In wake of the housing bubble and revelations about the behavior of Goldman Sachs and other Wall Street firms, financial regulatory reform is a very popular topic on Capitol Hill these days. Many people feel that an important part of any reforms would be an overhaul of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac.
The mortgage giants play an enormous role in the U.S. lending market by purchasing mortgages in order to provide stability and liquidity. In so doing, the GSEs promote lending and make mortgages less expensive by keeping mortgage rates low.
It is easy to lose sight of the fact that the GSEs amount to a colossal subsidy of the housing market, supported by the U.S. taxpayer. Making home ownership more accessible is politically popular, and there is much pressure on Fannie and Freddie to accomplish this goal. This pressure is one of the reasons that the GSEs got into trouble by lowering underwriting standards and making subprime loans in the bubble leading up to the recession.
Most observers agree there should be some reform of the mortgage lenders, but there is little accord as to how the reforms should be instituted.
The newest reform proposal from the Republicans in the Senate would make some huge changes to the GSEs:
- The government conservatorship of the GSEs would end within two years of the passage of the bill.
- Freddie and Fannie’s government charters would expire three years after the conservatorship.
- The GSEs would have 10 years to dissolve existing mortgages.
- The activities of the GSEs would slowly wind down, as capital requirements would increase and loan purchases would decrease.
- The companies would no longer be exempt from state and federal taxes.
The plan fails to specify what would happen when the government withdraws from the mortgage markets, and what, if any type of support would take their place. Sweeping reforms such as these could potentially cause borrowing costs to increase dramatically.
What do you think is the best way to reform mortgage lending? Let us know in the comments section below.
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