As your NAR Regional Vice President, I’m sharing some important information from my Region 7 Leadership Digest because it could be beneficial to you and your business.

As the National Association of REALTORS® (NAR) continues to advocate on behalf of members and for the rights of private property owners, it’s important to understand what your association is saying about reforms for government sponsored entities (GSEs) like Fannie Mae and Freddie Mac.

Depending on your appetite for details, you can read the NAR’s position paper GSEs: Their Viability as Public Utilities, read the executive summary of the paper or watch a recording of The Future of the GSEs Webinar: Readying Fannie and Freddie for the Next Chapter. I believe there are three important takeaways about the subject:

• “Utility” does not mean the same thing to all groups. For some, a utility is a cumbersome and inefficient bureaucracy, while for others it is a means of “controlling” private capital to meet a public end. However, a utility is a collaboration between private investors and the public where BOTH groups cooperate to mutually benefit.
• How well the utility supports the public mission depends on how well it is constructed to satisfy private capital. Investors take risks and expenses and expect to be compensated for them. If the risks are unclear, they require higher returns. The less clarity there is or risks from counterparties, inefficient regulation, and politics, the higher the return investors will require, reducing revenues for charter duties. With a clear utility construct that reduces the unknown risks and allows expenses to be spread over time, investors will demand a lower return, leaving more revenue to support the public mission.
• The investors in the future GSE market utilities are not the investors of pre-conservatorship. Utility investors favor stable returns over a long horizon and will accept lower returns for it versus high, short-term gains that are more volatile. Thus, these investors’ interests align with the charter mission. The key is attracting them. Under the utility structure we propose, investors will enjoy consistent positive returns in a federally protected marketplace.

NAR’s January event was just the beginning of a larger effort to complete the transformation and canonize the GSEs in their current state…as market utilities. In the months and years ahead, the policy community must wrestle with how to attract the correct type of investors, how to strengthen the regulatory structure to oversee these market utilities, how to refine the capital, liquidity and product rules to appropriately fit a market utility, and how to build a political consensus for these market utilities that will end the current, corrosive debate.

We look forward to working with you all in the housing policy community to take the next steps in reform of the GSEs and stabilizing housing finance for generations to come. Stay tuned for more updates on the utility option and how we can advance these critical reforms together.

Utility model in the news

David Stevens, former CEO of the MBAA, penned a piece for Housing Wire titled, The real danger of releasing the GSEs from conservatorship. He concluded that, “…the failure to remember history can be the formula to repeat it. Viewing the GSEs as what they are and should be is the mandate; utilities created by Congress to support the housing finance system and not some for-profit play where shareholders win when times are good and taxpayers pick up the bag when it fails.” Aligning investor incentives and charter duties is at the heart of GSEs: Their Viability as Public Utilities.

Our guest speaker and former Freddie Mac CEO Don Layton penned, Revisions to the GSE Treasury Support Agreement: Some Substance, Some Political Optics, and Treasury Gains Power. In it he noted of the recent amendment by the FHFA and Treasury to the PSPA agreements and the Treasury’s Blueprint on Next Steps for GSE Reform that, “The one new item of substance is that it supports some sort of utility-style regulation (“pricing oversight”) of guarantee fee pricing by the FHFA post-conservatorship – which was conspicuous by its absence in the September 2019 plan – but only in the most general way, with no detail about how to do so.”

We agree and argue that Congress should empower the FHFA or a commission to do so or the FHFA should gain them by some other channel, but the key is to set a band of reasonable returns within which private investors can migrate. What is critical is setting a cap to prevent rent seeking and overpricing and a floor to prevent undercapitalization and anti-competitive behavior.