Reforming Flaws in the GSEs’ Charters

How can the housing finance system be reformed in the absence of legislation? A new report by The Milken Institute sets out to answer this question, by building upon the progress that has been made towards a safer housing finance system through the conservatorship of the government-sponsored enterprises (GSEs) under the Federal Housing Finance Agency (FHFA).

Titled, "A Blueprint for Administrative Reform of the Housing Finance System," the report makes a case for why the government must avoid releasing the Fannie Mae and Freddie Mac from conservatorship without fixing some of the flaws in their charter. The report's authors, Eric Kaplan, Michael Stegman, Phillip Swagel, and Theodore Tozer outline actions that can address some of the challenges related to legislative action to set the stage for further reform that "includes changes to the GSE charters."

"Ending the conservatorship without further reforms would preserve flaws that allow the GSEs to privatize profits and socialize losses," said co-author Eric Kaplan, Director of Housing Finance Policy at the Milken Institute Center for Financial Markets. "Implementing our recommendations would help strengthen the housing finance system and pave the way for bipartisan legislation putting in place the last piece of the housing finance reform puzzle."

The report argues that the GSEs' post-crisis success has occurred under the protected "duopolistic status that impedes entry and competition, unparalleled access to capital with government backing," and due to the strong economic environment that reflects historically low delinquencies.

Some of the actions recommended by the report include greater transparency into and FHFA oversight of GSE activities, more risk-based pricing combined with explicit affordable housing subsidies, and finalizing a GSE capital rule that supports a housing finance system that is "driven by private capital that can survive future downturns and maintain liquidity for creditworthy borrowers throughout the economic cycle."

The report also made recommendations for the Consumer Financial Protection Bureau (CFPB). They include actions for CFPB on the ability to repay/qualified mortgage rule and facilitating innovation while maintaining consumer protection.

Click here to read the full report.