DS News - U.S. Bank

» VISIT US ONLINE @ DSNEWS.COM 73 So if elements of the conservatorship are considered to be lacking, does that mean that the goals have changed overtime? O'Reilly thinks the answer is not so cut and dry. "If the thinking has changed, and this is where I think in congress and in Treasury and the key stake holders need to continue to have this dialog but move to resolution around, what outcome from conservatorship do we want?" poses O'Reilly. "If it was the case in 2008 that this was a timeout or this was a moment in time but not intended to be in perpetuity, then let's get to it. In other words, this won't happen without the political will and commitment that is necessary to move these entities to a post conservatorship state." "I think there was a belief that in time, there would be lots of evidence that there was adequate and sufficient private capital that you could stand these entities up, if you will, recap and release them, or that private capital would flock to the market and perhaps that the problem would solve itself in that regard. at's a gross over simplification. I think what has become more evident is that there may not be interest, adequate or sufficient interest, on the part of private capital to capitalize these entities in a way that is sustainable over the long term. e challenge is that they continue to be vitally and critically important to the healthy function of the housing finance system in the United States." CHANGING COURSE e subject of GSE reform has long been a hotly contested one among lawmakers and the housing industry and is not a conversation that the FHFA has shied away from. In his prepared remarks at the Bipartisan Policy Center earlier this year, Melvin Watt, Director of the FHFA stated that, "without looking somewhat down the road, FHFA and the Enterprises would both lose their momentum and jeopardize day-to-day success. e key dilemma when you have an uncertain future, however, is how far down the road to look and how to retain the necessary talent to implement either short- or longer-term plan." A spokesperson of the U.S. Department of the Treasury shared with DS News that "e taxpayer remains at risk under the status quo. e best way to address the conservatorship of the GSEs is through comprehensive housing finance reform that provides broad access to safe, responsible financing, like the 30-year fixed rate mortgage, in all communities through all economic cycles." ough both Democrats and Republicans have proposed various plans for GSE reform in recent years, little has been done by Congress to change the conservatorship or even consider a legitimate path toward reforming the current system. O'Reilly shares that in an entirely non- partisan sense, he believes that the political will to evolve from conservatorship in its current state certainly does not seem to exist. "I think the one thing that we've all learned from this is that it's easier to institute a conservatorship that it is to undo one or conclude one. at I'm certain of," says O'Reilly. "is is much more complicated to unwind because it seems to me that the last eight years exposed a reality which is that there is a greater dependence and criticality to both of the enterprises in housing finance in the U.S. than many had been willing to acknowledge prior to the crisis. In that respect, that fact it seems to me underscores the complexity of this. It's not nearly as simple as recap and release, or again letting them build their capital and then putting them out into the private market place as purely private entities, it's more challenging than that." In the past year though, GSE reform has been hot in the news, with parties on both sides of the aisle pushing heavily for action from Congress. In mid-May, 12 right-center organizations wrote a letter that urged Congress to pass the Mulvaney Bill, a GSE reform bill sponsored by Rep. Mick Mulvaney (R-South Carolina) that would suspend the GSE's obligation to fund the National Housing Trust Fund and Capital Magnet Fund until they were better capitalized. Not long after that, a group of 32 Democratic House of Representatives members wrote to Treasury Secretary Jack Lew and FHFA Director Mel Watt to demand reassessment of the Preferred Stock Purchase Agreement (PSPA), which requires the GSEs to have a capital buffer of zero by January of 2018. is request came on the back of Watt's February speech at the Bipartisan Policy Center, when he proclaimed the GSEs' capital buffer as one of the biggest risks of conservatorship to date. Additionally, a new bill was proposed by Congressman French Hill (R-Arkansas) in June, called the HR 5505 GSE Review and Reform Act. e bill would require the U.S Treasury Secretary to study the Federal Housing Finance Agency's conservatorship of Fannie Mae and Freddie Mac annually, as well as the impact ending that conservatorship might have. e bill would also require the Treasury to present recommendations to Congress each year on how to progress GSE reform and move toward ending the conservatorship. LOOKING INTO THE FUTURE e question still remains though, are these legislative pushes the catalysts that will push forward the process to conclude conservatorship, or will something even more drastic have to occur before deeper action is taken? "We've become very custom to and comfortable with the fact that every quarter both entities net plus to the treasury," says O'Reilly. "e dynamic will change pretty dramatically over night when the GSEs say 'oh yeah no deposit, you need to make a withdraw'. I don't think anyone thinks that that won't happen. I think most people educated in this industry would tell you that it's not a question of whether, it's a question of when." O'Reilly states that when this happens he hopes decision makers will sit down and start to have honest productive dialog that is intended to achieve an outcome rather than what we've seen to date. All eyes will turn to the new administration come January for signs of movement with GSE reform, but until that time one thing will remain certain; the past eight years of FHFA's conservatorship has had a large impact on not just Fannie Mae and Freddie Mac but the industry as a whole. INDUSTRY INSIGHT INDUSTRY INSIGHT

• Cover