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Secondary market reform is critical, and the details matter

Based on a recent statement by President Obama and activity in Congress, it appears that Washington may finally be inching toward reforming secondary mortgage giants Fannie Mae and Freddie Mac. While very few elected officials and market experts dispute the need for reform, opinions of how it should be accomplished vary greatly.  For future home owners and the REALTORS® who will serve their home buying and selling needs, the details of the final reform plan will matter a great deal.

To date, lawmakers in Washington appear to be aligning themselves with two different reform camps. The first, led by the president and a bipartisan group of moderate legislators, favors reforms that would significantly restructure the secondary mortgage market, while maintaining a critical role for the federal government. The second, led by conservatives in the House and Senate, would end the government’s long-time role as a guarantor in the secondary market altogether, leaving serious doubt that market liquidity would be maintained by private market entities during tough economic times.

The National Association of REALTORS® (NAR) has stated its opposition to the latter reform plan in terms that are loud and clear. According to 2013 NAR President Gary Thomas, “NAR supports a comprehensive approach to restructuring the secondary mortgage market, including winding down Fannie Mae and Freddie Mac, but believes any new secondary market entity replacing the enterprises must have an explicit government guarantee.”

Without that guarantee, Thomas correctly argues, the nation’s $10 trillion mortgage market could lose a functioning secondary market, leading to its ultimate collapse. The impact of that collapse would result in a dramatic destruction of wealth for middle class Americans that would see the value of their homes fall significantly. The lack of a functioning secondary market would also lead to mortgage rates that are unnecessarily high and unaffordable for many Americans.

While NAR does argue that a federal guarantee is a necessary ingredient of any successful reform effort, it also warns against a restoration of the old, broken system. That system, unfortunately, resulted in the creation of two entities – Fannie Mae and Freddie Mac – whose shareholders pushed private profits without demonstrating any concern for taxpayer losses.
Rather than an attempt to “fix” Fannie and Freddie, NAR is recommending that the president and Congress work toward the creation of new entities that are government-chartered, non-shareholder owned, and subject to strong oversight that “ensures they can accomplish their mission and protect the taxpayer.”

Along with the top priorities of protecting taxpayers and ensuring mortgage liquidity at all times, NAR is advocating for the following:

  • The new entities should guarantee or insure a wide range of safe, reliable mortgage products, to include 15 and 30-year fixed rate loans, traditional ARMs, and other products for which homeowners have “demonstrated a strong ability to repay.”
  • The establishment of “sound and sensible” underwriting standards for loans purchased and securitized in mortgage-backed securities (MBS), loans purchased for portfolio, and MBS purchases.
  • The entities should remain politically independent, and should not be allowed to lobby Congress or the administration. Their CEO’s should have fixed terms, so they cannot be fired without cause.
  • The entities should be self-funded instead of receiving ongoing government appropriations.

The American economy and individual home owners have benefitted greatly over the past 70 years from the stable source of mortgage funding provided through the government sponsored enterprises, Fannie Mae and Freddie Mac. Let’s hope that their shocking failures, ultimately brought on by a harsh recession and too much focus on shareholder profit over taxpayer protection, has created enough urgency in Washington to introduce meaningful reforms that will help us avoid another such calamity.

The result of such a reform effort, if it can be accomplished by a Congress and president that haven’t proven their ability to accomplish much lately, would be a new and improved secondary mortgage market that could help sustain home ownership and the national economy into the distant future.

Jamie Ridge is president/CEO of the Suburban REALTORS Alliance

Posted by: Jamie Ridge on Friday, August 16, 2013 at 12:00:00 am

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