GSE Reform: Housing Finance Savior or Looming Disaster?
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GSE Reform: Housing Finance Savior or Looming Disaster?

GSE Reform

The battle for Fannie Mae and Freddie Mac – so-called government-sponsored enterprises or GSEs – involves two hugely profitable companies and what will become of them.

Fannie Mae and Freddie Mac are in play and with them the financial heart of the real estate marketplace. As they evolve – if they evolve – transactions worth trillions of dollars are at stake as well as billions of dollars in potential profits.

The battle for Fannie Mae and Freddie Mac – so-called government-sponsored enterprises or GSEs – involves two hugely profitable companies and what will become of them. They were open and functioning even during the worst moments of the mortgage meltdown. And yet, somehow, they are still in government hands after more than a decade as a federal conservatorship. The trillion-dollar question is what’s next for Fannie Mae, Freddie Mac, and the mortgage marketplace?

The Government Accountability Office has identified at least 14 GSE reform plans introduced on Capitol Hill to revamp Fannie Mae and Freddie Mac, plans announced prior to this year. Now there’s a 15th, a February proposal announced by Sen. Mike Crapo (R-ID), chairman of the Senate Banking Committee.

After 14 times at bat, will the 15th congressional reform plan find enough support for enactment? Might the country adopt a proposal from the Executive Branch or maybe a plan from outside Washington? Or – just maybe – will Fannie Mae and Freddie Mac continue as they are, cash cows controlled by the government that mean billions of dollars in additional revenues for the Treasury Department?

The Secondary Market

Fannie Mae and Freddie Mac now dominate the secondary market, the electronic arena where lenders and investors buy and sell mortgage loans. The GSEs buy mortgages from loan originators, package them together to create mortgage-backed securities (MBS), guarantee them, and then raise money through sales to investors.

The secondary mortgage system offers several big benefits.

First, it brings vast amounts of capital into the mortgage marketplace. Not just cash from US investors but cash from sources worldwide. More cash (supply) means lower mortgage rates.

Second, because of the secondary market lenders never run out of funds. If a lender has $50 million set aside for mortgage lending, and if the typical loan amount is $200,000, the lender has the capacity to originate 250 mortgages. Borrower #251 – no matter how well qualified – is out-of-luck because the lender has no more money to lend. Alternatively, through the secondary market, the lender sells its mortgages, takes in new cash, and then has the ability to make additional loans.

Mortgage-backed securities, according to the Financial Industry Regulatory Authority (FINRA), “are bonds secured by home and other real estate loans. They are created when a number of these loans, usually with similar characteristics, are pooled together. For instance, a bank offering home mortgages might round up $10 million worth of such mortgages. That pool is then sold to a federal government agency like Ginnie Mae or a government sponsored-enterprise (GSE) such as Fannie Mae or Freddie Mac, or to a securities firm to be used as the collateral for the new MBS.”

So far it might seem as though MBSs are being created and sold back and forth just like other bonds but that’s hardly the case. Mortgage-backed securities are very different from the typical bond – and they’re also at the heart of the GSE debate.

To learn more, read the full article in the May/June Edition of Think Realty Magazine here. 


Category: News