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Momentum for housing-finance reform

The U.S. real estate market is an enigma. Few realize their mortgage is more likely than not owned by one of two companies, Fannie Mae or Freddie Mac — government sponsored enterprises collectively known as "the GSEs." As a result of their collapse at the height of the financial crisis, these two entities are currently in conservatorship, meaning they are essentially owned by the U.S. Treasury Department and backed by the taxpayers.

When you add in the 30 percent of the market directly guaranteed or insured by other federal agencies (the Federal Housing Administration, Veterans Administration or the Rural Housing Service at the Agriculture Department), it becomes clear that the government is not only the backbone but the entire central nervous system of the real estate finance market.

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Why then is not every economist, politician and relevant stakeholder actively pushing to address this distorted reality? After all, the GSEs may not have caused the 2008 economic meltdown, but they were certainly standing in a pool of sulfur when the fuse was lit. For this they have been rewarded with limitless government protection and the security of knowing that, absent their presence, the entire housing market would come to a standstill.

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Changing key components of the GSEs' operations requires federal legislation. Several bills have been proposed in the last year, all containing various methods and avenues to restructure the secondary mortgage market — where mortgage backed securities are traded on the open market, providing more funding for mortgage lending.

The Senate Banking Committee in particular recently released a bi-partisan legislative proposal from Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) which lays out a path to end the GSEs' conservatorship. This legislative proposal, while still a work in progress, eliminates the Fannie Mae/Freddie Mac duopoly and creates a competitive new market backed first by private capital. The bill also creates a strong, new regulator, the Federal Mortgage Insurance Corporation, which would protect taxpayers while providing an explicit government backstop for certain mortgage-backed securities, a backstop paid for by private mortgage lenders themselves.

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Unfortunately, some groups bristle at the notion of Congressional action, instead choosing to embrace the status quo. These groups offer misleading information and comparisons to other unpopular, but unrelated initiatives, in an effort to derail this bipartisan reform effort, one that that has been years in the making. And here is the kicker — they have little interest in the long-term future of the housing market. They are in it for the short term; for the quick buck.

Who are they? That is not readily apparent, mainly because they hide behind altruistic-sounding names like "The 60 Plus Coalition" and "The Coalition for Mortgage Security." But they are, without a doubt, certain hedge funds and other third party groups who swooped in when Fannie and Freddie crashed, bought the companies' stocks for pennies and are trying to manipulate the debate in order to reap huge financial payoffs. They fear that if Congress succeeds in restructuring the GSEs, they would lose out.

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Now, I have no objection to the hedge fund model, and everyone has a right to make their fortune. But the lack of transparency and the outright lies these groups are telling in order to derail reform of Fannie and Freddie are just plain wrong and they come with a price.

If these groups, through their demagoguery and lies, succeed in killing GSE reform efforts, the entire real estate finance market, taxpayers and consumers will be the ultimate losers. Further, failure to address the future of the secondary mortgage market will have far reaching implications to the overall economy. So don't allow yourself to be fooled. Housing finance reform is needed, and the current efforts in the Senate are headed in the right direction: ensuring a healthier and more sustainable house finance system.

David H. Stevens, former Assistant Secretary for Housing in the Obama Administration, is the President & CEO of the Mortgage Bankers Association. Follow him on Twitter @DavidHStevens.

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