The Trump administration Thursday released a long-awaited plan to overhaul the way the U.S. government helps homeowners. Separate guidance from the U.S. Department of Housing and Urban Development and the United States Department of the Treasury include major reforms to the Federal Housing Administration (FHA) and an end of government conservatorship for mortgage-backed securities giants Fannie Mae and Freddie Mac.
Ben Carson | Credit: HUD
“As a direct result of the Trump Administration’s pro-growth policies, unemployment is at 50-year low and American families are earning higher incomes and enjoying more opportunities than seemed possible just a few years ago,” said HUD Secretary Ben Carson said in a statement.
“There is still one piece of unfinished business from the financial crisis: housing finance reform. These changes to our housing finance system will help more American families achieve their dream of owning a home.”
HUD reforms
Among the first reform, in HUD’s 43-page guidance, is a plan for FHA to provide housing finance support to low- and moderate-income families that cannot buy through traditional underwriting. Today, FHA is the largest provider of home loans in the country, according to HUD.
Administrative reforms aimed at refocusing FHA include the implementation of a new homebuyer sustainability scorecard to measure the performance of loans to low- and moderate-income first-time buyers. It will track the percent of borrowers who default, turn to renting, refinance out of an FHA loan and remain in an original FHA-financed home. The scorecard will help future underwriting changes.
HUD also calls on Congress to establish statutory limitations on FHA cash-out refinances, as well as establish FHA, Veterans Affairs and the United States Department of Agriculture as the sole source of low downpayment financing for borrows not served by the conventional market.
The released guidelines also include plans to reform FHA and Ginnie Mae’s risk management and governance, including the elimination of regulatory barriers to building more housing, including manufactured housing. The guidance calls on Congress to enact legislation to restructure FHA as an autonomous government corporation within HUD and for Congress to provide funding to modernize FHA’s IT structure.
“FHA and Ginnie Mae should focus on helping families and individuals in their respective programs become sustainable homeowners while minimizing risk to the taxpayer to the greatest extent possible,” Brian Montgomery, FHA commissioner and assistant secretary of housing, said in a statement.
Ending Fannie and Freddie’s conservatorship
The U.S. Department of the Treasury released its own guidance Thursday and among the biggest reforms, is the recommendation that the Federal Housing Finance Agency (FHA) begin the process of ending the government conservatorship of Fannie Mae and Freddie Mac.
“The Trump Administration is committed to promoting much-needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” U.S. Treasury Secretary Steven Mnuchin said in a statement. “An effective and efficient federal housing finance system will also meaningfully contribute to the continued economic growth under this administration.”
The law doesn’t provide a specific endpoint for the conservatorships, but the guidance notes that the move was not meant to be forever.
“An eventual end is also necessary to reduce the far-reaching government influence over the housing finance system inherent in FHFA’s management of [Fannie Mae and Freddie Mac] through the conservatorships.
Mark Calabria | Credit: U.S. Senate Banking Committee
Mark Calabria, FHFA’s head — and a one-time economist for the National Association of Realtors (NAR) — has long been an advocate for reforming the two government-sponsored entities (GSEs). The plan would allow Calabria to exercise authority as conservator to begin the process without legislations in place.
Fannie and Freddie were put under government conservatorship in 2008 — at the same time FHFA was created — as a result of the 2008 financial crisis. They were bailed out by taxpayers to the tune of $187.5 billion, but have since paid that back and become profitable once again.
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.
The reform also calls for more competition for Fannie Mae and Freddie Mac from the private sector by opening up the charter. 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.
The plan draws some criticism
Critics of the plan include Democratic Senator Sherrod Brown, who was also a vocal critic of the appointment of Calabria.
President Trump’s housing plan will make mortgages more expensive and harder to get. I’m urging the President: Make it easier for working people to buy or rent their homes, not harder. https://t.co/6X6CcEa2PX
— Sherrod Brown (@SenSherrodBrown) September 5, 2019
A host of advocacy groups also announced their opposition to the proposed reforms. The National Urban League, Center for Responsible Lending, Leadership Conference on Civil and Human Rights, NAACP, National Coalition for Asian Pacific American Community Development, National Fair Housing Alliance, UnidosUS (formerly the National Council of La Raza), National Community Reinvestment Coalition, and the NAACP Legal Defense and Education Fund, Inc. released a joint statement:
“The Administration’s proposal will increase the cost of mortgages for all borrowers, especially families of color, low- to moderate-income families, and rural families whose income growth has been surpassed by housing costs for homes as well as rental markets across the country,” the statement reads.
“Changes to the system must build upon the GSEs’ important public mission, including support for the GSEs’ existing duty to serve mandate and the affordable housing goals,” the statement continues. “Furthermore, any plan for reform must recognize that much more needs to be done to bolster affordable housing, including by the GSEs. Fair lending requirements must be strengthened and fully enforced. Any effort to weaken existing requirements under the guise of ‘efficiency’ is a nonstarter.”
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