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GSE Reform: Finding the Right Path to Sustainability

Recently, President Donald J. Trump signed a memorandum tasking the Treasury Department and Department of Housing and Urban Development (HUD) with preparing a reform plan for Fannie Mae and Freddie Mac. The White House memo directed that this plan be delivered "as soon as possible." In an opinion piece published by the Wall Street Journal, American Enterprise Institute fellows Peter J. Wallison and Edward J. Pinto discussed the feasibility of the Presidential memo and its proposed reforms.

According to Wallison and Pinto, the memo’s direction to the Treasury will lead to government housing-finance system that roughly replicates what existed before 2008, notably “government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending.”

“These elements will be retained, but the problems they caused in 2008 are supposed to be mitigated by better regulation, more capital for the GSEs, and compensation to taxpayers for the risks they’ll assume when the government guarantees the GSEs’ obligations,” Pinto and Wallison's op-ed states. “The housing lobby misled the public before on the efficacy of these protections.”

According to Wallison and Pinto, the FHFA should shrink their footprint as conservator of Fannie and Freddie over a period of five to 10 years. They suggest reducing the size and types of the mortgages that GSEs could buy and opening larger portions of the housing-finance market to the private sector, improving competition.

“Most of the U.S. economy is open to the innovation and competition of the private sector,” said Wallison and Pinto. “Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country.”

The Presidential memo states that "in the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts." The memo went on to claim that "the Department of Housing and Urban Development’s (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems."

You can read the full memo here. You can also read more about proposed GSE and housing finance reforms in our April DS News cover story, available online.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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