The housing-reform plan released Thursday by the Trump administration can certainly be described as comprehensive, with its 53 pages penned by the U.S. Treasury Department aimed largely toward removing the government from the equation.
But the big news, as it was always going to be, was the proposal to move Fannie Mae and Freddie Mac out of federal conservatorship — a status the two government-sponsored enterprises (GSEs) entered exactly 11 years ago Friday.
In that sense, the much-anticipated plan itself is a bit anticlimactic. The document released by the administration, the first to formally detail what a proposed overhaul could look like, calls for recapitalizing the GSEs and releasing them into the private sector. It also aims to lessen their dominance of the mortgage market while promoting competition from other private companies. Both of these goals, however, were known to some extent. What the proposal didn’t offer was a specific timeline or steps for recapitalization, a possible disappointment to those who were hoping the announcement would trigger an expedient transition, given the administration’s bold stance on the matter.
Still, the document offers a blueprint for the administration’s vision for reform. Despite President Donald Trump’s saber-rattling attitude toward Congress as it failed to act on the conservatorship, the plan affirmed a distinct preference and recommendation for change to come via Congressional compromise. The proposal does not rest upon lawmakers, however, and is clear about ideas that federal agencies can implement without legislative action.
Sunsetting and replacing the ‘GSE patch’
For one, the plan backed the Consumer Financial Protection Bureau’s previously announced intention to let the “GSE patch” expire in January 2021. That announcement was met with widespread negativity from the mortgage industry, with many raising concerns that doing so would restrict credit availability. The Treasury Department’s plan seeks to quell those concerns by calling for “further revisions to the ATR (ability to repay) rule to ensure that mortgage lenders continue to have a bright-line safe harbor after expiration of the QM (qualified mortgage) patch.”
Although some groups have advocated for revising the guidelines in Appendix Q of the ATR rule as a way to do just that — by addressing self-employed borrowers and those with nontraditional incomes, for example — the Treasury Department appears wary of such a move. Instead, its plan advocates for “alternative approaches … that do not rely on prescriptive underwriting requirements.” These approaches include conclusively classifying loans with financing costs below a certain threshold as qualified mortgages, or setting a “seasoning period” after which a mortgage conclusively becomes a qualified mortgage.
The plan clearly states that each GSE should remain in conservatorship until sufficiently capitalized in order to operate “in a safe and sound manner.” And although no specific path was laid out, several options were put on the table. These include adjusting the dividend paid by the GSEs to the Treasury so that Fannie and Freddie can regrow their capital cushions beyond their currently permitted $3 billion capital reserves; issuing shares of stock through private or public offerings; and placing Fannie and/or Freddie in receivership in order to revise their capital structure.
The first option, adjusting dividend payments, is specifically flagged in a bullet point as an “interim step” that should be considered, pending the development of a more concrete plan.
Each of these options, the document notes, “poses a host of complex financial and legal considerations that will merit careful consideration.” These considerations are already underway as the Treasury Department and Federal Housing Financial Agency (FHFA) assess how to move forward.
‘Limited and tailored’ government support
The plan is clear that government support of Fannie and Freddie under their respective senior preferred-stock purchase agreements (PSPAs) should be replaced with an explicit federal guarantee. The Treasury Department recommended the guarantee come via Ginnie Mae — a move that requires Congressional approval. To prepare for that, the plan advises Ginnie Mae and the FHFA to review Ginnie’s operations and infrastructure.
Further, on the administrative side, the Treasury Department expects to maintain “limited and tailored government support” for the GSEs to preserve stability within housing finance. The plan recommends doing so by leaving the PSPA commitment in place even after the GSEs leave conservatorship, with the government compensated for its continued support via the periodic commitment fees established by the PSPAs.
Keeping the PSPAs in place, the plan noted, leaves a mechanism for either GSE to request government funding in the future, while also preserving a method for that funding to be repaid and protect taxpayers. Even then, the report said, taxpayers would only be pushed to bail out Fannie and Freddie under “exigent circumstances.”
