What’s Next For Fannie, Freddie and Credit Unions?
by Henry Meier
As the pace begins to pick up in Congressional efforts to re-examine the tax code, credit unions are understandably nervous about even the whiff of legislation to do away with their tax exemption. But another issue, on which they need to be ready to mobilize, is reform of the housing market.
According to today’s Wall Street Journal, a bipartisan group of Senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner is working on a proposal that would replace Fannie and Freddie with an entity that would act as a public guarantor of mortgage-backed securities. I’ve commented in other posts about similar proposals that have been made by housing specialists. The basic idea is that instead of having Fannie and Freddie buying mortgages from credit unions and banks, which they then package as securities, a public guarantee corporation would insure mortgage-backed securities against default in return for those securities meeting baseline underwriting standards. It would not be in the business of buying mortgages. Advocates of this approach argue that it would get the GSEs with their now explicit government backing out of the business of buying mortgages and competing against the private sector for securitization. In addition, by guaranteeing mortgage-backed securities against default, the legislation would take its aim at one of the primary culprits behind the Great Recession.
Now for the bad news. Credit unions need a secondary market in which to sell their mortgages. Therefore, it is absolutely crucial that whatever structure ultimately is proposed by Senators includes a mechanism for mandating that securitizers not be able to discriminate in deciding what mortgages to buy. This brings me to a second idea. According to the same article in today’s journal, a second group of Senators led by Rhode Island’s Jack Reed, is floating a proposal that would reform Fannie and Freddie but not do away with them completely. Whatever proposal is ultimately put out there by the Senate will have to overcome the opposition of House Republicans who honestly believe that but for Fannie and Freddie there would not have been a housing crisis.
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