The nation’s largest mortgage trade group on Thursday rolled
out a blueprint on how Congress and the Trump administration could end
the government’s near decade-long conservatorship of Fannie Mae and Freddie Mac.
The Mortgage Bankers Association (MBA) has previously
presented a vision of a new system that turns the government-sponsored
enterprises (GSEs) into regulated, private utilities, and one that would allow
for new chartered entities to enter the market as mortgage guarantors.
In a white paper released Thursday, the trade group published
a detailed roadmap on how to accomplish GSE reform, which was stymied
throughout the Obama administration.
Notably, MBA’s plan would take a long time to implement, up
to 10 years to transition into a new system. It is a hybrid government-and-private system.
puts private capital at the head, envisioning at least two, and possibly
several, shareholder-owned, chartered companies that would purchase and
securitize mortgages. The new system, however, would maintain a strong
government role, with Fannie, Freddie and the other entities under the supervision of the
Federal Housing Finance Agency (FHFA), or another similar strong regulator.
The government would back the mortgage-backed securities
through an explicit government guarantee, ensuring that investors would get
paid in the event of a catastrophic downturn. A new insurance fund would be
created through premium charges to stand in front of the government guarantee.
The government would step in only if the funds were exhausted.
The utilities also would have to maintain a significant
amount of private capital, which would absorb the first losses on mortgage defaults. These
entities would be encouraged to continue to transfer the default risk on the
riskiest loans either by private insurers or through the risk transferring
deals that have been piloted by Fannie and Freddie since 2013.
The newly chartered Fannie and Freddie also would
not be structured as aggressive growth companies that might be inclined to
make risky business moves, and wouldn’t be allowed to hold significant
As utilities, the entities would have to adhere to strict
pricing controls on the guarantee fees. They could not originate loans, or
offer volume discounts on fees to large lenders, which has been the worry of
small lender groups.
In addition, the new utilities would have to meet affordable housing
goals, which would appeal to progressives.
Congress needs to drive the car
MBA says that the reforms need to be initiated through
Congress, and the trade group has been against the FHFA acting unilaterally to alter the current agreement with the government and allowing the GSEs to rebuild capital buffers. An act of Congress would be needed to amend the charters of Fannie and Freddie, and to give the FHFA the authority
to grant new charters so other companies could enter the market early during the
transition and begin building capital. Congress also would need to pass legislation to make explicit the government guarantee and create a new insurance fund.
Fannie and Freddie have been controlled by the federal
government since 2008, when they were bailed out during the financial crisis.
The GSEs don’t make loans, but purchase the most-common type of mortgages and
package them into securities. The GSEs fund roughly half of all U.S. mortgages.
In a call with reporters on Thursday, MBA President David
Stevens said housing-financing reform will likely get on the agenda after
Congress moves on tax and regulatory reform. The Senate Banking Committee and
the House Financial Services Committee could potentially propose GSE-reform
legislation at the end of this year or later next year.
“Everything that has been signaled to us is that they are
supporting the legislative reform process,” Stevens said. “As we know, there
are many uncertainties in the political environment and that could change, but
we are going with the clear public statements that we have heard. It was made
very clear that they intend to legislate.”
GSE-finance reform is expected to be another political battlefield, however, because there are several competing plans. The MBA’s plan drew praise from two small lender groups, the Community Mortgage Lenders of America and Community Home Lenders Association, which have been highly skeptical of previous proposals and also have lobbied FHFA to allow the GSEs to rebuild their capital buffers without Congressional approval.
appreciates the plan MBA released today, particularly since its framework is
similar to the Reform Plan CHLA released last month — use of a utility model,
risk sharing, and the principle of fair and equitable access for smaller
lenders,” CHLA Executive Director Scott Olson told Scotsman Guide News.
there are some important small lender components from the CHLA plan not
addressed here,” Olson said.
MBA's plan was also criticized by the shareholders group, Investors Unite, which want the Trump administration to end the agreement that sends most of the GSE profits to the U.S. Treasury coffers.
“The MBA’s proposal ignores the rights of shareholders in
Fannie Mae and Freddie Mac, and the growing threat to taxpayers caused by the net worth sweep, which is depriving these companies of their operating
capital,” the group's founder Tim Pagliara said.