Government Sponsored Entities
Andre Gardiner writes:
On March 14, 2013, the American Enterprise Institute (AEI) hosted a housing discussion moderated by AEI resident scholar Edward Pinto. The panelists were brought together to discuss a paper recently published by Thomas White and Charlie Wilkins, of Seachange Consulting Group and Compass Group respectively, on the role of role of government sponsored entities (GSEs) Fannie Mae and Freddie Mace in the multi-family mortgaged backed security (MBS) market. They argued government involvement in the form of default guarantees, provided little genuine value to the market and opened up the government to billions in potential liabilities. They also stressed that the potential for politicization was a major threat to the financial stability of the Federal multi-family housing program.
The events keynote speaker, Representative Randy Neugebauer, supported the overall conclusions of the paper authors. Representative Neugebauer sits on the House Committee on Financial Services and is chairman of the Subcommittee on Housing and Insurance. He stressed the link between the link of Federal involvement in the MBS during the buildup to the subprime financial mortgage crisis and the $300 plus billion in bailouts to Fannie Mae and Freddie Mac.
The panelists’ discussants, Peter Donovan from CBRE, Thomas Kim from the Mortgage Bankers Association, and Jim Lockhard of WL Ross & Co. were skeptical of the papers conclusion. They argued that the government acted as a stabilizing force during the crisis, and that the authors were inappropriately using lessons from the single family MBS market. While they agreed that reform was necessary, they considered the papers recommendations rash. Jim Lockhard has the most vocal in his opposition to the paper. He argued that the multifamily operations of GSEs were vastly safer than their private counterparts in the private commercial mortgage backed security (CMBS) market (Chart #1).
Chart #1: GSE CMBS Delinquency Comparison
In response to the criticism the authors largely conceded that Fannie Mae and Freddie Mac had performed quite well in the multi-family space during the subprime mortgage crisis. However, they argued that this criticism missed the point of the paper. Given the disastrous role of the Federal government in the single-family market, the threat of that possibility legitimized ending the Federal Guarantee in the multi-family market.
Useful Links
• http://www.aei.org/files/2013/03/15/-whitewilkins-presentation_113301900302.pdf
• http://www.aei.org/files/2013/03/15/-whitewilkins-presentation_113301900302.pdf
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