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The why and how of GSE reform

The debate on how to reform the government-sponsored enterprises (GSEs) that now so dominate US mortgage finance has been raging almost from the minute they were taken into conservatorship by former Federal Housing Finance Authority director James Lockhart on September 6 2008. In recent months, however, there is a growing sense that all those words might eventually translate into action.

This is largely the result of the actions of two senators from opposite sides of the political divide. In late June, Tennessee Republican Bob Corker and Virginia Democrat Mark Warner introduced a bill in the Senate that proposed the winding down of Fannie Mae and Freddie Mac over the next five years and their replacement with a Federal Mortgage Insurance Corporation. No less than 10% of the first loss on the securitizations covered by the FMIC will be taken by the private sector. These two senators are not the most senior members of the Banking Committee, but their bill is now being co-sponsored by 10 of its 22 members. "Corker-Warner is being taken very seriously," says Steve Abrahams, managing director and head of MBS and securitization research at Deutsche Bank in New York. "This is the first meaningful stake in the territory. It is not another piece of throwaway grandstanding." Not to be outdone, on July 24 the Financial Services Committee of the House of Representatives threw its hat into the ring with the Protecting American Taxpayers and Homeowners (Path) bill.

Barbara Novick, head of government relations and public policy at BlackRock
Barbara Novick, head of government relations and public policy at BlackRock

The sense of momentum built further when president Barack Obama gave a speech in Phoenix, Arizona, on August 6 that shed light on the administration’s position on housing market reform for the first time.