President Trump is calling for a major overhaul of the nation’s housing finance system. Central to that plan is the release of Fannie Mae and Freddie Mac from government control. They were placed into conservatorship to prevent their failures during the 2008 financial crisis. A memorandum (1) signed by the President says, “It’s time for the United States to reform its housing finance system to reduce taxpayer risks, expand the private sector’s role, modernize housing programs, and make sustainable home ownership for American Families our benchmark of success.”
This is just the beginning of a very big task. Housing Wire reports that HUD and the Treasury department will be asked to draft a proposal for housing finance reform that includes the overhaul and regulation of Fannie and Freddie. (2) The White House also plans to work with Congress on this far-reaching reform package.
Memorandum on Federal Housing Finance Reform
The memorandum calls for several objectives. There’s a long list of goals, so here’s a sampling.
- Preserve access to the 30-year fixed-rate mortgage and other mortgage options for qualified homebuyers
- Maintain equal access to the Federal housing finance system for lenders of all sizes.
- Increase competition in the private mortgage market.
- Regulate GSEs to insure their own soundness, and to prevent risks to the U.S. financial system.
The GSEs have been in need of reform. The National Association of Realtors has been active in lobbying for changes that also maintain certain features of the current system. NAR supports the preservation of the 30-year fixed-rate mortgage. It also wants to preserve affordable credit options and make access to housing reliable for both renters and homeowners.
NAR Letter to FHFA
NAR and 27 other industry groups sent a letter to the chief of the Federal Housing Finance Agency just recently, outlining what they believe is needed in a reform package. It says, “Ultimately, we believe any reform, be it administrative or legislative, must seek to further two key objectives: 1) preserving what works in the current system, while 2) maintaining stability by avoiding unintended adverse consequences for borrowers, lenders, investors, or taxpayers.” (3)
Fannie and Freddie play an important role in the housing finance system. They were created by Congress to help provide liquidity to lenders. They buy mortgages from lenders, and either hold them or sell them as mortgage-backed securities. Lenders then have more money to grant more loans.
They were not heavily regulated before the 2008 financial crisis and were victims of the subprime mortgage defaults. That’s when the government bailed them out with taxpayer money and put them into conservatorship. The President’s memorandum lists several objectives for the future regulation of Fannie and Freddie including higher capital requirements to prevent future bailouts, and limits on their managed portfolios.
Fannie, Freddie Reform
Prior to the letter sent by NAR and the other real estate groups, NAR has suggested replacing Fannie and Freddie. As reported by Inman, NAR described a new private entity that would be regulated like a utility. NAR policy representative, Ken Fears, told Inman that the conservatorship was supposed to be temporary. He says of the bailout, “It’s almost like the government took them into a cocoon. It’s not intended as a permanent status.” (5)
Fears told Inman, “The mission is to support a national market for mortgage finance.” He says the GSEs have made it possible to get the same mortgage rates in various markets across the country. He says that system also prevent rate spikes during any kind of economic crisis.
That’s good reason to maintain the aspects of Fannie and Freddie that are currently working and providing these crucial services. This will be a major change for the industry as the new regulations are drawn up, debated, and approved. We’ll bring you updates as we learn more.
(3) NAR Letter
(4) Inman Article