Administration Releases GSE Reform Plan

The Trump Administration on Thursday released its long-awaited plans on reforming government-sponsored enterprises, offering nearly 50 recommended legislative and regulatory reforms aimed at limiting the federal government’s role in the secondary mortgage market.

Treasury Secretary Steven Mnuchin said the recommended legislative and administrative reforms, coming a day before the 11th anniversary of the federal government’s conservatorship of Fannie Mae and Freddie Mac, are designed to protect American taxpayers against future bailouts, preserve the 30-year fixed-rate mortgage and help Americans fulfill their goal of buying a home. The proposal comes six months after President Donald Trump issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan for administrative and legislative reforms.

“The Trump Administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said Treasury Secretary Steven Mnuchin. “An effective and efficient federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”

The Treasury proposal, developed with input from HUD as well as the Mortgage Bankers Association and other industry advocates, recommends legislative and administrative reforms to define a limited role for the federal government in the housing finance system; enhance taxpayer protections against future bailouts; and promote competition in the housing finance system.

HUD submitted its own proposal (https://www.hud.gov/sites/dfiles/Main/documents/Housing-Finance-Reform-Plan0919.pdf ). Secretary Ben Carson said the proposal ensures FHA and Ginnie Mae “can continue to serve their important missions effectively, responsibly and sustainably for many years to come.”

Carson noted the proposal accomplishes four key HUD objectives: refocuses FHA to its core mission; protects American taxpayers; provides FHA and Ginnie Mae the tools to appropriately manage risk; and provides liquidity to the housing finance system. “There is still one piece of unfinished business from the financial crisis: housing finance reform,” he said. “These changes to our housing finance system will help more American families achieve their dream of owning a home.”

MBA President and CEO Robert Broeksmit, CMB, issued a statement commending the Administration’s proposals, noting they reflect many long-advocated MBA priorities as outlined in its 2017 white paper (https://www.mba.org/advocacy-and-policy/gse-reform).

“We are gratified that the reports reflect many of the important priorities that MBA has long recommended, including protecting taxpayers from future bailouts, an explicit government guarantee on qualified mortgage-backed securities for single-family and multifamily loans, increased competition and consumer choice via potential additional guarantors and ensuring a level playing field for lenders of all sizes and business models,” Broeksmit said. “The reports recognize the need to better coordinate the roles of FHA and the GSEs. Such coordination must preserve affordable financing options for a wide range of borrowers and reflect the vital role FHA plays in the larger housing finance system.”

Broeksmit said MBA looks forward to working with the Administration, Congress and regulators as they address issues identified in the reports, including the appropriate role the GSEs play in the single-family and multifamily markets. “Housing is a critical piece of the American economy, and reform efforts must ensure the uninterrupted flow of affordable mortgage credit for qualified borrowers through all economic cycles and in all parts of the country,” he said.

Federal Housing Finance Agency Director Mark Calabria called the proposals “an important step toward meaningful, lasting housing finance reform.”

“After nearly 11 years, ending the conservatorships of Fannie Mae and Freddie Mac is now a top priority for this Administration and the FHFA,” Calabria said. “I look forward to working with the Administration and Congress to chart a path forward that achieves the following objectives: Creating a competitive mortgage market with a limited government role; ensuring taxpayers never again have to rescue Fannie Mae and Freddie Mac; and paving the way for sustainable and affordable housing for homeowners across America.”

“The housing finance system is in serious need of reform,” the proposal said. “The GSEs remain in conservatorship more than 10 years after the financial crisis, and they continue to be the dominant participants in the housing finance system. Although they remain critical to the functioning of that system, they are not yet subject to capital and other regulatory requirements tailored to the risks they pose to financial stability. This lack of reform has left taxpayers exposed to future bailouts.”

The proposal noted lack of reform has also prolonged the Federal Housing Finance Agency’s management of the GSEs through the conservatorships, “perpetuating far-reaching government influence over the housing finance system.”

Key elements of the Treasury proposal:

–In stressing a limited role for the federal government in the secondary market going forward, the proposal said existing government support of the secondary market should be “explicitly defined, tailored and paid-for,” and the GSEs’ conservatorships should come to an end.

–The plan recommends reforms to enhance taxpayer protections against future bailouts. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.”

–The proposal endeavors to promote private sector competition in the housing finance system, suggesting that elements of the Dodd-Frank Act be dismantled to “level the playing field between the GSEs and private sector.” Recommended reforms would include simplifying the Consumer Financial Protection Bureau’s Qualified Mortgage rule and eliminating the QM patch; reducing unnecessary regulatory impediments to responsible private-label securitization; and limiting certain GSE activities for which government support is not necessary or justified.

