Former GSE CEO sees hope in Toomey’s housing reform plan
Recognizing that the national housing finance system is in urgent need of reform, the ranking member of the Senate Banking Committee Pat Toomey (R-PA) recently published his framework for legislation end the government-sponsored business (GSE) duopoly and foster a liquid secondary mortgage market, while protecting taxpayers and promoting fair access for all lenders.
Keys to Senator Toomey’s proposal include:
- A transition from the GSE duopoly to a competitive secondary market;
- The end of the guardianship of Fannie Mae and Freddie Mac;
- Establishing a level playing field for other sources of private capital that bear mortgage credit risk;
- Promoting a liquid secondary mortgage market that promotes the continued availability of affordable 30-year mortgages and other long-term fixed rate mortgages nationally and throughout the business cycle;
- Protect taxpayers by ensuring that significant first-loss private capital is in front of any government support and that taxpayers are properly compensated for this support;
- Promoting equitable access to the secondary mortgage market by mortgage lenders of all sizes, business models, charter types and locations; and
- Ensure a smooth transition to the reformed housing finance system by ensuring that the reforms are gradual and realistic, taking advantage of the existing regulatory and market structure.
Don Layton, Senior Industry Fellow for the Harvard University Joint Center for Housing Studies and former CEO of Freddie mac, took a closer look at Senator Toomey’s framework for housing industry change and asked whether this was a legitimate kickoff to comprehensive housing finance reform, or just the latest in a series of statements that could fade away.
“I believe the answer is no, but it could lay the groundwork for something successful and worthwhile,” said Layton in his analysis.
Layton cites two attempts published in September 2019 to reform the housing market, “Housing finance reform plan“By the US Department of Housing and Urban Development and the US Department of the Treasury ‘s”Housing reform plan. “
Layton detailed four takeaways from Senator Toomey’s cadre.
First, Layton thinks the framework is more about GSEs and not so much about housing reform.
“The significant possible reforms of the Federal Housing Administration (FHA), Ginnie Mae and other aspects of housing finance are beyond his focus on housing finance reform,” Layton said.
Second, Layton believes the housing reform framework offers a necessary concession.
“This concession is a good start, because without it no agreement with the Democrats would be possible”, Layton said in his analysis. “It’s interesting that putting private capital in front of the taxpayer actually started almost eight years ago, when large-scale credit risk transfer began; the retention of profits by the GSEs from the end of 2019 then accelerated the process. In other words, since such a reduction in taxpayer exposure is well advanced, Congress need only allow it to continue as part of any legislative reform.
Third, the cadre maintains a position against the GSEs.
Also dated is the call to ‘end the [GSE] duopoly, ”Layton said. “It was a political goal shared by most mortgage industry players and many Democrats (and myself) in the years immediately following the 2008 financial crisis, but not for several years now. This collective shift in perspective has come about for the simple and practical reason that efforts to work out the details of how to end the duopoly, without possibly massively disrupting housing markets during a transition, have failed. “
In 2017, the industry and most policymakers focused on “Utility model” for GSEs, when they are regulated not only for safety and soundness, but in the same way as a public electricity or water service, their pricing and conditions of service are set by a commission.
“Such a utility model is now, I believe, widely regarded as the only reasonable way out of the trusteeship that is credibly believed to work as intended and without the risk of an unacceptable transition,” Layton said. “Sen. Toomey’s call to end the duopoly and replace it with a” competitive aftermarket “is therefore outdated and fails to recognize the reality of what has been learned over a decade of unsuccessful reform proposals . “
Finally, Layton says Senator Toomey’s framework “abandons the holistic approach and instead aims for reforms that are” incremental and realistic, building on the existing regulatory and market structure. “
The framework is based on slow and steady reforms, rather than a drastic overhaul of the entire housing finance system. Smaller changes would impact the industry on a much smaller scale than a drastic and complete overhaul that could cause potential shock to the system.
“Indeed, the ‘global’ has been the enemy of progress; Congress produced 100% of nothing instead of 10 or 20% of something, ”Layton said. “So it is good to see Senator Toomey abandoning the comprehensive approach in favor of specific, narrowly defined reforms that could potentially work as promised and could be passed by a Democrat-controlled Congress.”
Click here for more on Don Layton’s analysis of Senator Toomey’s housing finance reform.