The Obama Administration, via the Department of the Treasury and the Department of Housing and Urban Development (HUD) finally released their much anticipated report to Congress, entitled, "Reforming America's Housing Finance Market."
The report calls for a dramatic transformation of the government's role in the housing market. "Going forward, the government's primary role," the report's introduction states, "should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response."
To achieve its goal, the plan calls for the role of Government Sponsored Entities, Fannie Mae and Freddie Mac, in the housing market to be reduced and for them to eventually be wound down by the Federal Housing Finance Agency (FHFA). By increasing guarantee fees, increasing down payment requirements, among other measures, the plan seeks to bring the private capital back into the market, thereby reducing taxpayer risk.
Realizing that a wind down of the GSEs cannot occur without a healthy private capital market, the plan seeks to "level the playing field" by making sure the GSEs' availability and pricing corresponds with the guarantees extended. By increasing guarantee fees, increasing the down payment requirements and lowering the conforming loan limits, private capital providers will be able to capture an increased market share within the housing finance market.
While winding down the GSEs, the report also seeks to reduce the role of FHA insured mortgages from a current level of 30% market share, inline with the historic level between 10-15%. To accomplish this goal, the Administration seeks to lower the maximum loan size, first by allowing current temporary increases to expire and then seeking to reduce them further. This would likely include the temporary HECM limit of $625,500. Additionally, they would add an another 25 basis point increase to the annual mortgage insurance premium.
In accordance with the Dodd-Frank Consumer Financial Protection Act, the Administration will also seek to implement reforms that will strive to address flaws that are believed to have led to the crisis in the housing market. The first goal to this end will seek to empower consumers with the information to make fully informed decisions. The newly formed agency, the Bureau of Consumer Financial Protection (CFPB) will be tasked with establishing rules that curb abusive practices, promote choice and clarity, while also strengthening underwriting standards.
Within the securitization market, the report calls for increasing transparency, standardization and accountability. First, it calls for new rules that will require securitizers or originators to retain 5% of a securities risk when sold to investors, with a potential example for Qualified Residential Mortgages (QRMs) that meet high underwriting standards. Second, the SEC is called upon to establish stricter disclosure and reporting requirements to more clearly identify the underlying collateral and risks of securities. Lastly, an Office Of Credit Ratings would need to be established to set requirements for disclosure on the activities of ratings agencies.
Realizing that neither reform extremes, full privatization nor extensive nationalization, are realistic, the report presents three options that are seen as the best possible reform scenarios that support creditworthy access to credit, while mitigating taxpayer risk, and maintaining healthy, stable financial markets.
Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers – this option presents the most limited role of government but also has the potential to cause the largest increases in mortgage interest rates and may limit access to program outside the FHA by smaller institutions.
Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis – this option would allow the ability of the government to maintain a "backstop" presence that could be increased during times of crisis.
Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital – this option would allow the government to offer reinsurance for securities within a targeted range of mortgages. While the reinsurance would still increase rates, the plan could increase liquidity by attracting a larger number of investors.
Under all the options presented in this plan, the ultimate result will likely add to mortgage pricing and interest rates. Encouraging private capital back into the housing finance market essentially requires that the government restrict and price their products to a point where private capital is confident that they can compete, mitigate risk, and remain profitable.
Although the report makes no specific mention of reverse mortgages, a restructuring of the government's role in mortgage finance, especially as related to restricting the role of the FHA is likely to impact the HECM product. Most apparent is the likely reduction in the maximum loan limit, initially by to $417,000 when temporary increases expire in October, with potential further decreases as necessary to achieve FHA market goals. For investors who seek to capitalize on the this growing market, however, this could create a greater potential arena for proprietary products to fill any gap created by program changes.
This, of course, is speculative. This report is just the Administration's opening salvo into the housing market reform debate. Congress has already opened hearings in this debate ahead of the release of this report. The road ahead is likely to be bumpy and filled with contentious discourse as competing forces seek to reform and restructure a fractured market.
