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3 Key Trends that Could Shape Housing

by Peter Thomas Ricci

We keep wondering when/if the government will reform Fannie Mae and Freddie Mac, but key trends will determine how those reforms take place.

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It’s the question on many a real estate professional’s mind – when will the government get around to reforming how Fannie Mae and Freddie Mac operate, and in the process fundamentally change how housing finance will work in the coming decades?

Indeed, it’s an awfully large, important topic, but one that has not received any signification action from Congress or the White House. However, as time drags on, a number of highly influential trends are taking place in housing right now that could shape how Washington handles the GSEs:

1. Mad Money – Fannie and Freddie have been posting crazy profits the last year. How crazy? Try this: in just 2013’s third quarter, Fannie reported an $8.7 billion profit, while Freddie reported a whopping $30.5 billion profit. Altogether, the GSEs paid back $39 billion to the Treasury, and by Feb. 2014, when they’ll report their fourth quarter earnings, it’s expected they’ll have paid more money to the Treasury than they took out after the housing collapse.

In short, profitability could make it much harder to reform Fannie and Freddie. It was easy to recommend reforms when the firms were hemorrhaging cash, but quarterly profits in the billions of dollars makes the case a bit more trying. Also, as Nick Timiraos pointed out in the Wall Street Journal, new federal budgeting rules require Congress to score firms on the revenue they generate, and with the mad profits that the GSEs are boasting, Congress would be forced to cut spending in one area or raise revenue in another to accomplish any reform – two prospects that haven’t necessarily worked well in recent months!

2. An Empty Seat – The Federal Housing Finance Agency, or the FHFA, is the hugely powerful independent agency that oversees and regulates Fannie and Freddie. Despite the power the agency holds – remember, the majority of mortgages nowadays are guaranteed by the GSEs – the FHFA has been without a permanent director for some time, and President Obama’s nominee for the job, Democratic representative Mel Watt, failed to win enough votes last month in his preliminary committee vote.

Ed DeMarco, the acting director of the FHFA, has been steadfast in his view that Fannie and Freddie should be wound down and their influence lessened, but if the White House succeeds in getting Watt into position, it could spell a different future for the GSEs and housing.

3. Bipartisan Legislating – Amidst all this, the Senate Banking Committee is still working on a bipartisan bill to reform how Fannie and Freddie operate, using a recent bill from Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) as a template; Corker and Warner’s bill has already earned support from five other Republicans and four other Democrats.

The problem, as with everything in Washington nowadays, will come down to compromise, and between three groups: centrists who support the Corker-Warner bill; liberal Democrats who want a more active government role in affordable housing; and conservative Republicans wary of government intervention in housing.

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