GSE Reform & What You Should Know

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If 50% of all mortgage loans went away tomorrow, how would your buyers and business be impacted? When business is good, the real estate market is humming along, and buyers are getting financed, it’s easy for brokers to get lulled into a state of complacency. After all, if the deals are closing, commission checks are lined up, and the lights are staying on, why question it? But what if half of the deals that you thought were en route to the closing table were suddenly cancelled due to a lack of financing?

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If you think this couldn’t possibly happen, think again. What many real estate professionals don’t understand is the critical role that government sponsored enterprises (GSEs) play in 50% of the mortgages that are written in the U.S. every year. What they also don’t understand is just how different the GSEs Fannie Mae and Freddie Mac operate today versus how they worked prior to the last housing recession.

“A lot of agents don’t even know what GSE stands for,” says Chris Read, NAR Director and 2020 Chair of the organization’s Conventional Finance and Policy Committee, “or, they just look at financing like a water faucet: you turn it on and expect the water to come out. You never really consider where that water comes from or how it gets to the faucet.” 

10 Years or Less 

This lack of knowledge of GSEs can be in part attributed to the fact that brokers with 10 or fewer years of experience in the industry don’t know what it means to operate in a market where money is tight. And while financing is currently available, brokers need to understand that both Fannie Mae and Freddie Mac are currently in conservatorship, having both been bailed out by the U.S. government (to the tune of about $190 billion) in 2008.    

“A lot of reform was put in place to fix some of the problems that arose in the 2000s,” says Read, who adds that the results of Fannie Mae’s and Freddie Mac’s work have been excellent.  Homeownership rates have risen 43% in 1940 to nearly 65% today, and the amount of home equity Americans hold has increased from $350 billion in 1960 to over $15.5 trillion. “The role of the GSEs is vital,” Read explains, “as the housing market now touches 15% of the entire U.S. economy.”

This is both encouraging and alarming for the real estate professional who doesn’t understand how GSEs work or their current conservatorship status. While Fannie Mae and Freddie Mac are critical to the American mortgage system and American homeownership, they do not make mortgage loans (bankers and other lenders do). Though they are private companies, the GSEs were created by the U.S. government, which implicitly guarantees that it will cover Fannie Mae’s and Freddie Mac’s debts in case of a default.  

The GSEs buy the mortgages that banks and other lenders make. Then, banks and lenders make even more mortgages by using the proceeds from those mortgage sales to Fannie Mae and Freddie Mac, which take the majority of the mortgages they buy, bundle them into “mortgage backed securities,” and sell them to investors. 

Today Versus 2005 

When the government bailed out the GSEs in 2008, the U.S. Treasury Department got control-ling ownership over both Fannie Mae and Freddie Mac through Preferred Stock Purchase Agreements (PSPA). Congress then created The Federal Housing Finance Agency (FHFA), which—unlike the old regulatory system that was split among multiple entities (reducing accountability) and with inadequate tools (reducing oversight)—has broad powers to oversee and regulate the GSEs. 

Through stronger regulation, the FHFA ensured Fannie Mae and Freddie Mac engaged in only sound business practices and went back to setting market standards rather than chasing them. 

The bottom line is that the GSEs of 2019 are not the GSEs of 2005, and this is a potential red flag for the real estate industry. 

“If the GSEs stop buying as many mortgages, there is no assurance that new guarantors will step into the breach,” Read points out. “And, as more guarantors enter the market, is FHFA up to overseeing more than just Fannie Mae and Freddie Mac?” NAR has an alternate vision that’s gaining traction among policymakers. It proposes a “Utility Model” that doesn't limit or risk disruption of the housing market. 

“As with energy utilities, the GSEs would be re-chartered as privately-held utilities to maintain the mission of mortgage market liquidity while also encouraging innovation,” Read explains, noting that these private companies would be regulated in terms of their products, rates and operations. The end result would be fewer GSEs (which, in turn, would ease oversight and regulation); no need to shrink Fannie Mae’s or Freddie Mac’s footprint; and the maintenance of the current GSE structure. 

To brokers and owners that want to help NAR get its voice heard on the future of GSEs, Read says the best steps are to stay informed, support the organization’s Calls for Action, and share the story with your co-workers, cooperative agents, clients, and personal database. “We want members to understand GSEs and that we’re in a vulnerable place right now in terms of maintaining the original mission of Fannie Mae and Freddie Mac,” Read says, “which is to provide sustainable homeownership for any credit-worthy individual.” 




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