When it comes to the question of what to do with the government-sponsored enterprises (GSEs), I have always believed that genuine success can be achieved by removing the GSEs from the federal system and transferring their control to the states. After all, there is no such thing as a national housing market, and each state’s needs are unique.
State housing finance agencies have traditionally been more aware of the problems facing local homeowners. Indeed, take a search back to headlines in 2006 and 2007 and you will find it was the state housing finance agencies that were sounding the alarms about the collapsing housing bubble while their federal counterparts pretended that nothing was amiss.
One of my favorite examples of a state agency taking the initiative to bolster its local housing market took place in the early 1990s. Up in Vermont, an effort was made to create a secondary marketing vehicle that served the distinctive challenges of the state. It wasofficially called the Green Mountain Mortgage Market and it was run by the Vermont Housing Finance Agency (VHFA). However, the program was nicknamed Sugar Mae – as a tribute to Vermont’s celebrated maple syrup and in keeping with the Mac and Mae names carried by secondary marketing entities.
Sugar Mae was designed to help securitize rural residential loans that did not meet the GSE underwriting standards. Back in the early 1990s, underwriting standards were much stricter – the loosey-goosey practices of the Clinton years were still a bit away – and properties that had rural attributes such as a wood burning heat source or unpaved roads were not welcomed for securitization by the GSEs. As a result, most Vermont lenders had to stick these loans in their portfolios.
Under the Sugar Mae program, the VHFA would purchase these difficult rural loans and swap them for Fannie Mae’s mortgage-backed securities. Banks that participated in this program agreed to use the proceeds of their loan sales for affordable housing investments. The VHFA would sell the securities created from those loans to local pension funds.
In concept, it was a win-win situation. But, in reality, it never clicked. In fact, only one transaction took place during Sugar Mae’s relatively brief existence. Problems with the above-market interest rates on the rural residential loans and complaints from pension funds of a too-high premium on the securities they were expected to purchase stalled the program.
Yes, it would be easy to dismiss Sugar Mae as a failure – at least in terms of not meeting its projected volume. But the program, I believe, offered a responsible and intelligent attempt to try something different that addressed local housing market needs without being a burden on taxpayers; indeed, Vermont’s taxpayers were not burdened with wasteful financial residue. By that measurement, Sugar Mae was an innovative success in planning.
And this circles back to the stalemate in the GSE reform effort. Rather than leave the issue to a bickering Congress and an indifferent Obama Administration, I would open the debate to the state housing finance agencies to consider how they could inherit GSE duties if they were localized to state level operations.
Who knows what the state agencies can produce? Maybe the foundation started by Sugar Mae can be taken up, tinkered with, and spun into an entity that will be able to function and blossom? After all, an experiment that seeks to create new opportunities is often preferable to the misery of a dysfunctional status quo. And the real tragedy in business (as in life) is not about trying and failing, but in never trying at all to make things better.
About The Author
Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.