As the Senate Banking Committee engaged in discussion regarding potential housing finance reforms, President Donald Trump signed a presidential memorandum outlining his administration’s goals for enacting sweeping reforms to the secondary market.
The financial services industry expressed support for the administration’s stated goals of ending the conservatorship of Fannie Mae and Freddie Mac and promoting competition in the secondary market while providing taxpayer protections.
The memo directs Treasury Secretary Steven Mnuchin and Department of Housing and Urban Development Secretary Ben Carson to submit reform plans for the government-sponsored enterprises (GSE) and other housing finance agencies.
“I look forward to working with FHFA, HUD, Congress, and other stakeholders to address the need for housing finance reform as laid out by President Trump’s presidential memorandum,” Mnuchin said in a statement. “We support a system that provides for access to lending for hardworking Americans, while also protecting taxpayers from risk. An effective and efficient federal housing finance system will also meaningfully contribute to economic growth.”
Ensuring that all types of mortgage lenders nationwide have access to the secondary market, which long has been a pillar of advocacy agendas for community banks and credit unions, is among the goals outlined in the memo.
The memo also addresses another priority for lenders of all sizes and business models – how to release Fannie Mae and Freddie Mac from conservatorship in a safe and sound manner. To set the necessary conditions to free the GSEs from conservatorship without putting taxpayers at risk, the memo proposes the following conditions:
- The federal government is fully compensated for the explicit and implicit guarantees the GSEs or any successor entities provide in the form of an ongoing payment;
- The GSEs’ activities are restricted to their core statutory mission and their retained mortgage and investment portfolios are appropriately limited in size; and
- The GSEs are subjected to heightened prudential and safety and soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability.
The plan calls for HUD, the Federal Housing Administration (FHA) and Ginnie Mae to account for the following goals when planning reforms to its programs:
- Ensure that FHA and Ginnie Mae assume primary responsibility for providing housing finance support to low- and moderate-income families that cannot be accomplished through traditional underwriting;
- Reduce taxpayer risk exposure through improved risk management and program and product design;
- Modernize the operations and technology of FHA and Ginnie Mae.
- Address the financial viability of the Home Equity Conversion Mortgage program;
- Assess the risks and benefits associated with providing assistance to first-time homebuyers, including down-payment assistance;
- Define the appropriate role of the FHA in multifamily mortgage finance; and
- Diversify FHA lenders through increased participation by registered depository institutions.
Also with regard to Ginnie Mae, the memo states that HUD should identify ways to enhance criteria for Ginnie Mae program participation to ensure the organization’s safety and soundness and to protect the interests of borrowers and investors. It also tasks HUD with working to reduce abusive and unsound loan origination or servicing practices for loans in the Ginnie Mae program. To achieve that goal, the memo suggests, if appropriate, that the organization allow for cooperation with other loan program sponsors and regulators.
Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit applauded the reforms outlined in the memo, saying they would help promote competition in the real estate finance marketplace and protect taxpayers from future government bailouts.
“We are heartened the memorandum recognizes the GSEs should be released from conservatorship only after specified reforms,” Broeksmit said in a statement, “and that it insists on other core principles such as preserving the 30-year, fixed-rate mortgage and leveling the playing field for lenders of all sizes. MBA looks forward to working with the Trump administration, Congress and other stakeholders to achieve comprehensive reforms in a bipartisan fashion.”
Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey also championed the plan’s call to end the conservatorship and to develop a capital plan for the GSEs, stating the she believes it would “provide stability and access to the secondary market for all lenders.”
“As detailed in ICBA’s Principles for GSE Reform whitepaper and this week’s written statement to the Senate Banking Committee, community banks have long supported ending the net-worth sweep of GSE earnings and recapitalizing them,” Romero Rainey said. “These reforms are required by the Housing and Economic Recovery Act and can be accomplished administratively by the FHFA and Treasury. This will immediately better protect taxpayers by increasing the capital held by the GSEs.”
Speaking with Dodd Frank Update during ICBA’s 2019 annual conference in Nashville, Romero Rainey said her organization does not see the need for a radical approach to housing finance reform.
“There are some modifications that need to be made but, with regard to a complete overhaul to the system, that is not something we think is necessary at this point in time,” Romero Rainey said. “At the end of the day, it is important that we ensure that community banks have access to the secondary market and that they have individual loan and pricing opportunities.”
“I think what we will likely see is a melding of the different proposals going forward,” she added. “ICBA has taken the position that there are opportunities for both administrative and legislative reform, and we don’t think we need to wait on legislative reform for some of the administrative reforms we’re seeking to happen.”
National Association of Federally-Insured Credit Unions (NAFCU) President and CEO Dan Berger weighed in on Trump’s reported intent to a sign the housing finance reform memorandum.
“A healthy secondary mortgage market is of the utmost importance to Americans, and we support efforts by the Trump administration to reform our housing finance system in a way that promotes competition and puts an end to taxpayer bailouts,” Berger said in a statement. “To this end, NAFCU will continue to push for legislative measures to guarantee access to the secondary mortgage market for lenders of all sizes, loan pricing at the GSEs that is based on quality not quantity, and the establishment of an explicit government guarantee at the GSEs to provide certainty in the marketplace. To protect taxpayers and the safety and soundness of the housing finance system, the GSEs also should be permitted to rebuild capital.”
The timing of the memo’s release closely coincided with the Senate Banking Committee’s two-day hearing on housing finance reform plans, including discussion of a list of housing reform proposals outlined in plan published by Committee Chairman Mike Crapo (R-Idaho) in February. Several of the goals included in Crapo’s plan align with the agenda the Trump administration laid out in its memo.
“This outline sets out a blueprint for a permanent, sustainable new housing finance system that protects taxpayers by reducing the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors; preserves existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital; establishes several new layers of protection between mortgage credit risk and taxpayers; ensures a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards; and promotes broad accessibility to mortgage credit, including in under-served markets,” Crapo said in prepared remarks.
Several hearing participants noted their support for Crapo’s proposal, referring to it as a good starting point for enacting positive change in the secondary marketplace. It has been well-received by the financial services industry as well.
Ranking Member Sherrod Brown (D-Ohio) stated that more needs to be done to ensure that the GSEs adequately serve the needs of borrowers with low- and-moderate income. He levied criticism at the Federal Housing Finance Agency (FHFA) and the Trump administration for actions he believes have been detrimental to the housing marketplace.
“Since 2008, FHFA has been an independent regulator that has worked to serve underserved markets, closely monitored the GSEs’ business, and built up the capability to collect the housing data we need to help us help families,” Brown said. “Unfortunately, not all of the 2008 changes have been consistently implemented. Even though they are funded outside the appropriations process, the Housing Trust Fund and Capital Magnet Fund have not been safe from attempts to eliminate them. For the last three years, this administration has proposed cutting these funds. And this year, nearly three months after the close-out of the GSEs’ books and a month and a half after Fannie and Freddie told investors that they had set aside funds for the Housing Trust Fund and Capital Magnet Fund, the acting FHFA director still has not disbursed these affordable housing dollars.”
Brown noted that during a committee hearing in the previous Congress, six community banks expressed the following concerns about the secondary market:
- That preferential treatment based on the volume of loans a lender delivers, whether in the form of volume discounts or underwriting exceptions or the cost to retain servicing, hurts small lenders and ultimately consumers;
- The need for a guarantor that pools costs across the market and that has a duty to serve all lenders;
- That small lenders need improved consistency in the secondary market; and
- That the system does not need more than two guarantors in the secondary market.
Brown asserted that any GSE reforms adopted should account for those concerns for the benefit of small lenders and consumers.