Life after Fannie, Freddie
Sen. Bob Corker is honing plans for a fully private mortgage market in the United States, a move that would revolutionize the troubled housing industry.
Earlier this year, the Tennessee Republican introduced legislation that would unwind Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy up mortgages from lenders and package them into securities on a secondary market. One piece of the legislation would create a private secondary market that Corker argues could become the new standard-bearer for the housing industry. Many mortgage industry professionals have expressed concern that the disappearance of Fannie and Freddie — even with their well-documented problems — would ultimately bring the housing market to a grinding halt.
“We understand where the housing finance market is right now,” Corker said in an interview. “What we need to do is migrate in a thoughtful (way) to a private system. ... I think there’s unanimity that we cannot continue as we are.”
In developing such legislation, Corker is tackling one of the economy’s most fundamental, yet stalled, engines. He’s also back at the forefront of a key financial issue, though this time he’s spurring concern among some in a sector that championed his efforts to influence 2010 federal financial reform.
Getting it right is critical, experts say. Scott Colbert — chief economist with Commerce Bank of Kansas City, Mo., which has a Middle Tennessee presence — said housing typically accounts for about 4 percent of the nation’s gross domestic product. While not an overwhelming share, housing ripples through the economy in outsized ways, he said, describing a sector that’s beyond sluggish: it’s eating into the recovery.
“Believe it or not, housing has negatively contributed to the recovery,” he said.
Some in the financial and real estate industries — even those who agree with Corker philosophically — fear his legislation will strip the market of liquidity and spur home prices upward. Corker argues now is the time to act, but those with concerns are especially worried given the frailty of the market.
“From my personal philosophy, any time you mention privatizing something that’s government run, I’m going to be for it,” said Richard Herrington, president of Franklin Synergy Bank. “My concern when we talk about this is a pragmatic concern.”
Fannie and Freddie buy up mortgages and sell securities that have an implied government guarantee, allowing banks to use more of their balance sheets for additional lending and offering investors confidence in the secondary market. When the financial crisis hit, those securities were at the core of the sub-prime mortgage crisis that rocked the economy and led to massive bank losses, foreclosures and pain in related sectors.
Conservative Republicans have long decried Fannie and Freddie as improper government intrusion, while Democrats argue they made prosperity possible for the middle class. Over time, underwriting standards at Fannie and Freddie loosened to create more home ownership opportunities. The degree to which that drove the housing crisis — alongside other factors like irresponsible lending and financial gambles in the private sector — is a matter of political debate.
Various business interests, including those who avoided and decry sub-prime mortgage lending, are concerned there won’t be enough liquidity. Herrington said it’s not just about lending: banks are major buyers of mortgage securities, and they won’t see them as attractive as before without government backing.
Mike Hardwick, president of Churchill Mortgage in Brentwood, agreed. A supporter of Corker’s — both generally and during his federal financial reform efforts — Hardwick thinks the price of borrowing will soar. He and others suggested leaving some form of government framework with a return to tight standards.
Corker said his fix would provide a robust market, but that true private sector risk would make housing stop short of the sort of liquidity that creates a bubble. Markets shouldn’t trust the federal government to revert to tighter standards, he said, given what happened before.
How it would work
U.S. Sen. Bob Corker’s plan for a private secondary mortgage market would set up a framework for a kind of futures trading.
His legislation would set up deliverability rules and broad sets of data for a futures market, allowing investors to judge the quality of mortgage-backed securities. Corker argues that the system will allow investors to confidently trade on a futures market, but without the government guarantee that many argue led to loose underwriting and reckless betting on the resulting securities.
The Tennessee Republican’s plan — among many circulating around what to do with Fannie Mae and Freddie Mac — creates a 10-year transition time. Each year, another 10 percent of the government’s guarantee of such securities would go away, which Corker said allows the market to gradually price mortgages properly — without massive jumps in costs or plunges in liquidity.
Corker said he’s looking for a plan that is “palatable but takes us where we need to go as a country,” and that his plan will likely evolve.