A politically-charged battle has begun over housing-finance reform that would also release Fannie Mae and Freddie Mac from government control. While Trump administration proposals promise changes that will protect taxpayers from another Fannie-Freddie bailout, preserve affordable home loans, like the 30-year fixed-rate mortgage, and promote competition in the housing finance sphere. Democrats say, the plan will make home loans more expensive and harder to get.
As you know, Fannie and Freddie provide liquidity for the mortgage market. They don’t provide loans. They buy loans from banks and repackage them into securities which they sell to investors. That gives banks the funding they need to make more loans. Meantime, Fannie and Freddie guarantee about half of the nation’s $10 trillion in home loans.
Fannie, Freddie Bailout
Back in 2008, at the height of the housing crisis, Fannie and Freddie were at risk of collapsing. To keep that from happening, and potentially cause an even bigger housing market meltdown, the government bailed them out and placed them in conservatorship. Bailout funds amounted to 191 billion taxpayer dollars. Since then, Fannie and Freddie have become profitable once again, and have returned more than $300 billion to the government. Members of the Trump administration say, it’s now time to begin the process of reform for the two entities and remove them from government control.
Both the Department of the Treasury and the Department of Housing and Urban Development submitted proposals. According to MarketWatch, the one from the Treasury provides recommendations on how to end the conservatorship of Fannie and Freddie while continuing to provide support for home loans and affordable housing programs. (1)
It addition to general proposals, it says, “This plan addresses the last unfinished business of the financial crisis in a way that preserves what works in the current system, protects taxpayers, and reduces the influence of the Federal Government in the housing finance system.” The HUD plan focuses more on the future role of the Federal Housing Administration and the tools needed to manage housing market risk during a downturn.
Housing Finance Reform
The plans submitted to the President include both legislative and administrative reforms. While it’s possible that the administrative reforms can be implemented without Congressional approval, it’s unlikely that a bipartisan agreement on legislative reforms will happen anytime soon. The Fannie-Freddie debate has been ongoing for years, and was just rekindled during a hearing before the Senate Banking Committee.
There’s no dispute among the heads of those agencies, that a Congressional solution is needed, but they also warned that they will take steps on their own if Congress doesn’t act soon. They said, Fannie and Freddie rely too heavily on the government and tax-payer dollars, and an overhaul is needed to make sure the housing finance system can weather another downturn. FHFA Director Mark Calabria said at the hearing, “If we do nothing, this is going to end very badly” because Fannie and Freddie are undercapitalized.
Under the conservatorship plan, they are allowed to keep $3 billion each. The rest of their profits are “swept” into government reserves. Treasury Secretary, Steven Mnuchin, said at the hearing that he’d like to end that plan “very quickly.” He’d like to allow them to keep more of their earnings and build up their capital reserves. He said, they’d likely need the help of third-party investors as well to reach a goal of about $100 billion.
The Trump administration plan to cut Fannie and Freddie loose would also encourage private sector competition. It also covers economic and legal details on how to implement this transition without destabilizing the mortgage market. Officials said, their goal would be to privatize Fannie and Freddie without making it harder or more expensive for Americans to get loans. (2)
The top Democrat on the committee, Senator Sherrod Brown, wasn’t impressed by the plan. He ripped it apart during the hearing, saying it will be disastrous for U.S. home buyers. He said, “Rather than create a system that addresses the needs of working families, the Trump Administration has put out half-baked proposals that will make mortgages more expensive and harder to get.”
The housing market is doing well right now in the midst of a lot of other turmoil, so lawmakers may not be in a hurry to make big changes. As former president of the Mortgage Bankers Association and former FHA Commissioner, David Stevens, told Market Watch, “With concerns about the economy’s fragility, trade wars, Brexit, Iran, North Korea, and more, it is critical that the administration not disrupt one of the bright spots in the economy, which is housing.”
The presidential election may also make it difficult, especially if the plan relies on outside investors. They would need to feel confident about government continuity and support for the overhaul. As Beacon Policy Advisers said in a note to clients, “We remain skeptical that much progress will be made in making it a reality, even with respect to proposed unilateral actions, before next year’s elections.” The firm wrote, “If Trump failed to win reelection, the GSE blueprint will likely fall out of favor as quickly as Trump leaves.” If that happens, it could leave outside investors holding an empty bag.
(2) Housing Finance Reform: Wall Street Journal