Written By: Joel Palmer, Op-Ed Writer
President Donald Trump signed a memorandum last week that serves as a key step in lifting Freddie Mac and Fannie Mae out of government conservatorship.
The President’s Memorandum on Federal Housing Finance Reform directs the Treasury Secretary to develop a plan for administrative and legislative reforms to achieve a number of housing reform goals, including:
•Ending the conservatorships of the GSEs upon the completion of specified reforms.
•Facilitating competition in the housing finance market.
•Establishing regulation of the GSEs.
•Compensating the federal government for GSE support provided.
“The lack of comprehensive housing finance reform since the financial crisis of 2008 has left taxpayers potentially exposed to future bailouts, and has left the Federal housing finance programs at the Department of Housing and Urban Development potentially overexposed to risk and with outdated operations,” reads a summary of the memo. “Accordingly, it is time for the United States to reform its housing finance system…”
Reform proposals contained in the memo include:
•Preserving the 30-year fixed-rate mortgage
•Maintaining equal access for lenders to the Federal housing finance system.
•Establishing appropriate capital and liquidity requirements for the GSEs.
•Increasing competition and participation of the private sector in the mortgage market.
•Mitigating the risks undertaken by the GSEs, which may include changes in policies on loan limits, program and product offerings, credit underwriting parameters, and the use of private capital to transfer credit risk.
•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 system.
“We are heartened the memorandum recognizes the GSEs should be released from conservatorship only after specified reforms, and that it insists on other core principles such as preserving the 30-year fixed-rate mortgage and leveling the playing field for lenders of all sizes,” said Robert D. Broeksmit, CMB, president and CEO of the Mortgage Bankers Association.
When the 2008 financial crisis hit, the combination of plummeting home prices and rising mortgage defaults put at risk mortgage-backed securities backed by Fannie and Freddie. This required a $188 billion bailout from the federal government, which took over ownership in September 2008.
Under the conservatorship arrangement, the GSEs’ profits are paid to the U.S. Treasury in the form of dividends. Through the fourth quarter of 2018, Fannie Mae has paid $175.8 billion in dividends to Treasury, while Freddie Mac has paid $116.5 billion.
"While NAR believes the GSEs must be transitioned out of conservatorship, this must be done in a responsible manner that will protect taxpayers and retain the Enterprises' public mission, and these actions must be driven by Congress. This is the only way to secure an explicit government guarantee, a public mission and the 30-year fixed rate mortgage, critical components of a robust U.S. housing market,” said John Smaby, president of the National Association of Realtors.
"A healthy secondary mortgage market is of the utmost importance to Americans, and we support efforts by the Trump administration to reform our housing finance system in a way that promotes competition and puts an end to taxpayer bailouts," said Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions (NAFCU).
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.