MBA, Trade Groups Urge Treasury to Promote ‘Critical Reforms’ of GSEs

More than 12 years after the federal government placed Fannie Mae and Freddie Mac under conservatorship—and seemingly no closer to moving them out of conservatorship—the Mortgage Bankers Association and several industry trade groups urged the Treasury Department to promote “critical reforms” of the GSEs and bolster their safety and soundness.

In a December 14 letter to Treasury Secretary Steven Mnuchin, MBA; the American Bankers Association; the National Association of Home Builders; and the National Association of Realtors said there are “tangible, near-term steps that Treasury can take in coordination with the Federal Housing Finance Agency to correct structural flaws in the GSEs’ pre-conservatorship business models and allow them to safely transition out of conservatorship.

“We have not supported, nor do we currently support, an ‘endless’ conservatorship. Our position is quite the opposite – we wish to see the GSEs reformed and operating outside of government control,” the letter said. “We therefore favor actions that move the GSEs closer to the preferred end state in a timely manner that does not disrupt the housing finance market and inflict broader economic harm.”

The letter expresses concern, however, that other potential actions to release the GSEs from conservatorship without necessary safeguards would undermine investor confidence, create volatility in the single-family and multifamily mortgage markets and impede access to credit for consumers. “A stable housing finance system is key to defending housing affordability and facilitating homeownership and rental housing opportunities,” the letter said. “In particular, protecting access to credit is necessary for a healthy demand side of the market, and the inventory deficit cannot be improved without the long-term stability necessary to develop land and build homes.”

The letter recommended steps that Treasury and FHFA can and should take to continue with housing finance reform efforts. “These steps will better prepare the GSEs and the market for a post-conservatorship future without risking severe market disruptions,” it said.

First, Treasury and FHFA can address the fact that the GSEs are likely to soon reach the caps on their allowable capital reserves under the terms of the Senior Preferred Stock Purchase Agreements and the 2019 Letter Agreements on Capital Reserves. Once these caps – which together equate to $45 billion in capital – are reached, the GSEs will be denied the ability to retain earnings and further build their capital buffers.

“It is important for the GSEs to build appropriate levels of capital prior to their release from conservatorship,” the letter said. “The finalized FHFA capital framework for the GSEs indicates that, as of June 30, 2020, the GSEs would need a combined $283 billion in capital to be adequately capitalized and meet the buffers necessary to avoid other limitations on dividends or bonus payments. While public offerings likely will be necessary to reach this level of capital, the GSEs can lower the necessary size of these equity raises by continuing to accrue capital organically. Simple modifications to the PSPAs and the Letter Agreements could adjust these capital reserve thresholds higher, removing a barrier to further progress toward an end to the conservatorships.”

Second, Treasury and FHFA should also continue their efforts to institute market conduct reforms that ensure the GSEs, once released from conservatorship, do not operate as they did pre-conservatorship. “Many of these reforms have been implemented in some fashion over the past decade, but some remain unfinished, while others are in their nascent phase,” the letter said. “Treasury and FHFA should find ways to more thoroughly ‘lock them in’ through rulemakings, amendments to the PSPA, or other durable mechanisms.”

Third, Treasury and FHFA also should provide more detail regarding the specific “footprint” or markets that they envision the GSEs serving in a post-conservatorship environment. “The new capital framework suggests a larger role for the Federal Housing Administration and the private market, as well as the elimination or discouragement of certain existing GSE offerings,” the letter said. “Greater specificity with respect to these issues will help primary market participants and investors prepare for a post-conservatorship environment.”

The letter noted while the GSEs are not yet in such a state to exit conservatorship, “important progress has been made in recent years, and we hope you will continue this critical work. Efforts to further build capital reserves and implement key reforms are natural next steps in this process – steps that will benefit the housing finance system and the broader economy while avoiding unnecessary market disruptions.”