GSE Reform’s Impact on Housing

A new research published by the Urban Institute’s Housing Finance Policy Center looks at what the current administration will likely do to administratively reform Fannie Mae and Freddie Mac as the time for legislative reforms runs out. It found that there were considerable risks on this path including potentially serious disruption of the housing and mortgage markets.

The research looked at numerous scenarios that could be played out by the Federal Housing Finance Agency, (FHFA), the regulator and conservator of the GSEs, and an agency that is likely to play a central role in these administrative reforms. The scenarios ranged from reducing the GSEs’ footprint and limiting the cross-subsidy to bringing the GSEs out of conservatorship—all moves that would result in scaling back the GSEs' reach or privatizing them. All these moves, the report said, could lead to significant disruption to housing and mortgage markets as well as the broader economy.

“Shrinking the share of the market they support will reduce the number of borrowers who receive this subsidized lending,” the report said, adding that in most of the scenarios that were evaluated, higher risk borrowers would bear the brunt of the change as they were the ones who received a huge share of the GSEs’ subsidies and cross-subsidies.

These high-risk borrowers would “see the lion’s share of the increases in cost as the market shifts to full risk-based pricing,” the report said.

To avoid such a scenario, the report recommended that the FHFA instead, look at expanding the GSEs’ current credit risk transfer process to more sources of private capital, expand the common securitization program into a more robust market utility, and make the GSEs more transparent. If the FHFA took these steps, the report concluded, “it would put the nation into position to transition to a housing finance system in which mortgage credit is as available as it is today but in a way that poses less risk to taxpayers and the economy.”

To read the full research and recommendations, click here.