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"Time to rethink" housing policy - keynote

By Graham Bippart
17 Sep 2015

Not just Freddie Mac and Fannie Mae, but perhaps the American dream of home ownership itself, are in need of a revamp, former heads of the Federal Housing Finance Agency and the Office of Federal Housing Enterprise Oversight said on Thursday.

The two government sponsored enterprises (GSEs) are still in conservatorship seven years after the crisis, but the political will to reform their business models, which some say are inherently broken, is nowhere to be found.

“The really said thing is…here we are, seven years later, and nothing’s happened,” said former director and chairman of the oversight board of the FHFA James Lockhart.

Lockhart, alongside former OFHEO director Armando Falcon and former FHFA director Edward DeMarco, said that their years dealing with the aftermath of the investigations into and conservatorship of Fannie and Freddie illustrated how entrenched the institutions are into the political and financial system. 

Much of the fight against a mass of lobbying and politics might be over, but the basic structure of the GSEs, which they agreed heavily distorted markets and might represent a misleading and dangerous approach to the American dream of homeownership, has been left in tact. And there’s little momentum to finish the job.

“There was an attempt in the Senate a year or two ago,” Lockhart said. “I thought that legislation was reasonable, but they couldn’t get it out and there’s no sign now [of reviving it] and the House [of Representatives] is totally split. One half wants to kill them and have the whole market disappear and the other wants to reinstate them.”

While all three agreed that the creation of the common securitization platform, which brings Fannie and Freddie issuance together into a single platform, will go towards ameliorating some of the problems that caused the descent into disarray of those institutions during the crisis, they also agreed that they are fundamentally out of sync with market realities, as well as political aims.

“When you layer in to that kind of business model an important social mission in addition to the government guarantee of debt, that just exacerbates a situation that is eventually going to lead to problems,” said Falcon.  

“We’ve got to move away from this model that we’ve got right now. There’s some talk among … shareholders about recapping and releasing Fannie and Freddie. In my view, that would just be a big mistake.

That would just be a recap, release and repeat. The business model isn’t working, so you can’t go back,” he continued.

DeMarco argued that the business model behind Freddie and Fannie is inimical to the idea of homeownership, something to which Falcon and Lockhart agreed.

“When you look at federal housing policy, so much is about increasing debt rather than building equity,” DeMarco said. “Homeownership is about equity .... We’ve seen the tremendous damage done to families” by the idea that debt accumulation is the best means to home ownership.

Falcon added that if policymakers were polled on what their goals for the government’s role in housing finance were, there would likely be a surprising amount of agreement.

“And that might guide us to the next step we want to achieve in GSE reform,” he said.

By Graham Bippart
17 Sep 2015