Trump Administration Proposes to End GSE Conservatorship, Privatize Fannie Mae, Freddie Mac
The Trump Administration issued a massive government reorganization proposal that would end the federal government’s conservatorship of the government-sponsored enterprises and privatize Fannie Mae and Freddie Mac.
The proposal (https://www.whitehouse.gov/wp-content/uploads/2018/06/Government-Reform-and-Reorg-Plan.pdf) 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.”
Among its proposed changes, which the Administration noted 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.
Mortgage Bankers Association President and CEO David H. Stevens, CMB, issued a statement, noting as with any proposal of this size, “the devil is in the details and MBA looks forward to working with the Administration, and Congress to finally tackle this long-overdue issue.”
Stevens said the proposal to reform Fannie Mae and Freddie Mac “closely tracks much of the work that has been done to date by policymakers on Capitol Hill. It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on [mortgage-backed securities] only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access. MBA is heartened that the proposal recognizes that reform must be part of any plan before either Fannie Mae or Freddie Mac is released from conservatorship.”
In 2017, MBA issued GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (https://www.mba.org/issues/gse-reform), outlining key principles and guardrails to guide the reform effort and provides a detailed picture of a new secondary-market end state. It also attempts to shed light on two critical areas that have tested past reform efforts–the appropriate transition to the post-GSE system and the role of the secondary market in advancing an affordable housing strategy.
The Administration proposal asserted the federal role in support of housing finance “is not effectively targeted to households in need of assistance or sufficiently accountable to taxpayers, as the costs and benefits of that support are unclear.” The proposal would end the conservatorship of Fannie Mae and Freddie Mac and propose “better tailoring of delivery” of federal programs.
“Policy makers should also pursue an approach that would level the playing field with the private sector to decrease the federal subsidies supporting housing,” the proposal said.
Competition to the “duopolistic role” played by the GSEs would be an essential element of reform to decrease moral hazard and risk to the taxpayer, the proposal said. “Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit federal guarantee for mortgage-backed securities that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for. This 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.”
The Administration proposal has the following broad goals:
—Increase competition. The proposal would remove the federal charter from statute and fully privatize the GSEs. A federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, 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, ensuring they would all be adequately capitalized and competing on a level playing field. If the GSEs lost some of the benefits that have led them to dominate the market, this would enable other private companies to begin competing in this space. The regulator would also ensure fair access to the secondary market for all market participants, including community financial institutions and small lenders.”
–Increase transparency and accountability. Under the proposal, 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.
—Align incentives and reduce overlap. The GSEs would focus on secondary market liquidity for mortgage loans to qualified borrowers, while HUD would assume 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. To effectuate this, the newly fully privatized 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. A separate fee on the outstanding volume of the MBS issued by guarantors would be used specifically for affordable housing purposes, and would be transferred through congressional appropriations to, and administered by, HUD.
—Provide more targeted assistance to those in need. The proposal would be designed so that 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. 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,” the proposal said.
MBA will provide additional analysis of the Administration proposal in the coming days.
