On September 6, 2018, the House Financial Services Committee held a hearing to evaluate the ill-famed ten-year anniversary of conservatorship for government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.  Committee members and witnesses addressed the inherent dangers of keeping the status quo as well as potential reforms to limit systemic risk.

What was supposed to be a temporary patch to the 2008 financial crisis has transformed into a decade of inaction towards a long-term solution; abusive GSE expansion; and a constant threat of another massive taxpayer-funded bailout.  Since conservatorship, Fannie Mae and Freddie Mac have borrowed more than $190 billion from taxpayers, including most recently a $3.7 billion request on February 15, 2018.  The Congressional Budget Office has also confirmed that the federal government—taxpayers—are on the hook for the GSEs’ $5.1 trillion in mortgage obligations.

Committee Chairman Jeb Hensarling (R-Texas) asserted that the failure to enact GSE reform poses a growing systemic risk to both mortgage markets and taxpayers.  Chairman Hensarling argued that while efforts to reform have been ignored, the GSEs have slowly crept back to their “pre-crisis market dominance,” which is “bad news for competition, innovation, and most of all, taxpayers.” 

Edward DeMarco, President of the Housing Policy Council and former acting director of the Federal Housing Finance Agency (FHFA), agreed that there is a concerning growth in “systemic reliance on Fannie Mae and Freddie Mac,” eerily similar to the early days of the 2008 financial crisis.  According to DeMarco, the failure of Congress or FHFA to act has created an uncertainty in the housing finance market that impedes long-term investment and threatens taxpayers.  DeMarco argued that the focus of FHFA should not be to allow Fannie and Freddie to reap the benefits of government backing, but to strengthen and modernize the secondary mortgage market.

Edward Pinto, Co-Director of the Center on Housing Markets and Finance and Resident Fellow at the American Enterprise Institute, warned that the U.S. is in the midst of another unsustainable housing boom and, therefore, that reform is needed now to avoid the same mistakes made prior to 2008.  Pinto also expressed concern over the systemic threat the GSEs pose to both the mortgage market and taxpayers.  Particularly, Pinto focused on Fannie and Freddie irresponsibly purchasing mortgages above the maximum debt-to-income ratio of 43 percent.

Although attempts to change the system have proven difficult, committee members from both sides of the aisle showed an appetite for reform.  Chairman Hensarling discussed two potential reform plans before his time in Congress ends next January.  One option is to reintroduce the Protecting American Taxpayers and Homeowners Act, or PATH Act, which would end taxpayer-funded bailouts of Fannie and Freddie entirely and phase out the GSEs within five years.  While it has a slim chance of passing, Pinto believes this to be the only viable legislative solution available to create a sustainable housing finance system.  Knowing the difficulty to pass the PATH Act, Chairman Hensarling and Rep. John Delaney (D-Md.) unveiled a new proposal called the Bipartisan Housing Finance Reform Act of 2018.  This legislation, according to Chairman Hensarling, would end the GSEs’ charters, transition to a system backed by private capital and securitized government guarantees headed by Ginnie Mae, and reduce taxpayer exposure to a catastrophic loss position.  Chairman Hensarling said the proposal is “by no means perfect,” but is a “grand bargain on how to move past an increasingly dangerous status quo.”

Through ten years of conservatorship, Congress and FHFA have sat idly by allowing the GSEs to expand far beyond their core mission, thereby increasing risk for the entire housing finance system.  Talk must now turn into action, as Congress can wait no longer to make much-needed reforms to Fannie and Freddie that both protect taxpayers and maintain a stable secondary mortgage market.