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After a decade, why rush GSE reform now?

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It can hardly be said that the process of releasing Fannie Mae and Freddie Mac out of government conservatorship has been rushed. The painstaking process has taken place over the course more than a decade and has consumed the Federal Housing Finance Agency (FHFA) through two presidential administrations. And yet, FHFA capital requirements proposals published this week for the government-sponsored enterprises (GSEs) may not go far enough to ensure their safety and soundness.

For private market proponents who watched in dismay in 2008 as the GSEs were bailed out and taken over by the government, the push to recapitalise and release them will be seen as a victory.

Yet, regardless of a formal regulatory definition, Fannie and Freddie are undoubtedly systemically important financial institutions. They are leveraged risk takers on a big scale, and regulators who ignore that do so at the peril of a US economy in the throes of the worst crisis since the one that saw them taken into public hands. 

Their hypothetical release from government control would likely happen at the dawn of a new economic cycle. Operating without sufficient constraints, the GSEs would be a risk to the system in the same way they were proven to be in the run up to 2008. 

Release of the GSEs from government control finally appears to be coming closer. But if the current FHFA leadership remains in place after the November presidential election, it should be sure to carefully consider the implications of a thinly capitalised Fannie and Freddie through the next economic cycle before bowing to political demands that the government get out of mortgage finance.

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