The Trump administration is proposing a sweeping reform of how the federal government supports housing finance by calling for the full privatization of mortgage-backed securities giants Fannie Mae and Freddie Mac and a reduction of some of their guarantees.
The changes — which are included in a 132-page document on government reform issued this week by the Office of Management and Budget and its director Mick Mulvaney — call for an end to the conservatorship of the two government sponsored entities (GSEs), which were taken under full government control during the 2008 financial crisis and bailed out by taxpayers to the tune of $187.5 billion.
In place of this arrangement will come new limited federal guarantees for mortgage-backed securities issued by Fannie and Freddie and any prospective private players that enter the secondary market alongside them, to be overseen by an unspecified “federal entity.”
The White House wants to give other mortgage lenders and banks a chance to enter the secondary market, where Fannie Mae and Freddie Mac currently purchase mortgages directly from lenders, add to these mortgages a guarantee that the GSEs will pay up if homeowners default, repackage the mortgages into mortgage-backed securities and hold them or sell them to investors.
Right now, there are no private competitors for mortgage securitization to speak of, an after-effect of the financial crisis when smaller investors fled from the market. Instead, we have a situation where loans backed by Fannie, Freddie and Ginnie Mae (the Government National Mortgage Association, a fully government-owned enterprise operated out of HUD that guarantees home loans issued by HUD and other government agencies including the Department of Veterans Affairs and Department of Agriculture) together accounted for “about 70 percent of mortgages originated in 2017.”
The report calls on lawmakers to, “level the playing field with the private sector to decrease the Federal subsidies supporting housing.” That new competition would decrease the risk to the taxpayer, according to the report.
“Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities that they issue that is only exposed in limited, exigent circumstances,” the report says. “Such a guarantee would be on-budget and fully paid-for.”
“This would also ensure that the Government’s role is more transparent and accountable to taxpayers, minimize the risk of taxpayer-funded bailouts, and ensure that mortgage credit continues to be available in times of market stress for creditworthy borrowers,” the report adds.
The report also calls for the the responsibility of providing loans to low- and moderate-income families to be transferred entirely over to the Department of Housing and Urban Development (HUD).
Lou Barnes, a Colorado mortgage banker and regular Inman contributor told Inman that the White House’s proposal has no chance of passing.
“It’s perfectly routine political posturing,” he said. “Full privatization is as ridiculous as fully carried by the Treasury — we will some day work out a hybrid entity.”
Barnes said in the run up to the financial crisis, Fannie Mae and Freddie Mac had transformed from their original models acting as guarantors to giant savings and loan operations. By 2008, the two agencies held, via borrowed funds, $1.7 trillion in mortgages and related securities, adding to stockholder profits, but to stockholder risk as well.
“In the panic that summer, they were unable to roll over their debt, which forced the Treasury conservatorship which is still in place,” Barnes said. “Since 2008 the agencies have sold off 80 percent of that portfolio, dramatically reducing risk.”
“Privatization is not a panacea,” he added. “The worst of the credit bubble was private debt, not the mortgage agencies. Taxpayer funds used to stop the 2008 panic were entirely to the benefit of taxpayers and were repaid years ago.”
The two companies, along with the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs, account for $6.6 trillion of the $10.1 trillion total U.S. first mortgages, Barnes explained, citing the Federal Reserve Z.1 accounts. The entire U.S. banking industry net of mortgages has assets of only $6.7 trillion, per the Federal Reserve’s H.8 total bank credit, he added.
A better proposal, according to Barnes, would be to turn Fannie Mae and Freddie Mac back into guarantors, instead of eyeing their full privatization, which would cause mortgage rates to jump immediately by at least 1 percent and curtail availability.
David Stevens, the president and CEO of the Mortgage Bankers Association (MBA) released a statement in favor of the proposal.
“It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on [mortgage-backed securities] only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access,” he said in a statement. “As with any proposal of this size, the devil is in the details.”
A Freddie Mac spokesman told Inman that it is not allowed to take a position on any bills while under government conservatorship, but Freddie Mac CEO Donald Layton appeared on CNBC today and said he believes he will end his tenure still in conservatorship.
Any change would require the authorization of Congress. Senators Bob Corker and Mark Warner introduced a bill earlier this year in an effort to allow more competition into the mortgage-backed securities space in exchange for a fee the companies pay to support affordable housing, but it has not received the support of more progressive Democrats.
In the same document, the White House also proposes moving the Department of Agriculture’s rural housing loan guarantee and rental assistance programs to HUD.
“Moving USDA housing programs to HUD would foster a more integrated approach to homeownership and rental housing programs by consolidating oversight and policy direction under one agency,” the report says. “In the long term, it would improve operational efficiency and service delivery through integration of like programs and the adoption of best practices.”