The Trump Administration on Thursday introduced a housing finance reform plan that – similar to past proposals – would lessen the government’s footprint in the mortgage market by transitioning government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac out of conservatorship and back to the private sector, while shifting private mortgage insurance to a first-loss position.
Under the proposed plan, which would require congressional approval, the GSEs would issue mortgage-back securities with a “catastrophic” government guarantee. Private mortgage insurance would bear the cost of any initial loss, up to a certain amount, but once a set threshold has been crossed, the government would step in and cover any “catastrophic” loss.
“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,” the Administration writes in its sweeping, 132-page Reform Plan and Reorganization Recommendations, which outlines proposed reforms for a number of government agencies. “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.”
Some market watchers say the plan has little chance of coming to fruition – mainly because neither political party has any interest in taking the complex matter of GSE reform up in the House or Senate. They point out that – as far as consumers are concerned – the mortgage market is working fine and it’s simply not a burning issue.
In his daily mortgage and housing market analysis, Brent Nyitray, CFA, points out that “there are all sorts of issues that remain before private label MBS can do the heavy lifting of the mortgage market.”
“First and foremost, there is a huge gulf between what the MBS investor market requires as a rate of return and current mortgage rates,” Nyitray writes. “In a perfect world, private label MBS would trade at similar levels to Fannie/Freddie MBS, but they won’t. There are huge governance issues that need to be resolved. For just one example, will the servicer (who is probably the issuer, who may also have a second lien) service the loan to benefit the MBS holder or themselves? What about reps and warranties?
“These uncertainties need to be priced in, which means that the bid/ask spread between private label and Fannie Mae MBS is so large that nobody would take out a mortgage at the rate the private label investors require,” he adds. “That is a necessary but not sufficient requirement to bring back private money into the U.S. mortgage market.”
Despite the fact that the government’s proposal is light on certain details, the Mortgage Bankers Association (MBA), which last year advanced its own, much-more-detailed reform proposal, expressed support for the plan.
“[The] MBA applauds the Administration for releasing a proposal to reform Fannie Mae and Freddie Mac which closely tracks much of the work that has been done to date by policymakers on Capitol Hill,” David H. Stevens, CMB, president and CEO of the MBA, says in a statement. “It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS 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.
“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.”