Hard-Line Critics Would Damage GSEs, Says Freddie Mac CEO
Tighter oversight of the nation’s government-sponsored enterprises is needed, but critics of Fannie Mae and Freddie Mac are going too far in their proposals to increase the capital requirements of those institutions and limit their ability to respond to the growing need for financing residential mortgage debt, Richard Syron, chairman and chief executive officer of Freddie Mac, told NAHB leaders in remarks in Orlando, Fla. on Feb. 8.
With the amount of the nation’s outstanding residential debt expected to double over the next decade as an additional $13 trillion is needed to finance housing, the solutions proposed by some of the “most hard-line critics” of the GSEs would become “tomorrow’s problems,” Syron said.
“The loudest voices in the debate have been those demanding not only to tighten oversight of the GSEs — which we agree with — but to diminish our tools and shrink the box within which the GSEs can operate,” he told a joint meeting of NAHB’s Executive Board and Budget and Resolutions committees.
At the same time as the future demands on housing finance become “greater than ever,” Syron said that a number of private financial institutions will “face strong pressure to pull back from mortgages.”
“There is another big economic change underway that will make the GSEs all the more necessary,” he said. “For more than a decade, the private-label mortgage market has been a very attractive and relatively easy business to be in — partly because the risk premiums demanded by investors have been at historic lows,” he said. “Yet there are mouting concerns that this situation cannot last, and that when this change comes, it will not be pretty.”
“What all this means is that the GSEs will be more important than ever. For the mortgage business will become harder as investors become more wary of risk and pricing for perfection comes to an end. And this, in turn, will only increase the need for mission-responsive institutions in housing finance,” he said.
“Our charters specify that we must be a continual presence in the mortgage market, providing affordability, liquidity and stability,” he added. “All of which begs the question, Why overly hamper us just when you’re going to need us most?”
Discussing specific regulatory changes that would make the GSEs “less competitive, less profitable and less relevant,” Syron said:
- A dramatic rise in capital requirements not tied to inherent risk would “put a big squeeze on the GSEs’ securitization business — the one area where there is the least controversy over what the GSEs do.”
- New program restrictions would force the GSEs to wait for regulatory approval before purchasing any innovative new product or undertaking any new activity and this would be especially harmful at a time when demographic changes in the marketplace require more innovation and agility than ever before.
- Higher loan limits need to be established in high-cost states because “assuming a uniform cost of living across the United States simply does not make sense.”
- A healthy, robust and profitable retained portfolio is needed so that the GSEs can spring into action when they need to respond to market realities. “If something bad befalls the GSEs, the first line of defense is not the taxpayer, it’s roughly $100 billion in private shareholder capital. But shareholders demand an adequate return on their investment; and if that return falls too low, the model simply won’t work.”
Syron said that “appropriate” GSE legislation “strengthens our oversight but also enables us to meet our expanding mission. The truth is, we are talking about the fundamental shape of the housing finance system in this country. And that has implications for the health of the home builders, the entire housing sector and our nation’s economy.”
“We need legislation,” he said, “but we need to get it right.”
For more information, e-mail Chellie Hamecs at NAHB, or call her at 800-368-5242 x8425.
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NAHB Kit Gives Builders Back-to-Basics Tips in Changing Market
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