By Barry Zigas, Consumer Federation of America
More than a decade after Fannie Mae and Freddie Mac were placed into conservatorship at the height of the financial crisis, the Trump Administration’s Treasury Department on September 5 released its long-awaited report on mortgage finance reform. Importantly, the report endorses a government role in supporting long term fixed rate mortgages and a federal guarantee of mortgage backed securities. The report’s other central driving principles are a commitment to move the two companies out of the conservatorship and shrink their role and that of any possible additional chartered guarantors in the overall housing finance market.
But the report lands in an environment where there is no likely path to legislative action on Fannie Mae and Freddie Mac, and its organization and recommendations reflect this reality. So after many conferences, meetings, hearings, white papers and recommendations from every point of the compass, it appears that Fannie Mae’s and Freddie Mac’s role in the mortgage market will end pretty much as it began – with a duopoly of congressionally chartered private shareholder owned companies dominating the secondary market.
The result for consumers will be a mixed bag. On the one hand, there will continue to be support for long term fixed rate mortgages; underwriting standards for most mortgages will be broadly uniform and driven by Fannie and Freddie; global and national investors will confidently provide the cash to fuel US homeownership and rental housing finance; and this duopoly will be constrained in some measure by stricter regulation than in the past and with an enduring requirement to meet specific housing goals and investments in targeted markets through the duty to serve requirements adopted in 2008. On the other hand, mortgages are likely to become more expensive for more borrowers; it will be harder for low wealth consumers with less than sterling credit to get a mortgage outside of FHA, VA or other totally government supported lending; and managing the inherent conflicts between public purpose and private shareholders will continue to be a challenge for FHFA and Congress.
The report contains both legislative and administrative proposals. The legislative proposals fail to address the specific hurdles that have stymied even bipartisan legislative efforts in the last 10 years, which have included a lack of agreement about how to manage access and affordability for LMI borrowers in any new legislation. They would eliminate the current regime of housing goals and specific duty to serve requirements with something like a plan advanced in draft Senate legislation last year that would scrape a fee off guaranteed securities and give the money to HUD for specific on-budget appropriated programs aimed at LMI borrowers. This was a key reason for the failure of last year’s Corker Warner reboot, and there is no support for this approach among Democratic leaders in the House or Senate. The report offers no further insight into how this recommendation would fare any better now, especially with a Democrat controlled House, or how to modify it to bring any Democratic support. Early highly negative responses from both House Financial Services Committee Chair Maxine Waters (D-CA) and Senate Banking Committee Ranking Member Sherrod Brown (D-OH) reinforce this. The report also notes the challenge in a multi-guarantor system of ensuring that guarantors serve a national rather than smaller geographic areas but fails to offer any usefully specific ways to resolve this problem.
Given the small chance of legislative action, the report’s meatier administrative recommendations move front and center. These amount to a roadmap for recapitalizing Fannie and Freddie and then releasing them from conservatorship. Given the broad powers granted to FHFA in the HERA amendments of 2008 and in the terms of the conservatorship, there is little to stop FHFA from moving forward as outlined in this report.
Under this approach the current affordable housing approach – with the housing goals, duty to serve regime, and the 4.2 basis point assessment to fund the Housing Trust Fund and Capital Magnet Fund –would remain in place, although the report urges consideration of undefined “alternative approaches.” The proposal also would keep in place the Preferred Stock Purchase Agreements (PSPAs) through which Treasury invested nearly $200 billion to shore up the companies’ capital, maintaining their explicit guarantee. But recapitalization would begin through an end to the so-called Net Worth Sweep, which in turn replaced the original quarterly dividend on the PSPAs. The sweep would be replaced with a periodic commitment fee to pay for the PSPAs’ guarantee.
The report promotes administrative actions that would reduce the GSEs’ role in the market. This is promoted as a way to “crowd in” private capital that has remained largely on the sidelines since the crisis. But doing so risks constraining mortgage access at a time when the larger economy is already sending weakening signals. The report therefore basically punts on whether and when to take such actions as restricting GSE financing of vacation homes, investor properties, cash-out refinances, among other products, directing FHFA to closely examine such moves.
The report also endorses a continuing role for the GSEs and any successors in financing multifamily rental housing but expresses concern that they have too big a footprint in the market today, again suggesting limitations that could be pursued by FHFA as administrative actions.
The report also highlights the overlaps that currently exist between the GSEs’ market and that of other federally supported guarantors like the FHA and urges both legislative and administrative action to reduce the overlap between the markets they serve. Examples of such overlap cited in the Treasury report include high LTV Fannie and Freddie loans, FHA loans for cash out refinancings, and loans refinanced from conventional to FHA mortgages. A companion report from HUD also highlights the need for better coordination and market share management, and recommends legislative action to establish “…FHA, VA and USDA…as the sole source of low downpayment finance for borrowers not served by the conventional mortgage market.” But it’s not clear what other sources this action would restrict.
The HUD report also outlines a legislative and administrative track for reform. The key legislative recommendation would set up FHA as an autonomous corporation rather than the government agency it now is. Again, Congress is unlikely to move on this recommendation although similar recommendations have been made by several commentators across the political spectrum, dating back at least to a housing commission report in 2002.
The report also recommends administrative steps for HUD to establish a “Housing Sustainability Scorecard” to monitor its insurance programs; further restrict down payment assistance from private sources, citing poorer performance among loans with such a feature; refine and finalize a “defect taxonomy” to give lenders better guidance on the relative penalties likely to result from mistakes in FHA insurance placement; make the FHA loss mitigation process less cumbersome; clarify loan conveyance procedures to reduce delays and confusion; and work with the CFPB to reduce loss mitigation costs.
The Senate Banking Committee has scheduled a hearing with Treasury Secretary Mnuchin, FHFA Director Calabria and HUD Secretary Ben Carson on September 10 to review the report. The hearing most likely will reinforce the lack of sufficient Senate consensus on key issues like assuring broad access and affordability. How quickly and how aggressively FHFA and Treasury move on the administrative recommendations in the report may depend in part on the tenor and questions raised at the hearing. But the most likely outcome is a renewed effort by Director Calabria to move forward on the administrative recommendations as quickly as possible.