December 16, 2016
The United States Government Accountability Office released a report, Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorships. The GAO’s findings read a bit like a “dog bites man” story — stating, as it does, the obvious: “Congress should consider legislation that would establish clear objectives and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. FHFA agreed with our overall findings.” (GAO Highlights page) I think everyone agrees with that, except unfortunately, Congress. Congress has let the two companies languish in the limbo of conservatorship for over eight years now.
Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, asked the GAO to prepare this report in order to
examine FHFA’s actions as conservator. This report addresses (1) the extent to which FHFA’s goals for the conservatorships have changed and (2) the implications of FHFA’s actions for the future of the enterprises and the broader secondary mortgage market. GAO analyzed and reviewed FHFA’s actions as conservator and supporting documents; legislative proposals for housing finance reform; the enterprises’ senior preferred stock agreements with Treasury; and GAO, Congressional Budget Office, and FHFA inspector general reports. GAO also interviewed FHFA and Treasury officials and industry stakeholders (Id.)
The GAO’s findings are pretty technical, but still very important for housing analysts:
In the absence of congressional direction, FHFA’s shift in priorities has altered market participants’ perceptions and expectations about the enterprises’ ongoing role and added to uncertainty about the future structure of the housing finance system. In particular, FHFA halted several actions aimed at reducing the scope of enterprise activities and is seeking to maintain the enterprises in their current state. However, other actions (such as reducing their capital bases to $0 by January 2018) are written into agreements for capital support with the Department of the Treasury (Treasury) and continue to be implemented.
In addition, the change in scope for the technology platform for securitization puts less emphasis on reducing barriers facing private entities than previously envisioned, and new initiatives to expand mortgage availability could crowd out market participants.
Furthermore, some actions, such as transferring credit risk to private investors, could decrease the likelihood of drawing on Treasury’s funding commitment, but others, such as reducing minimum down payments, could increase it.
GAO has identified setting clear objectives as a key principle for providing government assistance to private market participants. Because Congress has not established objectives for the future of the enterprises after conservatorships or the federal role in housing finance, FHFA’s ability to shift priorities may continue to contribute to market uncertainty. (Id.)
One finding seems particularly spot on to me. As I wrote yesterday, it appears as if the FHFA is not focusing sufficiently on building the infrastructure to serve secondary mortgage markets other than Fannie and Freddie. It seems to me that a broader and deeper bench of secondary mortgage market players will benefit the housing market in the long run.