The GSE reform proposal unveiled in late March by a collection of economic heavyweights—including Mark Zandi, Lewis Renieri, and Bary Zigas—was more evolutionary than revolutionary in nature.

Many of the same concepts have been floated over the last seven years—the Mortgage Bankers Association (MBA) back in 2009 and the Johnson-Crapo Bill in 2014 are two notable examples. But this is an election year, a season where think tanks and white-papers proliferate.

Yet, it’s safe to say that comprehensive housing finance reform isn’t going to happen any time soon: A lame-duck President, and a Congress as dysfunctional as any are two obvious roadblocks.

But forget, for a moment, what's obvious. A funny thing happened on the way to housing finance reform—it was set into motion years ago under the radar, slowly, glacially, via the Federal Housing Finance Agency’s (FHFA) oversight and prescriptive requirements.

To a lot of GSE insiders, in fact, we’re already more than halfway there—it’s just not obvious yet.

The Latest Proposal

The latest paper, dubbed “A More Promising Road to GSE Reform,” proposes merging Fannie and Freddie into one entity—called the National Mortgage Reinsurance Corporation (NMRC)—a government corporation that would transfer risk to the private sector while offering an explicit government guarantee.

The NMRC would open up competition by allowing smaller lenders to access the “cash window” at rates once enjoyed only by the biggest volume lenders. And the proposal would maintain FHFA’s oversight and the GSEs’ existing “duty to serve” through affordable housing goals.

As a government corporation, not entity, the NMRC wouldn’t care about market-share or be motivated by profit—but it would have more flexibility in rule-making, and it wouldn’t depend on Congress for funding. So, it would still enjoy some benefits of a private company, but would act more as a utility.

“Like the national highway system, in which a wider range of commerce is able to move freely across the country because of the government’s stewardship of the infrastructure, here institutions of all sizes and forms will be better able to compete because they have the same access to the basic functions of the conforming mortgage market on which they rely,” the paper reads.

“It’s kind of happening anyway, we’re 90% there,” said one high-ranking executive with Freddie Mac who spoke on the condition of anonymity. “We have basically become utilities at this point.”

Cash Window

Before conservatorship, most non-GSE lenders complained about the unfair advantage Fannie and Freddie had over the rest of the mortgage market due to the appearance of being backed by the full faith and credit of the U.S. government.

In truth, it was an implied, not explicit, guarantee, so there was some gamesmanship going on: The GSEs milked it for all it was worth, especially in raising money from foreign investors.

But this new proposal—much like those that came before—is aimed at opening up more competition in the private sector, and that’s certainly by design.

When Michael Berman was MBA chair back in 2009, the organization proposed several reforms that would allow the private sector to fill in many blanks left by a scaled-down GSE system.

Berman then served as a policy adviser to HUD Secretary Shaun Donovan—as did Jim Parrot, one of the NMRC paper’s authors, who also recently looked at The Future of Risk Sharing in a paper for the Urban Institute. Berman also reportedly recruited former FHA Commissioner David Stevens to replace him as MBA chair due to his like-minded GSE approach.

So, there’s an alignment of interests, a momentum to allow Wall Street—and the little local Bank of Main Street USA, equally—a bigger slice of the mortgage market. Part and parcel to that would be a mandate that the GSEs transfer an overwhelming lion’s share of risk to the private sector.

In that sense, the NMRC would be a big break from the past:

It would be required to transfer all noncatastrophic credit risk on the securities that it issues to a broad range of private entities. Its mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee … sufficient to cover any risk that the government takes.

And while the NMRC would maintain a modest portfolio with which to manage distressed loans and aggregate single- and multifamily loans for securitization, it cannot use that portfolio for investment purposes, the paper says.

Glacial Evolution

But in other ways, the NMRC looks familiar. The corporation would charge an extra 10 basis point “affordability fee” on every mortgage to help support lower-income homeownership and rental programs.

Curiously, the new paper barely mentions the National Housing Trust Fund—to which the GSEs finally made their first contributions, to the tune of $186 million in March—except in a footnote.

But that contribution back in March spoke volumes: As the GSEs returned to profitability, paid back their bail-outs and then some—contributing money to a new housing program—the government seemed OK with doing nothing at all.

Or, that is, the government seems OK with making incremental tweaks that cumulatively add up to ad-hoc GSE reform.

Consider the Single Security and Common Securitization Platform, a program introduced at FHFA’s behest. The joint initiative between Fannie and Freddie would pool their fixed-rate loans into a single, mortgage-backed security.

The enterprises have been developing the platform for single-family mortgages, and FHFA has announced that later this year, the first such combined issuance should come to fruition.

Face Value

So, in a sense, the merging has begun: GSE reform is already inching along in plain sight.

But unlike General Motors, which rode a “glide path” back into the private sector after its bail-out, the GSEs—under the NMRC, or even organically in conservatorship—are instead being reined closer to the government, not further away.

Does this recent smart proposal matter? Here’s what one 20-year veteran GSE lender with a major regional bank had to say when asked about the proposal: "The idea that Congress is going to do anything with those agencies anytime in the near future is wishful thinking."

And a high-ranking ex-GSE executive, retired for a few years now, echoed similar sentiments, off the record.

“Oh, GSE reform will happen, but when it does, I don’t think they’ll be radically different than what they are right now,” this executive said. “I just hope I’m still alive to see it happen.”

In the meantime, this is way GSE reform may end: not with a bang, but a series of whispers.