The PSPAs could also be amended to include assurances that the GSEs are required to maintain nationwide cash windows and provide equitable secondary-market access to all lenders after they are released from conservatorship.
Revising affordable housing
The plan pegs affordable-housing goals as contributors to the risks (and consequently, losses) taken by the GSEs leading up to the financial crisis of the past decade. It specifically states that the current goals should be replaced with “a more efficient, transparent and accountable mechanism for delivering tailored support.” Although it doesn’t set particulars for reforming Fannie’s and Freddie’s statutory mandates, it offers options for doing so. One suggestion is to collect a periodic assessment from guarantors, which would determine appropriations for “on-budget affordable-housing programs” such rental housing, downpayment assistance and interest rate buy-downs.
The recommendations not only funnel the GSEs toward privatization, but would increase private-sector participation in protecting the market against losses — a burden that falls too heavily on taxpayers, the Trump administration claims.
To encourage private companies to partake in a post-conservatorship landscape, the plan called for “harmonizing” regulatory differences between the GSEs and any would-be competitors. Such moves could include changing Fannie’s and Freddie’s credit-risk capital charges to align more closely with those of regulated financial institutions. The report tabs the FHFA, in concert with other federal financial regulators, to ensure that any differences in regulatory frameworks between the GSEs and other market participants don’t create any undue advantages for Fannie and Freddie.
What people are saying
Considering the report is mainly a list of recommendations and is light on organized plans, reactions from the housing industry have been generally positive but fairly low-key. Many have commended the administration for being proactive, given the consensus that some kind of reform is preferable to continued limbo.
“The National Association of Realtors thanks President Trump and his administration for initiating thoughtful, genuine effort toward housing finance reform,” said National Association of Realtors President John Smaby. “We look forward to reviewing the proposal in more detail and are optimistic that, at a minimum, the White House’s efforts will shed light on the remaining mile markers on the path to reform, along with the critical role the GSEs and Federal Housing Administration play in America’s housing market.”
“MBA applauds the administration for releasing these reports, which highlight the critical need for comprehensive housing-finance reform,” echoed Robert Broeksmit, president and CEO of the Mortgage Bankers Association.
“We are gratified that the reports reflect many of the important priorities that MBA has long recommended, including protecting taxpayers from future bailouts; an explicit government guarantee on qualified mortgage-backed securities for single-family and multifamily loans; increased competition and consumer choice via potential additional guarantors; and ensuring a level playing field for lenders of all sizes and business models.”
Not everyone, however, was enthusiastic about potentially adding more guarantors. Although it also lauded the administration for releasing a plan, the Community Home Lenders Association (CHLA) once again expressed apprehension.
“The plan has many components that CHLA has long supported,” said Scott Olson, the CHLA’s executive director, “although we continue to vigorously oppose new guarantors, which would increase taxpayer risk, hurt consumer access to credit, and harm small community-based lenders due to the risks of vertical integration.”
Moody’s Senior Vice President Yehudah Forster noted both the opportunity for expansion as well as the possibility for further risk.
“The Treasury proposals to level the playing field between the GSEs and private-label securitization (PLS) would likely create a larger, more diverse PLS market,” he said. “Existing and new PLS sponsors would step in to finance at least a portion of mortgages that the GSEs no longer compete as strongly for or stop targeting, such as cash-out refinancings or investor loans. The influx would likely introduce riskier pools or shelves into the issuance mix.”
In Washington, D.C. and beyond, critics of the plan continued to caution that allowing Fannie and Freddie too much leeway as private organizations could push up housing costs, benefitting investors at the expense of potential homebuyers.
“President Trump’s housing plan will make mortgages more expensive and harder to get,” said Sen. Sherrod Brown, D-Ohio, according to a report in the Washington Post. “I’m urging the president: Make it easier for working people to buy or rent their homes, not harder.”