Written By: Joel Palmer, Op-Ed Writer
Ten years after Fannie Mae and Freddie Mac entered in to federal government conservatorship, the Trump Administration has submitted a proposal to return the GSEs to the private sector, encourage competition for the GSEs, and provide a government guarantee for mortgage-backed securities (MBS).
The proposals were part of a 120-page document released earlier this month, titled, “Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations."
It contains recommendations to merge, consolidate, streamline, reform, restructure and divest multiple government departments and programs.
If enacted, these proposals would affect a large swath of the federal government, including agencies like NASA and the U.S. Postal Service, and entire cabinet-level departments, such as Education, Energy and Housing and Urban Development (HUD).
On pages 75-77 of the plan, the administration outlined a proposal to “reform the federal role in mortgage finance.”
The summary of the administration’s mortgage finance reform states: “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 highlight of the proposal is to fully privatize the GSEs and to enable and encourage competition with Fannie and Freddie “to decrease moral hazard and risk to the taxpayer.”
In addition to removing Fannie and Freddie from federal conservatorship, the recommendations aim to restructure much of the federal government’s role in the housing and mortgage markets.
The proposal describes the current structure involving the GSEs, the Federal Housing Administration (FHA), HUD, and the departments of Veteran Affairs and Agriculture as a “complex and overlapping network of cross-subsidization, without clear accountability as to who is paying for, and who is receiving, housing subsidies.”
This structure has, according to the summary document, “created distortions in home pricing that may actually hinder the goal of homeownership."
Another major part of reform is access to a federal guarantee for mortgage-backed securities (MBS) for Fannie and Freddie, as well as new competitors. The proposal states that “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.”
In addition, the administration proposes that a federal entity with secondary mortgage market experience provide regulatory oversight to GSEs. This would include approval of guarantors, and ensuring fair access to the secondary marketing, including to community financial institutions and small lenders. The regulator would also set fees to create an insurance fund.
Another major change would include focusing the GSEs on secondary market liquidity and transferring affordable housing initiatives to HUD. The GSEs“would have mandates focused on defining the appropriate lending markets served in order to level the playing field with the private sector and avoid unnecessary cross-subsidization.”
The release of the mortgage finance reform proposals come after years of Congressional debate and industry-submitted proposals for GSE reform. While it’s been mentioned as a priority for the Trump Administration since before the 2016 election, GSE reform has taken a back seat to a host of other priorities.
The Mortgage Bankers Association supports the reform proposal described in the overall reform plan. “It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access,” said David H. Stevens, President and CEO of MBA.
On the flip side, Jesse Van Tol, CEO of the National Community Reinvestment Coalition, called the recommendations “disastrous for young Americans.”
He further stated that,“It would extract a lifetime of rent from families and millennials who currently qualify for a mortgage. This demonstrates the influence of industry lobbyists on this administration.By eliminating affordable housing goals from the conventional mortgage market, lenders can choose to loan only to the well-heeled rich and ignore everybody still working their way up the economic ladder.”
Another reform proposal within the larger set of recommendations would transfer USDA’s rural housing loan guarantee and rental assistance programs to HUD. According to the summary, this change “would allow both agencies to focus on their core missions and, over time, further align the Federal Government’s role in housing policy.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.