The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) have presented President Donald Trump with their respective plans for reforming the nation’s housing finance system.
In March, Trump issued a presidential memorandum directing the agencies to develop the plans, saying that the “housing finance system of the United States is in urgent need of reform.”
The Treasury Housing Reform Plan primarily addresses Fannie Mae and Freddie Mac’s transition out of conservatorship, while the HUD Reform Plan spells out reforms for the Federal Housing Administration (FHA) and Ginnie Mae.
“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,” says U.S. Treasury Secretary Steven T. Mnuchin, in a statement. “An effective and efficient federal housing finance system will also meaningfully contribute to the continued economic growth under this administration.”
The Treasury plan proposes to limit the role of the federal government in the mortgage market by transitioning the GSEs out of conservatorship – essentially, recapitalizing the companies and returning them to the private sector – but importantly it includes 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 plan states.
In addition, the Treasury plan “endeavors to promote private sector competition in the housing finance system.”
“A driver of the GSEs’ growth has been a regulatory framework that is biased in favor of GSE- supported mortgage lending – a bias that has increased following the enactment of the Dodd- Frank Wall Street Reform and Consumer Protection Act,” the plan states.
As directed, the Treasury’s plan breaks down which reform measures can be handled administratively and which must be handled legislatively.
“While this plan includes both legislative and administrative reforms, Treasury’s preference and recommendation is that Congress enact comprehensive housing finance reform legislation,” the plan states. “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 (MBS).
“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,” the plan states.
However, the Treasury says the administration could enact reform on its own, including recapitalizing the GSEs and releasing them from conservatorship, which, in turn, could force Congress to act on the legislative matter of setting up a new government backstop.
“At the same time, reform should not and need not wait on Congress,” the plan states. “[The] 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 [the] 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 plan adds.
The Treasury Department worked with a wide range of stakeholders in developing the plan, including affordable housing advocates, broker-dealers, investors, mortgage lenders, mortgage servicers, mortgage insurers, think tanks, trade associations and other interested parties.
It also consulted with the Federal Housing Finance Agency, the Department of Housing and Urban Development, and other government agencies.
The HUD Plan, as mentioned, focuses on reforms for the FHA and Ginnie Mae. It outlines four main objectives: Re-focusing FHA to its core mission; protecting American taxpayers; providing FHA and Ginnie Mae with tools to appropriately manage risk; and providing liquidity to the housing finance system.
“As a direct result of the Trump Administration’s pro-growth policies, unemployment is at 50-year low and American families are earning higher incomes and enjoying more opportunities than seemed possible just a few years ago,” says HUD Secretary Ben Carson, in a statement. “There is still one piece of unfinished business from the financial crisis: housing finance reform. These changes to our housing finance system will help more American families achieve their dream of owning a home.”
Mark Calabria, director of the FHFA, applauded the plans, saying they “are 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 says in a statement. “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.”
Robert D. Broeksmit, CMB, president and CEO of the Mortgage Bankers Association (MBA), also expressed support for the plans – albeit with some reservations.
“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 says in a statement. “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.”
However, there will no doubt be many details to be ironed out over the next five years, which is about how long it is expected to take for the plans to finally come to fruition.
“[The] MBA looks forward to working with the Administration, Congress, and regulators as they address the large number of issues identified in the reports, including the appropriate role the GSEs play in the single-family and multifamily markets,” Broeksmit says. “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.”