Housing finance reform may soon be back on the table in Congress, as Senate Banking Committee Chairman Mike Crapo (R-Idaho) on Friday released a rough draft of a housing finance reform bill that combines the ideas of past proposals.
“We must expeditiously fix our flawed housing finance system,” Crapo said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed rate mortgage, increase competition among mortgage guarantors, and promote access to affordable housing.
“I invite my Senate and House colleagues, the Administration and all interested stakeholders to work together to enact this critically needed reform,” he added.
The proposal suggests a permanent, sustainable housing finance system that would reduce “the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors” and preserve “existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital.”
The new framework would establish “several new layers of protection between mortgage credit risk and taxpayers” and would ensure “a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards.”
Its would also promote “broad accessibility to mortgage credit, including in underserved markets.”
The proposal would release Fannie Mae and Freddie Mac from conservatorship, subject to tight market-share restrictions. The companies, which are now profitable, would retain their role as mortgage guarantors, and would be subject to competition.
The proposal is already seeing broad support from the housing finance industry. Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), said Crapo’s proposal “is a significant sign of his continued commitment to work toward finally ending the conservatorships of Fannie Mae and Freddie Mac and ensuring a stable and liquid market – with an explicit, paid-for government guarantee – for both single-family and multifamily mortgages.”
“[The] MBA looks forward to continuing to engage on a bipartisan basis with congressional leaders, the administration and other key stakeholders on reform efforts to create a system that supports borrowers, serves lenders of all sizes and business models and protects taxpayers,” Broeksmit added.
There have been many different housing finance reform proposals over the past five or six years – none of which have made it to both the House and Senate for a vote.
In December, Broeksmit testified before the House Financial Services Committee in support of “The Bipartisan Housing Finance Reform Act of 2018,” a bipartisan housing reform proposal introduced by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), as well as Representatives John Delaney (D- Md.) and Jim Himes (D-Conn.).
“This proposal focuses on several principles including liquidity across mortgage markets, borrower access to credit, lender access to the secondary market, taxpayer protection, consumer choice, and a smooth transition to an end state,” Broeksmit told the committee. “Many of these principles align with what MBA has long supported.”
The introduction of the Crapo proposal coincides with a flurry of recent activity on the housing reform front. Two weeks ago, Joseph Otting, acting director of the Federal Housing Finance Agency (FHFA), reportedly held an internal meeting at the agency during which he said the FHFA would soon be introducing a plan to take government-sponsored enterprises Fannie Mae and Freddie Mac out of conservatorship.
In a MarketWatch article, a spokesperson for the agency confirmed that there was a discussion about ending conservatorship – but added that the timing and details of the proposal had not been discussed.
“Acting Director Otting held the internal meeting to meet FHFA staff and establish open lines of communication,” the FHFA told MarketWatch. “He mentioned, as he previously has, that Treasury and the White House are expected to release a plan for housing that will include details about reform and will likely include a recommendation for ending Fannie Mae and Freddie Mac conservatorships. [Treasury] Secretary Mnuchin has said that the goal of the [Trump] administration is to take the GSEs out of conservatorship. Acting Director Otting said that he and FHFA will work to advance that plan.”
Last week, however, the White House appeared to try to walk back Otting’s comments, saying no definitive plan for GSE reform yet exists.
“The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly,” White House Spokeswoman Lindsay Walters said in a statement. “At this time, no decisions have been made on any reform plan. As part of the process, however, the administration will work with Congress to formulate a plan that fully addresses the risks to taxpayers presented by the current housing finance system and that improves the ability of creditworthy Americans to buy a home.”
Meanwhile, the GSEs have entered their tenth year of conservatorship and continue to operate under the so-called “third amendment sweep” that allows almost all of their profits to be swept to the U.S. Treasury.
Whether or not the Trump Administration will take steps to take Fannie and Freddie out of conservatorship by way of administrative action – as opposed to an act of Congress – remains to be seen. The FHFA has already taken steps to significantly reform the companies – steps that have in effect paved the way for the end of conservatorship.
A key issue for all parties involved in the process is how to tackle housing finance reform comprehensively. Taking the GSEs out of conservatorship is just one major piece of the puzzle – and there are those who insist that the GSEs charters need to be re-written as part of any holistic housing finance reform effort.
“The 2008 financial crisis exposed fundamental problems in the GSEs’ business models, as well as weaknesses in the regulatory framework in place at the time,” Broeksmit said before the House Financial Services Committee in December. “Ten years later, we have still not determined how or if the GSEs will be reformed. Only by enacting comprehensive legislative reform can we realize the full benefits of a diverse, competitive primary market and a vibrant, liquid secondary market. Reform should proceed without delay.”
