By Barry Zigas, Consumer Federation of America
President Trump issued a memorandum on March 27 directing the Treasury, HUD, VA and USDA to develop a comprehensive plan for reform of the mortgage finance system, including both administrative and legislative actions as necessary. The memorandum specifically tasks Treasury with developing a plan to end the conservatorship of Fannie Mae and Freddie Mac “upon completion of specified reforms.”
While a White House directive focused on the mortgage finance system is a welcome and news making event, a close read of the memo suggests that there is much work to be done and little new ground broken so far. The memo is essentially a directive to “plan for a plan.” The most notable feature of the memorandum is its apparent expectation that Fannie Mae and Freddie Mac, in some form, will remain the key entities in the government’s support for mortgage finance and the apparent commitment to use administrative actions through the Federal Housing Finance Agency (FHFA) to get there. This is in marked contrast to other plans, including from Senate Banking Committee Chair Mike Crapo (R-ID) and House Financial Services Committee Chairwoman Maxine Waters (D-CA), in the past, which anticipated replacing Fannie and Freddie with some new form of federal guarantors.
Fannie Mae and Freddie Mac (the GSEs) were put into conservatorship in 2008 as a result of the broader financial crisis. The Treasury provided significant capital to support their ongoing operations in exchange for Senior Preferred Shares and warrants for nearly 80 percent of the outstanding common shares. The preferred shares carried a 10 percent dividend, compounding quarterly. The Treasury subsequently replaced the dividend with a sweep of all net earnings, which continues to this day and has contributed nearly $300 billion to the US Treasury.
Parameters for Reform
The White House memorandum outlines a series of policy parameters and aspirations for the anticipated plan. These closely mirror many of the broad and important considerations and principles that have appeared in a series of reform proposals in the last 10 years. These include the following provisions:
- Facilitating competition in the housing finance market
- Safeguarding the GSEs’ safety and soundness and minimizing their risk to taxpayers
- Appropriate compensation for any explicit or implicit support provided to them or the secondary market by the government
- Preserving access to 30-year fixed rate mortgages
- Maintaining access to the system by lenders of all sizes, charter types and geographic locations, including a cash window for loan sales
- Appropriate capital and liquidity requirements
- Increasing competition in the secondary market by authorizing the approval of new guarantors of conventional mortgage loans
- Mitigating risk undertaken by the GSEs
- Recommending appropriate size and risk profiles for the GSEs’ retained mortgage and investment portfolios
- Defining the GSEs’ role in multifamily mortgage finance
- Defining the mission of the Federal Home Loan Bank (FHLB) system and its role in supporting federal housing finance
- Defining the GSAEs’ role in promoting affordable housing, without duplicating support provided by the FHA or other federal mortgage credit programs
- Setting the conditions necessary for termination of the conservatorship.
Notably, the memo goes on to direct the HUD Secretary develop a plan that will ensure “…that FHA and GNMA assume primary responsibility for providing housing finance support to low- and moderate- income families that cannot be fulfilled through traditional underwriting;” and reducing taxpayer exposure at FHA through improved risk management and program and product design. The focus on strengthening FHA is urgently needed but will require significant new funding to succeed, on which the memo is silent. It is also unclear how this directive would shift from the current market, where FHA’s market share has grown while the GSEs’ credit box has tightened and its pricing for low down payment, moderate credit borrowers has escalated.
The memo also is silent on what form a future ongoing federal guarantee in the system would take – only on the securities issued in a new system, as every major proposal to date has done, or on post conservatorship GSEs as entities themselves. This latter choice would be closer to the pre-crisis GSE status, which has found little support since the crisis.
Is This a Step Forward?
The broad directives in the memo echo recommendations and principles that have been proposed in numerous forums over the last ten years from both Republican and Democratic sponsors, and outside groups including lenders, consumer advocates and think tanks across the ideological spectrum. It provides no details on how the enunciated principles will be executed or how the various obstacles that have prevented reforms consistent with these principles to date will be overcome. It is a plan to come up with a plan.
A provocative and welcome aspect of the memo is its explicit focus on the full range of the federal government’s various supports and interventions in the housing market, through the GSEs, Federal Home Loan Banks as well as FHA (and presumably VA and Rural Housing Services) mortgage guarantees rather than a narrow focus on only the GSEs.
The memo also reiterates the importance of defining any post-conservatorship role for the GSEs or new competitors in meeting affordable housing needs. But it also seems to expect FHA to primarily shoulder this task. Unfortunately, the memo describes FHA as serving low- and moderate-income borrowers – FHA has no income limits — rather than those with low wealth and less robust credit histories. While FHA’s book does skew to lower income borrowers it also includes higher income households who benefit from its mission-focused products, particularly in communities of color, where income and wealth are not always directly correlated thanks to decades of de jure and de facto discrimination in mortgage lending.
The memorandum was published on the second day of hearings in the Senate Banking Committee on mortgage finance reform. These hearings showcased the wide range of specific proposals that have been circulating for years but they did not offer a clear path forward for legislative action. House Financial Services Committee Chairwoman Maxine Waters authored a proposal for comprehensive GSE reform some years ago, but it is unclear how high a priority this will be for the committee.
The Administration’s newly articulated commitment to some kind of reform will add additional energy to this discussion, and its focus on potential administrative actions may mean that change in the status quo is closer than it was at the beginning of the week.