts as a framework for GSE reform. Fannie Mae and Freddie Mac have been under conservatorship since 2008.

CEOs of the American Bankers Association (ABA), the Mortgage Bankers Association (MBA) and the National Association of Home Builders (NAHB), along with NAR’s President-Elect, addressed the conservatorship of Fannie Mae and Freddie Mac, discussing how to navigate reform while preserving protections, including access to affordable home loans and the 30-year fixed mortgage.

“The industry is united in our desire to ensure any reforms to the GSEs secure a government guarantee, ensure equal access for lenders of all sizes, promote consumer affordability, maintain broad consumer access and protect the 30-year fixed rate mortgage,” said Bob Goldberg, CEO of NAR, in a statement. (Goldberg was unable to attend due to an unexpected procedure, according to NAR.)

Moderated by Lorraine Woellert of Politico, the associations discussed the future of the GSEs, emphasizing the need for “thoughtful reform.”

“While the housing market has generally improved since the financial crisis, there remains a need for policymakers to address challenges that may arise in another economic downturn,” said Vince Malta, NAR President-Elect, in the session. “Thoughtful reform of the secondary mortgage market will not only safeguard the interests of taxpayers, but will also ensure the availability of affordable mortgage options for creditworthy Americans.

“In addition, NAR firmly believes that comprehensive housing finance reform should be done in a bipartisan manner,” Malta said.

Malta was joined by ABA CEO/President Robert Nichols, MBA CEO/President Robert Broeksmit and NAHB CEO Gerald Howard.

Later, Dr. Susan Wachter, professor of Real Estate and Finance at The Wharton School at the University of Pennsylvania, and Dr. Richard Cooperstein, head of Risk Management at Andrew Davison and Company, presented NAR’s proposal. Cooperstein and Wachter co-authored the framework. In part, the plan reads:

This vision of a reformed secondary market for housing finance first recognizes the need for the GSEs to carry out a public mission, the same need that led to their initial creation. Second, this proposal builds upon the transformed enterprises under conservatorship, bringing in appropriate levels of private capital and a strong regulator to protect taxpayers. Third, this proposal codifies a structure that is effective, resilient and fair, balancing the tension of private operating companies with the public mission.

“This vision is the result of years of research and collaboration between NAR, our members, our friends in the industry and countless policymakers who have been influential in this arena,” said John Smaby, NAR President. “Our hope is that this research will help provide Congressional leaders and Administration officials with a credible, deliberate framework as they work to secure reforms that will benefit taxpayers, consumers and the American economy. Ultimately, ensuring the GSEs continue providing liquidity and stability in the mortgage market remains NAR’s priority during these discussions.”

While the Trump Administration has yet to formalize plans for reform, it is likely to be at the center of confirmation hearings for Federal Housing Finance Agency (FHFA) Director nominee Mark Calabria. The hearings, held by the Senate Committee on Banking, Housing and Urban Affairs, have not been set (at press time). Calabria, a Republican, is currently chief economist for Vice President Mike Pence.

Last week, Sen. Mike Crapo (R-Idaho), chairman of the committee, introduced his own outline for reforms, in which the GSEs would privatize, but the 30-year fixed mortgage—advocated favorably for by the housing industry—would remain untouched. Importantly, under Crapo’s plan, GSE loans would be eligible to be securitized through Ginnie Mae, which would constitute a government guarantee. In addition, it calls for converting the FHFA’s leadership structure, adopting a bipartisan board of directors, as well as eliminating the GSEs’ affordable housing goals and duty-to-serve requirements, to be replaced with a Market Access Fund.

“MBA welcomes the release of Chairman Crapo’s principles for housing finance reform as a significant sign of his continued commitment to work toward finally ending the conservatorships of Fannie Mae and Freddie Mac and ensuring a stable and liquid market—with an explicit, paid-for government guarantee—for both single-family and multifamily mortgages,” said Broeksmit of the MBA, in a statement at the time.

“NAHB commends Senate Banking Committee Chairman Mike Crapo for taking this important step to move the debate forward on overhauling Fannie Mae and Freddie Mac, and the U.S. housing finance system,” said Randy Noel, chairman of the NAHB, in a statement at the time. “He has consistently taken a leadership role on this issue. Sen. Crapo’s plan would maintain a limited federal backstop to the nation’s housing finance system, a critical element recommended by NAHB to achieve meaningful housing finance reform.”