A Conversation With U.S. House Financial Services Committee Chairman Jeb Hensarling

Current Status and Disappointment

• Chairman Jeb Hensarling expresses deep disappointment that Fannie Mae and Freddie Mac remain in conservatorship a decade after the financial crisis, describing the effort as "working hard to achieve so little."
• Hensarling notes that roughly 98–99% of securitizations and 70% of mortgage originations still rely on federal backing, leaving taxpayers exposed to approximately $8 trillion in mortgage-backed securities.
• He warns that the current system lacks market discipline and innovation, effectively centralizing risk in "two failed models" that he characterizes as "capitalism on the way up, socialism on the way down."
• Hensarling identifies a "race to the bottom" in underwriting standards, citing Freddie Mac and the FHA both offering 3% down payments and reaching 50% loan-to-value (LTV) ratios.

Proposed Reform Framework: The "DeMarco-Bright Plan"

• The proposed legislation aims to replace the Ginnie Mae wrap with a guarantee on private-label mortgage-backed securities (MBS) meeting a new "all-new and improved qualified mortgage" standard.
• Capital Stack Structure:
  • First Loss: Borrower down payment, proposed at a minimum of 5% (85% LTV) to replace the current 3% standard.
  • Second Layer: Private mortgage insurance (PMI) and mandatory loan-level credit enhancement from guarantors.
  • Third Layer: A mortgage insurance fund administered by the FHFA.
  • Fourth Layer: The issuer's balance sheet.
  • Last Loss: Taxpayers would be positioned only in a catastrophic loss scenario.
• The plan seeks to separate the issuer function from the guarantor function, requiring guarantors to maintain "bank-like capital" as defined by the FHFA.
• Legislation would allow for multiple guarantor entities to diffuse risk, aiming to reinvigorate the private-label MBS market currently dominated by Fannie Mae, Freddie Mac, and Ginnie Mae's ~400 issuers.
• Hensarling insists that any affordable housing component must be on-budget and demonstrably assist low-to-moderate income earners, potentially through premium support or increased Section 8 vouchers.
• The proposal preserves the 30-year fixed mortgage and maintains "cash windows" for community financial institutions to access funding via the Federal Home Loan Banks.

Regulatory and Political Obstacles

• Hensarling predicts that legislation is unlikely to pass in the current Congress but intends to establish a bipartisan, bicameral "marker" to serve as a foundation for the next session.
• He warns Democratic colleagues that failing to negotiate reform could lead to a Trump administration controlling housing finance from 2019 to 2029, granting an FHFA director plenary powers to alter G-fees, loan limits, and potentially shut down the GSEs.
• Current regulatory hurdles include the Basel LCR ratio not accounting for non-recourse loans and concerns that Reg AB2 may hinder the private MBS market.
• Hensarling criticizes the current FHFA leadership (specifically Mel Watt) for making Fannie Mae and Freddie Mac inward-facing rather than outward-facing, contrasting this with the previous administrator Ed DeMarco's preparatory work.
• He notes that the Congressional Budget Office values the contingent liability of the GSEs at 100 cents on the dollar, creating significant moral hazard.

Broader Economic Concerns and Future Outlook

• Hensarling argues that the U.S. currently lacks a "3 percent growth regulatory policy" to match its tax code, fearing this deficit will hinder long-term economic expansion, poverty reduction, and job creation.
• He expresses concern that the Senate supermajority rule for banking reform prevents the necessary deregulation needed for financial sector growth.
• Hensarling fears a shift toward regulators making credit allocation decisions for political favor, effectively turning major financial institutions into "functional equivalents of utilities."
• He highlights that the Senate banking rules effectively give regulators more power than elected House committee chairs, undermining democratic principles.
• Potential successors to lead this reform in the next Congress include House members Blaine Luetkemeyer and Bill Huizenga, though Hensarling acknowledges the difficulty of achieving consensus in a divided political environment.