Bipartisan Policy Commissioner Lays out Secondary Market Reform Plan

In the latest of its consumer education videos, Zillowrecently sat down with the Bipartisan Policy Center’s(BPC) Barry Zigas to discuss the center’s ideas for GSEreform and how they compare to current legislative efforts.

In an interview with Zillow chief economist Dr. Stan Humphries, Zigas—director of housing policy for the Consumer Federation of America and a commissioner on BPC’s Housing Commission—described how the group’s plan came together, a process that involved 16 months of research, hearings, and meetings with industry stakeholders.

“What we emerged with was a plan that was very true to the principles that the commission agreed to use to guide its work,” he said.

BPC’s plan shares similarities with those introduced by Sens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) and by Rep. Jeb Hensarling (R-Texas) in that it calls for the unwinding of Fannie Mae and Freddie Mac over several years and the institution of a limited government guarantee on securities.

Where it differs is in the details; for example, the Corker/Warner bill puts a hard number on the amount of loss that must be absorbed before a federal backstop is trigged (10 percent), while the BPC plan allows for more wiggle room to adjust to market dynamics.

“For instance, if the insurer saw a housing bubble beginning to inflate, like we saw recently … they could basically make what we call the capital call on the insurers and say, ‘You need to put more capital in the pot,’” Zigas explained.

On the other hand, Hensarling’s PATH bill removes the government guarantee from the equation—a move thatBPC regards as going too, though Zigas acknowledged that a federal guarantor should only be involved in a “catastrophic” situation.

“We came to believe through the work we did that the private market is not prepared to provide the levels of capital that are going to be necessary to meet homeowners’ needs unless they know there’s a federal guarantee behind those securities,” he said. “I think we agree with Congressman Hensarling on this one point, which is that the government should not be the guarantor of first resort. The government should be the guarantor of last resort.”

Asked about the probability that a bipartisan effort could even be achieved—especially at a time when political squabbling has brought the country to a standstill—Zigas said he is encouraged by the dialogues that have taken place so far and expects the left and right will be able to come together on the matter in the future.
“How near that future is? That depends on a lot of factors that are very, very difficult to assess right now,” he said. “I think the momentum is in the right direction.”

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