The International Monetary Fund (IMF) claims that a decade after the subprime mortgage meltdown in the USA, Fannie Mae and Freddie Mac, the two government sponsored enterprises providing infrastructure support for the US housing market, are still dogged by problems. Growing profits of Fannie Mae and Freddie Mac, the increasing market shares of temporary GSE substitutes, lower mortgage affordability for younger Americans and a number of other issues have led the IMF to believe that new risks keep building up and a new mortgage downturn might be in the making. The IMF therefore urges the US Government to merge the two firms, ease regulatory requirements for the housing market and open the market for US banks.
The IMF’s Stabilising the System of Mortgage Finance in the United States report was issued yesterday in the form of a working paper, which makes it the Fund’s official albeit not definitive statement that warrants further discussion. The author of the IMF’s paper on the US mortgage system is Richard Koss, a high-profile figure and Director of the IMF’s Global Housing Watch Initiative, who previously worked as Director of Economics at Fannie Mae, Staff Economist at the Council of Economic Advisers under Fed Chairman Alan Greenspan, Senior Advisor to at General Motors and Director of Global Investments at Brown Brothers Harriman. In his report, Mr Koss shuns away from the analysis of the 2007–2009 crisis outcomes and instead focuses on the prospects of Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSEs), in their relation to the US mortgage market.
As a reminder, in 2008, the Housing and Economic Recovery Act (HERA) was passed to protect the two GSEs created in the aftermath of the Great Depression to become key players of the US mortgage market for decades ahead from incoming claims and lawsuits by placing them under conservatorship. Richard Koss points out to the recent increases in the GSE profits and makes a case for substituting the conservatorship with a permanent arrangement in order to effectively support the US mortgage system.
According to the IMF, this change would be impossible without broader reforms. Mr Koss stresses that the share of the Federal Housing Administration (FHA) structures (such as Ginnie Mae) that stepped in to temporarily replace the GSEs is increasing. So does the share of the so called mortgage banks, i. e . non-bank institutions that issue US-backed mortgage loans. All along, the number of SEC-regulated commercial banks dealing with mortgage is declining, among other things, as a result of tougher regulation and the upcoming implementation of the Basel III framework. For example, Citi announced its banks were exiting this business entirely. On top of that, the FHA is far from being transparent, as its reporting system does not provide an accurate risk analysis. Finally, the IMF claims that the US refusal to implement further reforms makes mortgage increasingly unaffordable for households under age 35 and immigrants. Mr Koss reminds that the government-backed provision of 30-year fixed rate mortgages has played a significant role in developing the reputation of the country as a “melting pot”.
The IMF experts believe that the US mortgage market infrastructure badly needs streamlining in order to avoid another mortgage meltdown. According to Richard Koss, Fannie Mae and Freddie Mac should be merged without further recapitalisation, whereas CRT securities issued by the GSEs since 2013 should be changed to a more straightforward structure and the regulatory playing field between banks and mortgage banks needs to be levelled. Moreover, the IMF believes that the idea to build a Common Securitisation Platform (CSP) launched in 2014 and then delayed to 2019 should once again come to the fore. It stands to note that President Trump’s programme has not envisaged any changes in the US mortgage system. As the current political situation in the USA makes any broad reforms highly unlikely, there is a good chance of a new mortgage meltdown similar to the one that gave rise to the global financial downturn back in 2008.