The National Association of Realtors (NAR) wants to replace Fannie Mae and Freddie Mac with a new entity that would be private, but regulated like a utility, that the organization believes would ensure the mortgage industry keeps running long-term.
The recommended reforms, unveiled last week, are designed to “promote a reliable and affordable source of mortgage capital for American consumers,” according to a statement from NAR. They include a handful of different recommendations, but perhaps most notable among them is the call to replace Fannie Mae and Freddie Mac with a new “government-chartered authority(s).”
Ken Fears, a NAR senior policy representative who works on housing finance issues, told Inman that the recommendations are trying to address issues that have their roots in the recession and housing bubble a decade ago.
Leading up to bubble, Fannie and Freddie were loosely regulated, were allowed to lobby and had shareholders whose goal was to maximize profits.
When that system collapsed, dragging the economy down with it, the government began imposing various different regulations and put Fannie and Freddie into status called “conservatorship,” which is supposed to be temporary.
“It’s almost like the government took them into a cocoon,” Fears said. “It’s not intended as a permanent status.”
That conservatorship status continues to this day, and Fears explained that the government is also “basically providing all the capital to keep this running.”
Though the current status quo might work fine for the short term, Fears said that it could lead to instability if or when there is another financial downturn.
“The problem is that the Treasury has only agreed to provide a finite amount of money in the event of a crisis,” Fears added.
The recommendations from NAR are an attempt to remedy these problems and establish a permanent solution for the secondary mortgage market that Fannie and Freddie serve. And the goal is to do that with the “least amount of change” possible compared to the current system, according to Fears.
Fears described NAR’s proposed entity as a permanent government-chartered “private utility.” That means it’d be regulated like a utility but also receive private capital.
“The mission is to support a national market for mortgage finance,” Fears said.
This strategy, NAR argues in its proposal, would have a number of benefits that include increasing sustainable homeownership and increasing consumers’ access to mortgage financing, even during economic downturns.
The alternative, NAR also argues, will lead to consumers paying “much higher mortgage interest rates and mortgages may at times not be readily available at all — as happened in jumbo and commercial real estate loans.”
Fears further explained that the system Fannie and Freddie support is what allows people to get the same mortgage rates across vastly different regions. It also prevents rate spikes during crises, which would be more likely in a purely private market.
Fears said that it’s in the best interest of NAR and the real estate professionals it serves to make sure that system continues working. And while consumers may not generally understand how this system works, it is the “backbone” of the mortgage industry and ensures that homebuyers can keep getting access to capital to buy homes.
“At the end of the day, the two parties that really matter are the homebuyer who needs money to purchase the home and the investor who wants share money with them,” Fears said.
In a statement, NAR President John Smaby said that the goal of the recommendations is to give lawmakers “a credible, deliberate framework as they work to secure reforms that will benefit taxpayers, consumers and the American economy.”
Though NAR’s recommendations are just that, recommendations, Fears said that his organization has begun to discuss the ideas with people who work in the policy arena. However, Fears added that “we’re really just on the outset” and that it will take time to create a permanent solution for Fannie and Freddie.
“What this proposal would do is take what’s working today,” Fears added, “lock it down and improve it for the long term.”