If only the U.S. Treasury had a magic wand to ensure that the dozens of recommendations released last night in its long-awaited reform proposals for housing finance would become a reality; in that case, one could expect real-time results in the quest for an end to GSE conservatorship and the strengthening of the FHA. Instead, the two reports – one on FHA and Ginnie Mae and one on the GSEs – might simply be regarded as new acquisitions by the large public library devoted to the hundreds of dormant proposals for housing finance reform. It is not yet clear whether these two proposals would be shelved in the sections on fiction or non-fiction.
Don’t get me wrong. The reports are timely, thoughtful, and comprehensive, and housing finance geeks like me will pore over the details for several hours and debate among ourselves. The question is: will the recommendations go anywhere? Underlying this question is the fact that the reports are replete with the word “should,” without any accompanying action plan or implementation plan to convert the normative “should” into the actual “will.”
The proposals include various admonitions that the Administration may act unilaterally with administrative actions to implement certain of the recommendations if Congress does not pick up the ball and run with it. But it is hard to see how realistic that is as we move into an election year. At this point, housing finance reform is not a potent election issue, and the complexities of reform are very multi-layered, much like in the health care reform debate. And like health care reform, many of the moving parts are inextricably tied together, making it harder for unilateral administrative action to be effective without accompanying legislative action.
It is hard to boil down the two detailed proposals into a one-pager, but I’ll try. Generally speaking, these are the themes that emerge from the two proposals:
- Shrink the role of the federal government in its support of housing to more limited, well-defined missions.
- Limit unfair and unnecessary competition with private capital
- Clearly define, tailor and pay for the role the government will play
- Synchronize the roles of the different government players to avoid overlaps
- Permit the approval of private guarantors
- Transition to this reduced role of government in a responsible manner
- Run FHA, Ginnie Mae, and the GSEs like a business.
- Impose sufficient capital, liquidity and reserves requirements
- Improve risk management, including counterparty risk
- Improve technology
- Hire qualified staff
- Set the amount of mortgage insurance premiums and guaranty fees to reflect the risk
- Empower FHFA to supervise and oversee the GSEs
- Review the safety and soundness of underwriting criteria
- Recognize and rely on the interdependent relationship between the private sector and the government.
- FHA needs private lenders and it should not play “gotcha” with opaque requirements or immaterial issues
- In exchange for full faith and credit guarantee of P&I on MBS, require significant first loss private capital
- Look to private investors to provide equity investments into the GSEs
- Build in appropriate protections of consumers and small lenders.
Each of these bullet points and sub-bullet points could benefit from pages of further detail and explanation. Net-net, the proposals generally are consistent with the orthodoxy that espouses limiting the role of government, promoting and not crowding out private capital, and making sure the more limited government role is carried out in a responsible and accountable way.
Only time will tell whether these two proposals will get their own wing in the housing finance public library, or even their own building, but at least they are thorough and comprehensive and will find an enthusiastic audience among some of the library patrons. But don’t expect “should” to morph into “will” anytime soon, at least in a holistic way.
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