Thursday, The Trump administration released its long-awaited plan to reform the nation’s housing finance system and privatize Fannie Mae and Freddie Mac, calling it the “last unfinished business of the financial crisis.”
The recommendations include: “simplifying” the Qualified Mortgage rule and eliminating the so-called QM patch that allows Fannie and Freddie to sidestep some regulations; reducing “unnecessary regulatory impediments” for private-label securitization; and promoting private-sector competition.
“I applaud Secretary Mnuchin’s and Secretary Carson’s efforts to lay out plans for comprehensive housing finance reform,” said Mark Calabria, Federal Housing Finance Agency director. “These plans 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.”
“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,” Calabria said.
And members of the housing industry are already preparing to work with members of Congress on potential reform.
“The reports recognize the need to better coordinate the roles of FHA and the GSEs,” Mortgage Bankers Association CEO Robert Broeksmit said. “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.”
“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 said. “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.”
One expert explained the plan is built on sound financial principles and will minimize any future bailout risks.
“The American Land Title Association commends the U.S. Department of the Treasury and Secretary Steven T. Mnuchin for developing a plan for meaningful, comprehensive housing finance reform,” ALTA CEO Diane Tomb said. “We are encouraged to see that the plan acknowledges the need to have sound underwriting standards to prevent any future taxpayer bailout and minimize risks to financial stability.”
The National Association of Realtors thanked the Trump administration for its efforts and said the new plan shines a light on the markers for the last mile of reform.
“The National Association of Realtors thanks President Trump and his administration for initiating thoughtful, genuine effort toward housing finance reform,” NAR President John Smaby said. “We look forward to reviewing the proposal in more detail and are optimistic that, at a minimum, the White House’s efforts will shed light on the remaining mile markers on the path to reform, along with the critical role the GSEs and Federal Housing Administration play in America’s housing market.”
One expert stressed the importance of the moment, saying this moment could define housing finance for the next generation.
“Housing finance stakeholders have spent the last decade deeply engaged in preparation for this moment,” said Eric Kaplan, Milken Institute Housing Finance Program director. “The ramifications of these plans, their agendas, and execution—and the pivotal question of how Congress responds—will dramatically impact how we finance homeownership for the next generation. The significance cannot be overstated.”
Most of the recommendations in the 53-page plan don’t require input from Congress. But one expert explained that while the administration’s plan will reduce risk, it will still require some action from Congress.
“While Congress ultimately needs to address the underlying structural challenges of the GSEs, the Administration’s proposal to reduce taxpayer risk exposure and address the areas of misaligned incentives of the GSEs while increasing transparency and market discipline could be the catalyst to break the legislative logjam and enable policymakers to enact comprehensive reforms,” U.S. Mortgage Insurers President Lindsey Johnson said.
What effect would the plan have on the secondary market? It could create a riskier market as it could create an influx of certain loans the GSEs would no longer compete as heavily for.
“The Treasury proposals to level the playing field between the GSEs and private-label securitization would likely create a larger, more diverse PLS market,” Moody’s Senior Vice President Yehudah Forster said. “Existing and new PLS sponsors would step in to finance at least a portion of mortgages that the GSEs no longer compete as strongly for or stop targeting, such as cash-out refinancings or investor loans. The influx would likely introduce riskier pools or shelves into the issuance mix.”
As for timing, the industry is excited to see movement on the reform front, but agrees it will still be a while before any action is taken.
“Fitch believes the volume and breadth of administrative recommendations included in the GSE reform plan, coupled with the resources and interagency coordination required, shows that Treasury is still playing the long game on GSE reform,” said Christopher Wolfe, Fitch Ratings managing director and head of North American banks. “This means that Fitch’s credit ratings on Fannie Mae and Freddie Mac are unlikely to be affected in the near to mid-term.”
“The plan involves a mix of administrative and legislative reforms, and given the current political environment, we do not expect to see action on the legislative front,” Wolfe said. “Since the Treasury’s plan preserves a role, albeit reduced, for the federal government to support housing, Fitch still expects Fannie and Freddie to be tied to US sovereign ratings.”
But while the housing industry is rallying behind the plan, Democrats may not be willing to play along, bringing into question if it stands a chance of being passed in the Senate.
“Reforming our system of housing finance is a proposition that has very serious implications for millions of Americans, including those aspiring to become homeowners as well as renters,” said Rep. Maxine Waters, D-Calif. “It is an immense responsibility, and it is critical that housing finance reform proposals do not diminish opportunities for homeownership, increase housing costs or make housing less available.”
“However, Trump’s plan appears to do just that,” Waters said. “The proposal raises serious concerns about the future of housing in this country, particularly affordable housing. One of the most egregious parts of this proposal—and one which could cause significant damage for low-income persons and communities of color—is the replacement of the affordable housing goals with a fee that would fail to adequately support affordable housing.”
“This would hamper the ability of millions of underserved families to achieve the dream of homeownership,” she said. “I look forward to addressing these concerns with administration officials directly when they testify before the Committee.”