Any proposal, Broeksmit said, must recognize that “any reforms must meet the needs of the broad array of participants in the housing finance market, including borrowers, lenders, investors, and taxpayers.” Competition in the secondary market is also an important consideration, he said, as this, in turn, “promotes a highly competitive primary market, which, in turn, provides borrowers with greater choice at affordable prices.”
Regardless of whether the Crapo proposal or the Bipartisan Housing Finance Reform Act pass in Congress, the Trump Administration appears poised to bring an end to conservatorship through administrative measures. It could be that Otting and the FHFA are waiting for the confirmation of incoming director Mark Calabria, President Trump’s pick to head the agency, before releasing any plan for ending conservatorship. Calabria, who has extensive experience in housing policy, has been a strong opponent of the current GSE model and an advocate for reform. In a recent report, analysts at Keefe, Bruyette, & Woods suggest that Calabria may push for a “recap and release” of the GSEs – something which the MBA and other industry groups have rallied against, as it could potentially be disruptive to the housing market. Therefore, it’s possible that Calabria’s ideas for how to bring an end to conservatorship will be met with harsh criticism – something which the Trump Administration might not want, as any negative impact on the housing market could end up hurting a presidential re-election bid.
Also adding fuel to the notion that the Administration may soon act to end conservatorship is that the FHFA recently conceded that its structure is unconstitutional.
In July, the U.S. Court of Appeals for the Fifth Circuit ruled that the FHFA was not constitutionally structured and thus was operating in violation of the Constitution. The main problem with how the agency is structured, as per the ruling, is that, like the CFPB, it is led by a single director who wields almost limitless regulatory power and who is only removable for cause.
In January, Otting announced that because the FHFA was under new leadership, it would not defend itself from the court’s ruling that the agency is not constitutionally structured. What this means for the future of the agency is unclear. However, it is easy to imagine it being part of a rationale for dissolving the agency, as part of a plan for releasing the GSEs from conservatorship.
Then again, some may argue that the FHFA should remain intact during and after the transition from conservatorship, so as to monitor the process and ensure a smooth transition. If that’s the case, then there is a question as to whether the agency could adopt a new structure in enough time, as this would need to be congressionally approved.
Meanwhile, a similar suit challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB) continues to play out in the courts. Last year a D.C. Circuit Court in the PHH Corp. case found the bureau’s single director structure was constitutional, however, the New York federal district court in the RD Legal Funding case ruled the bureau’s structure is unconstitutional and that it should be dissolved.
The CFPB appealed the decision to the Second Circuit. However, some legal experts say it could end up in front of the U.S. Supreme Court.
Interestingly, newly appointed U.S. Supreme Court Judge Brett Kavanaugh wrote the D.C. Circuit Court of Appeals majority panel opinion in 2016 declaring the bureau unconstitutional. He also penned a lengthy dissent when his decision was overturned.
Also adding to the flurry of recent GSE reform activity is MBA’s recent statement on the Milken Institute’s recently released paper outlining how GSE reform can be handled administratively.
“The Milken Institute proposal includes a number of important administrative recommendations that would set the stage for much-needed legislative action,” Broeksmit of the MBA said in a Jan. 9 statement. “These recommendations focus on transparency in GSE pricing, data, and pilot programs, as well as strong capital standards, better-targeted affordable housing support, strengthened credit risk transfer, and improvements to the Ability-to-Repay/Qualified Mortgage rule.
“However, we strongly oppose any proposal that would unnecessarily limit the ability for borrowers to use the equity in their homes, or finance a second home,” Broeksmit adds. “We also oppose allowing the GSEs to begin significantly rebuilding capital prior to the implementation of key reforms.
“We look forward to working with policymakers to ensure that any changes to the GSEs are undertaken in a manner that does not disrupt the mortgage market or impede legislative reform efforts.”
Meanwhile, the National Association of Realtors (NAR) has also put its support behind the Bipartisan Financing Reform Act of 2018.
“NAR believes the discussion draft contains many provisions that should serve as the backbone for comprehensive housing finance reform,” Vince Malta, president elect of NAR, said in testimony before the House Financial Services Committee in December. “These components include an explicit government guarantee, regulatory flexibility and strong and reasonable regulatory authority.
“However, as the discussion draft evolves, the proposal can be improved to further ensure a reliable and affordable source of mortgage capital is readily available for responsible creditworthy Americans in all types of markets,” he added. “Above all else, NAR firmly believes that comprehensive housing finance reform must be done in a bipartisan manner.”