Housing Finance and Private Capital

Panel Composition & Context

• Panelists:
  • Gene Sperling: Director of the National Economic Council (Obama/Clinton); argues for a bipartisan framework ending the Fannie/Freddie duopoly.
  • Josh Rosner: Managing Director at Graham Fisher; criticizes Johnson-Crapo as insufficient, arguing it fails to address root causes and ignores market concentration risks.
  • Drew Newton: Managing Director at Citi; focuses on market perspective, capital availability, and the "plumbing" of the mortgage system.
  • Jim Lockhart: Former FHFA Director; oversaw the 2008 conservatorship of Fannie/Freddie; advocates for a smaller government role (30% market share) and hard-wired counter-cyclicality.
  • Don Layton: CEO of Freddie Mac (in conservatorship); notes the business model is fundamentally reliant on government support and highlights progress in multifamily private risk placement.

Legislative Landscape & Bipartisanship

• Current Status: Five distinct bills exist across the House and Senate, with significant bipartisan momentum centered on the Corker-Warner and Crapo-Johnson frameworks.
• Administration Stance: The Obama administration supported the Corker-Warner group to avoid politicizing the issue, stepping back to allow a "technical, behind-the-scenes" bipartisan negotiation similar to immigration reform efforts.
• Core Consensus:
  • The current system relies on an unsustainable implicit government subsidy for a duopoly controlling housing infrastructure.
  • Reform requires a strong regulator, an explicit government backstop, and significant private capital buffers ("first loss" provisions).
  • Affordability: The White House made progress contingent on including an affordability fee to address housing access, estimated to raise nearly $5 billion annually (vs. $500 million under current constraints).

Substantive Reform Proposals & Disagreements

• Capital & First-Loss Requirements:
  • Crapo-Johnson/Corker-Warner: Propose 5% to 10% first-loss capital, backed by an actuarial fee (up to 2.5%) and an explicit government backstop.
  • Josh Rosner (Opposition):
    • Argues the "first-loss" provision is "phantom" because the FMIC regulator can waive it during downturns, echoing the AIG bailout risk.
    • Highlights a capital shortage: A $5 trillion market with 10% first-loss requires $500 billion, whereas the entire private mortgage insurance industry holds only $7.9 billion.
    • Warns that exempting these securities from the 33 Act reduces transparency, potentially forcing reliance on "stupid money."
  • Gene Sperling (Support): Contends that 5-10% capital plus the MIF fund provides superior protection compared to the crisis era, ensuring no taxpayer bailouts.
• Role of Regulator & Counter-Cyclicality:
  • Jim Lockhart: Warns that current legislation grants regulators too much flexibility; argues counter-cyclicality must be "hardwired" (statutory) to prevent political pressure from relaxing standards during booms.
  • Josh Rosner: Criticizes the bill for prioritizing "Mission" over "Safety and Soundness," creating a three-way conflict between capital adequacy, public purpose, and consumer protection.
  • Lockhart's Goal: Reduce government market share from the current 80% to roughly 30%, utilizing a catastrophic reinsurer only for extreme events.
• Market Concentration & Competition:
  • Josh Rosner: Predicts that opening the market to aggregators will increase concentration (the "baby bells" effect), where small players lack scale, eventually forcing them to become third-party originators for large banks.
  • Gene Sperling: Disagrees, noting that the current 80% duopoly concentration is already a massive barrier to entry; argues that the new system's infrastructure allows for broader competition.
  • Vertical Integration Concerns: Debate exists over whether large originators (e.g., Wells Fargo, Chase) should also act as guarantors; Sperling suggests this may need further committee debate to protect community banks.

Freddie Mac Perspective (Don Layton)

• Current Reality: The GSE business model has shifted from a "wink and nod" implicit guarantee to a system requiring massive government support; before conservatorship, earnings relied heavily on a hedge fund strategy using unsecured borrowing rather than core guarantees.
• Private Capital Progress:
  • Freddie Mac's multifamily business already utilizes private first-loss capital (K-deals) covering >95% of risk.
  • Single-family "STACR" and Fannie's "CAS" deals demonstrate partial risk layoff is already occurring in conservatorship.
  • Prediction: Without new legislation, the GSEs will continue to shift the vast majority of risk to the private sector over the next 5–7 years.

Financial Market Outlook (Drew Newton)

• Capital Availability: The market is concerned about the treatment of existing GSE preferred stock ($33 billion total); uncertainty here may impact future capital costs.
• Litigation Risk: Washington's stance to litigate rather than negotiate a settlement on preferred stock creates uncertainty for large asset managers (hedge funds) considering re-entry into the mortgage market.
• Mortgage Costs: High cost of capital or market disruption could lead to higher mortgage rates, potentially stifling the middle-class housing market.
• Future Structure: Citi sees a role for large banks as originators, but notes that the separation of "guarantor" from "aggregator" in the new bill is a critical step toward competition.

Key Challenges to Implementation

• "Plumbing" Deficiencies: The industry lacks modern servicing standards, data protocols, and unified securitization platforms (e.g., the Common Securitization Platform is only half-built).
• Complexity: The single-family mortgage market is $10 trillion (comparable to the entire U.S. domestic banking system of $13–15 trillion), making it difficult to manage risk without significant regulatory oversight.
• Timeline: Lockhart and Sperling acknowledge legislation may take 2–4 years to finalize, with the "stair-step" evolution of risk transfer continuing during the interim.