Later this year, the housing industry will “celebrate” the 10-year anniversary of Fannie Mae and Freddie Mac being taken into conservatorship at the height of the housing crisis, but if the Trump administration has its way, the conservatorship of the government-sponsored enterprises could actually be ending soon.
The Trump administration on Thursday proposed a massive, sweeping overhaul of the federal government.
And while most headlines seem to focus on the administration’s proposal to combine the Department of Education and the Department of Labor, the privatization of the U.S. Postal Service, and other changes, included among the proposal is a plan to would radically reshape the country’s housing finance system.
In a section of the 132-page document entitled “Reform Federal Role in Mortgage Finance,” the Trump administration proposes ending the conservatorship of Fannie and Freddie and privatizing the GSEs.
According to the administration, the GSEs play an outsized role in the country’s mortgage finance system and stand in the way of competition in the market.
“This proposal would transform the way the Federal Government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of taxpayer-funded bailouts, while maintaining responsible and sustainable support for homeowners,” the proposal states in a summary section.
“Proposed changes, which would require broader policy and legislative reforms beyond restructuring Federal agencies and programs, include ending the conservatorship of Fannie Mae and Freddie Mac, reducing their role in the housing market, and providing an explicit, limited Federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers,” the proposal continues.
Under the Trump administration proposal, Fannie and Freddie would be converted to “fully private entities.”
According to the proposal, competition to the “duopolistic role” of the privately owned GSEs would be an “essential” piece of the reform plan in order to “decrease moral hazard and risk to the taxpayer.”
Under the plan, Fannie, Freddie, and “other competitive entrants” would have access to an “explicit Federal guarantee” for mortgage-backed securities they issue, which is only “exposed in limited, exigent circumstances.”
According to the plan, that explicit guarantee would be “on-budget and fully paid-for.”
The administration claims that would also “ensure that the government’s role is more transparent and accountable to taxpayers, minimize the risk of taxpayer-funded bailouts, and ensure that mortgage credit continues to be available in times of market stress for creditworthy borrowers.”
It appears that the plan is part of a move to increase private market competition in the mortgage finance system.
The proposal states that loans backed by Fannie, Freddie and Ginnie Mae (loans guaranteed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture) made up approximately 70% of all mortgages originated in 2017.
The prevalence of those agencies in the market is a double-edged sword, according to the Trump administration.
“All these entities, taken as a whole, form a complex and overlapping network of cross-subsidization, without clear accountability as to who is paying for, and who is receiving, housing subsidies,” the proposal states. “Although the Federal role in the housing market has helped to facilitate the availability of the 30-year fixed-rate mortgage, the current system has structural flaws that have also created distortions in home pricing that may actually hinder the goal of homeownership.”
Therefore, the proposal calls for changes that would “increase completion” in the mortgage market.
Specifically, the proposal states that the GSEs would be fully privatized and overseen by a “federal entity with secondary mortgage market experience.”
Additionally, that unidentified “federal entity” would also “have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs.”
That would ensure that all participants would all “adequately capitalized and competing on a level playing field,” according to the proposal.
The proposal also states that the plan will create increased transparency and accountability.
From the proposal:
Under this proposal, which would also involve entities outside the Executive Branch of the Federal Government, guarantors would have access to an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances. Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors, maintenance of responsible loan underwriting standards, and other protections deemed appropriate by their primary regulator. The regulator would set fees to create an insurance fund designed to take effect only after substantial losses are incurred by the private market, including the guarantors, in order to ensure the continued availability of mortgage financing through shifting economic cycles. The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure.
As the proposal notes, many of these changes could not be effectuated without Congress.
As part of the plan, the GSEs mission would also shift away from lending to low- and moderate-income borrowers. Instead, the GSEs would focus only on “qualified borrowers,” while HUD would take over “primary responsibility for affordable housing objectives by providing support to low- and moderate-income families that cannot be fulfilled through traditional underwriting and other housing assistance grants and subsidies.”
According to the proposal, a separate fee on the outstanding volume of the mortgage-backed securities issued by the guarantors would go directly to affordable housing development, to be administered by HUD.
“The proposal would be designed so that the affordable housing fees transferred to HUD would enable FHA to provide more targeted subsidies to low- and moderate-income homebuyers while maintaining responsible and sustainable support for homeownership and wealth-building,” the proposal states. “Some of the fees could potentially be used to support affordable multifamily housing or other HUD activities. All of this support would be on-budget and accountable.”
What’s interesting about this proposal, in addition to what it contains obviously, is where it came from. The proposal came straight from the Office of Budget and Management, not the Department of the Treasury.
Last year, Treasury Secretary Steven Mnuchin went on the record saying GSE reform will occur during President Donald Trump’s administration. In July of last year, Mnuchin reaffirmed that GSE reform is still a priority for the Trump administration.
But earlier this year, Mnuchin said that GSE reform isn’t happening in 2018 after all.
Maybe he was wrong?
To read the Trump administration government overhaul proposal in full, click here.