The ranking member of the Senate’s banking committee recognizes that the country’s real estate financing system is in dire need of reform Pat Toomey (R-PA) recently issued his Legislative framework End the duopoly of state-sponsored enterprises (GSE) and promote a liquid secondary mortgage market while protecting taxpayers and promoting equitable access for all lenders.
The keys to Sen. Toomey’s proposal include:
- A transition of the GSE duopoly to a competitive secondary market;
- An end to the Fannie Mae and Freddie Mac Conservatories;
- Create a level playing field for other private sources of capital that bear mortgage credit risk;
- The promotion of a liquid secondary mortgage market that promotes the continued availability of affordable 30 year and other long term fixed rate mortgage loans across the country and throughout the economic cycle;
- Protecting taxpayers by ensuring that any government support is preceded by significant private capital at first loss and that taxpayers are adequately compensated for this support;
- Promote fair access to the secondary mortgage market by mortgage lenders of all sizes, business models, types of charter and locations; and
- Ensure a smooth transition to the reformed real estate finance system by ensuring that the reforms are gradual, realistic and take advantage of the existing regulatory and market structure.
Don Layton, Senior Industry Fellow for the Harvard University Joint Housing Center and former CEO of Freddie Mac, took a closer look at Sen. Toomey’s Framework for Housing Change, and asked if this was a legitimate push for major real estate finance reform, or just the latest in a series of statements that might be disappearing.
“I think the answer is no, but it could lay the foundation for something successful and valuable,” he said Layton in his analysis.
Layton cites two attempts to reform the real estate market published in September 2019: “Housing finance reform plan“From the US Department of Housing and Urban Development and the US Department of the Treasury”Housing reform plan. ”
Layton detailed four important takeaways from the frame of Sen. Toomey.
First, Layton believes that the framework is more related to the GSEs and less to housing reform.
“Major potential reforms to the Federal Housing Administration (FHA), Ginnie Mae, and other aspects of home finance are beyond its focus on home finance reform,” Layton said.
Second, Layton believes that the housing reform framework provides a necessary concession.
“This concession is a good start because without it we would not be able to reach an agreement with the Democrats.” said Layton in his analysis. “Interestingly, the placement of private capital in front of the taxpayer actually began nearly eight years ago when the large-scale transfer of credit risk for single family homes began. The profit retention by the GSEs from the end of 2019 then accelerated the process. In other words, with such a reduction in tax risk already in full swing, Congress need only allow this to continue as part of reform legislation.
Third, the framework maintains an attitude towards the GSEs.
“The call to end this is also dated [GSE] Duopoly, ”Layton said. “This was a political goal that most in the mortgage industry and many Democrats (and I) shared in the years immediately following the 2008 financial crisis, but not for several years. This collective change of opinion took place for the simple and practical reason that efforts to devise details to end the duopoly without massively disrupting real estate markets during a transition have failed. “
By 2017, the industry and most of the political community focused on the “Utility model” for the GSEsIf they are regulated not only for reasons of safety and solidity, but resemble an electricity or water company, then their prices and conditions of use are set by a commission.
“Such a utility model is now widely viewed, I believe, as the only sensible path out of protection that is credibly believed to work as predicted and without unacceptable transition risk,” said Layton. “Sen. Toomey’s call to end the duopoly and replace it with a “competitive secondary market” is therefore out of date and does not recognize the reality of what has been learned in a decade of unsuccessful reform proposals. “
Finally, Layton claims that Sen. Toomey’s framework “abandons the comprehensive approach and instead seeks reforms that are” incremental, realistic, and take advantage of the existing regulatory and market structure “.
The framework relies on slow and steady reforms rather than a drastic overhaul of the entire real estate financing system. Minor changes would impact the industry to a much lesser extent than a drastic and major overhaul, which could potentially cause the system to shock.
“Indeed, ‘comprehensive’ has been the enemy of progress. Congress produced 100% of nothing instead of 10 or 20% of something, ”Layton said. “So it’s good to see Senator Toomey abandoning the sweeping approach in favor of specific, narrowly defined reforms that may work as promised and be passed in a Democrat-controlled Congress.”
Click here for more of Don Layton’s analysis of Sen. Toomey’s real estate finance reform.