One small step towards housing reform

by. Henry Meier

Yesterday the FHFA, which has oversight over Fannie Mae and Freddie Mac took another tentative step in what passes for housing reform in politically paralyzed Washington. It announced a Request for Comment on a proposal to begin offering a mortgage-backed security issued jointly by Fannie and Freddie Mac. This is both more important than you might think and less impressive than it sounds here is why.

Credit unions need a secondary market –somewhere they can sell their mortgages to. It makes their loans cheaper, it manages risk and it ultimately allows our smaller industry to provide more mortgages to our members. Since Fannie and Freddie imploded credit unions have had a huge stake in insuring that whatever mechanism replaces them provides a cost effectively venue to sell their mortgages. Some people argue that the government is too involved in the mortgage market and shouldn’t be in the business of buying selling and guaranteeing mortgages. Others concede that Fannie and Freddie need to be reined in but wouldn’t mind seeing most of the current system kept intact.

With Washington in the grips of political paralysis increasingly it appears that the advocates of more moderate reform may win by default. Fannie and Freddie are back making gobs of money buying your mortgages and packaging them into Mortgage backed securities and the Senate was unable to reach a consensus on housing reform legislation meaning that the only entity that can really bring about any changes is the FHFA which is the conservator of the GSEs.

Currently Fannie Mae and Freddie operate independently of each other. They buy mortgages, bundle them together and sell them (Freddie Mac technically sells participation certificates instead of securities but they work in much the same way as MBS’s). With yesterday’s announcement the FHFA is putting more meat on the bones of its plans to combine the operations of the two GSEs.

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