–While the plan includes both legislative and administrative reforms, Treasury’s preference and recommendation is that Congress enact comprehensive housing finance reform legislation. “Although Treasury does not believe a government guarantee is required, Treasury would support legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the federal government that is limited to the timely payment of principal and interest on qualifying mortgage-backed securities,” the Administration said. “Legislation could also achieve lasting structural reform that tailors that explicit government support of the secondary market and repeals the GSEs’ congressional charters and other statutory privileges that give them a competitive advantage over private sector competition.

–However, the plan also noted at the same time, reform “should not and need not wait on Congress. FHFA already has expansive statutory authorities to implement reforms in the absence of further Congressional action, and the housing finance system has functioned for some time, and continues to function, without an explicit full faith and credit guarantee by the Federal Government. Pending legislation, Treasury will continue to support FHFA’s administrative actions to enhance the regulation of the GSEs, promote private sector competition, and satisfy the preconditions set forth in this plan for ending the GSEs’ conservatorships.”

–The proposal calls for existing government support of each GSE under its Senior Preferred Stock Purchase Agreement with Treasury should be replaced with an explicit, paid-for guarantee backed by the full faith and credit of the federal government that is limited to the timely payment of principal and interest on qualifying MBS. The proposal said this explicit government guarantee should be available to the re-chartered GSEs and to any other FHFA-approved guarantors of MBS collateralized by eligible conventional mortgage loans or eligible multifamily mortgage loans. These guarantors would credit enhance the mortgage collateral securing the government-guaranteed MBS, such that the Federal Government’s guarantee would stand behind significant first-loss private capital and would be triggered only in exigent circumstances.

–Guarantors should be supervised and regulated by FHFA. FHFA’s regulatory capital requirements should require each guarantor to be appropriately capitalized by maintaining capital sufficient to remain viable as a going concern after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses. Single-family guarantors should be required to maintain a nationwide cash window through which small lenders can sell loans for cash, and also should be prohibited from offering volume-based pricing discounts or other incentives to their lender clients.

–The proposal said any reformed regulatory framework should not create capital arbitrage or other regulatory incentives that bias mortgage lenders toward securitizing their loans through guarantors. “In particular, similar credit risks generally should have similar credit risk capital charges across market participants,” it said.

–Treasury said it expects that it will be necessary to maintain limited and tailored government support for the GSEs by leaving the PSPA commitment in place after the conservatorships. “The federal government should be compensated for its continued support through the periodic commitment fee, as originally established by the PSPAs,” the proposal said. “Each GSE should be recapitalized with significant first-loss private capital so that Treasury’s ongoing commitment under each PSPA could be drawn upon only in exigent circumstances. To facilitate recapitalization of the GSEs, Treasury and FHFA should consider adjusting the variable dividend (also known as the “net worth sweep”) required by the terms of Treasury’s senior preferred shares, as well as the other approaches set forth in this plan.

–In parallel with recapitalizing the GSEs, the proposal said FHFA should begin the process of ending the GSE conservatorships. “Although applicable law does not prescribe a specific end point for the conservatorships, no conservatorship is meant to be permanent,” it said. “An eventual end is also necessary to reduce the far-reaching Government influence over the housing finance system inherent in FHFA’s management of the GSEs through the conservatorships.”

–The proposal noted even after recapitalization, taxpayers will still bear some risk of a future draw on the PSPA commitment. Treasury recommended the PSPAs should be amended to enhance Treasury’s ability to mitigate the risk of a draw on the commitment after the conservatorships. Other PSPA amendments should ensure that each GSE continues to be subject to appropriate mission and safety and soundness regulation after the conservatorship, for example, to require each GSE to maintain a nationwide cash window and provide equitable secondary market access to all lenders. Still other amendments should conserve the remaining PSPA commitment by limiting future GSE activities to those that have a close nexus to the underlying rationale for Government support.

–The proposal said the GSEs should also continue to support affordable housing for low- and moderate-income, rural, and other similar borrowers. Each GSE’s role should be to perform activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities,” it said. “As set forth in this plan and HUD’s reform plan, FHFA and HUD should develop and implement a specific understanding consistent with these defined roles for the GSEs and FHA so as to avoid duplication of Government support.”

–The proposal noted continuation of limited government support for the secondary market should not be regarded as a federal preference for mortgage lending through the GSEs.” To achieve a level playing field between the GSEs and other private sector competition, the regulatory frameworks governing the GSEs and other market participants should be harmonized, and in particular, the QM patch should be replaced with a bright line safe harbor that does not rely on the GSEs’ practices.”

MBA will provide additional analysis of this proposal and its potential impact on the real estate finance industry in the coming days and weeks.

Next week, Mnuchin, Carson and Calabria will appear before the Senate Banking Committee to discuss the proposal. The hearing, Housing Finance Reform: Next Steps, takes place Tuesday, Sept. 10 at 10:00 a.m. ET in Dirksen Senate Office Building Room 538.

The hearing can be accessed online at https://www.banking.senate.gov/hearings/housing-finance-reform-next-steps. MBA NewsLink will provide coverage.