Treasury Publishes Housing Finance Reform Plan
Written By: Joel Palmer, Op-Ed Writer
The Treasury Department released its long-awaited plan to reform the housing finance system.
Treasury said its recommended reforms are “designed to protect American taxpayers against future bailouts, preserve the 30-year fixed-rate mortgage, and help hardworking Americans fulfill their goal of buying a home.”
When the 2008 financial crisis hit, the combination of plummeting home prices and rising mortgage defaults put at risk mortgage-backed securities backed by Fannie Mae and Freddie Mac. This required a $188 billion bailout from the federal government, which took over ownership in September of that year.
“After nearly 11 years, ending the conservatorships of Fannie Mae and Freddie Mac is now a top priority for this administration and the FHFA," said Federal Housing Finance Agency Director Mark Calabria.
A key area addressed in the report is the 30-year fixed-rate mortgage. The report says that it’s “possible” for the loan to retain its pricing and availability without government support. This could include the use of jumbo loans, the pursuit of “other mechanisms for separating credit risk and interest rate risk,” or reliance on portfolio lending used in other countries.
“However,” the report continues, “any proposal to fundamentally change the housing finance system should take careful account of the risks posed by the transition, particularly as housing-related activity represents a significant share of United States economic activity. Stability in the housing finance system is crucial, and generally counsels in favor of preserving what works in the current system, including the longstanding support of the 30-year fixed-rate mortgage loan.”
The plan includes nearly 50 recommended legislative and administrative reforms to define a limited role for the federal government in the housing finance system, enhance taxpayer protections against future bailouts, and promote competition in the housing finance system.
Recommendations include:
An explicit, paid-for guarantee by Ginnie Mae of qualifying mortgage-backed securities (MBS) that are collateralized by eligible conventional mortgage loans.
The ability of FHFA to set and adjust fees for government guarantees of qualifying MBS.
A restriction of the permissible activities of guarantors to the business of securitizing government-guaranteed MBS.
A framework to limit the aggregate footprint of multifamily guarantors.
Replacing the GSEs’ statutory affordable housing goals with a more efficient, transparent, and accountable mechanism for delivering tailored support to first-time homebuyers and low- and moderate-income, rural, and other historically underserved borrowers, with a portion of the associated funding potentially transferred to HUD to expand its affordable housing activities.
Repeal of the existing statutory definitions relating to the GSEs’ regulatory capital that restrict FHFA’s discretion in prescribing regulatory capital requirements.
Require guarantors or their holding companies to maintain convertible debt or other similar loss-absorbing instruments sufficient to ensure there is adequate loss-absorbing capacity.
Prohibit guarantors from investing in mortgage-related assets or other investments except to the limited extent necessary to engage in the business of securitizing government-guaranteed MBS.
Restriction on mortgage loans eligible to secure government-guaranteed MBS to those that meet underwriting requirements approved by FHFA.
Amending the Truth in Lending Act to establish a clear bright line safe harbor for compliance with the required ability-to-repay determination.
Chartering new competitors to the GSEs, the re-chartering of the GSEs to match the charter available to potential competitors and the repeal of existing statutory charters.
Reaction to the plan was mixed.
"The reports recognize the need to better coordinate the roles of FHA and the GSEs,” said Robert D. Broeksmit, CMB, president and CEO of the Mortgage Bankers Association. “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.”
A coalition of civil rights organizations released a joint statement expressing several concerns with Treasury’s plan. Among them was the recommendation to charter new guarantors to compete with Fannie and Freddie.
“Adding new private guarantors to the housing finance system and privatizing Fannie and Freddie would not only increase costs, but will incentivize guarantors to chase the most lucrative markets and serve only the most profitable borrowers or regions of the country. Such a scenario would enable taxpayer-backed companies to evade their duty to serve the entire market, including urban and rural areas.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
