Housing finance reform: What’s in the details?

NLBMDA - crane ruleSince the financial crisis a decade ago, one of the topics regularly on the minds of lawmakers is reforming the national Government Sponsored Enterprises (GSEs). On September 5, the U.S. Department of Treasury, in con-junction with the U.S. Department of Housing and Urban Development, released a plan to reform the housing finance system. The proposal stems from a March 27, 2019 memorandum from President Trump which directed the Secretary of the Treasury and HUD to develop a plan to prevent another financial crisis.

In the Treasury reform plan, the Administration calls on Congress to create an explicit government guarantee for Freddie Mac and Fannie Mae’s mortgage-backed securities (MBS) after they exit conservatorship. Treasury says this explicit Government guarantee should be available to the re-chartered GSEs and to any other Federal Housing Finance Agency (FHFA) approved guarantors of MBS collateralized by eligible conventional mortgage loans or eligible multifamily mortgage loans (each GSE and competitor, a “guarantor”). Guarantors would be charged a fee in exchange for the federal guarantee. Treasury recommends that FHFA have additional discretion to set the capital requirements of these guarantors, including the GSEs, in co-ordination with the Financial Stability Oversight Council (FSOC). Treasury also calls on Congress to replace the GSEs’ existing statutory affordable-housing goals with “a more efficient, transparent, and accountable mechanism for delivering tailored support.”

In parallel with recapitalizing the GSEs, Treasury says the FHFA should begin the process of ending the GSEs’ conservatorships. Treasury recommends the preferred stock purchase agreement (PSPA), which governs the support Treasury provides to the GSEs, be amended to enhance Treasury’s ability to mitigate the risk of a draw on the commitment after the conservatorships. Other PSPA amendments should ensure that each GSE continues to be subject to appropriate mission and safety and soundness regulation after the conservatorship, for example, to require each GSE to maintain a nationwide cash window and provide equitable secondary market access to all lenders. Treasury says other amendments should conserve the remaining PSPA commitment by limiting future GSE activities to those that have a close nexus to the underlying rationale for government support. Treasury also recommends the GSEs continue to support affordable housing for low- and moderate-income, rural, and other similar borrowers.

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With respect to HUD reforms, the Administration calls on Congress to enact legislation to restructure the Federal Housing Administration (FHA) as an autonomous government corporation within HUD. It recommends Congress pass funding for a strategic modernization plan to holistically overhaul and integrate FHA’s Multifamily IT systems. It also recommends that Congress establish statutory limitations on FHA cash-out refinances, or at least ensure alignment (e.g., maximum allowed loan-to-value ratio levels) with such refinance transaction in the conventional market.

On the administrative side, HUD recommends the FHA maintain an appropriate level of capital reserves and work to ensure that borrowers are creditworthy. It calls on the FHA to improve its risk management capabilities and transform its data analytics and modernize its 40-year old technology. It also recommends that Ginnie Mae work toward eliminating loan churning, a process by which mortgage holders ex-pensively refinance their mortgages.

In testimony before the Senate Banking Committee, Treasury Secretary Steve Mnuchin stated that the way for-ward is based on four essential elements that have broad bipartisan support. It must maintain access to the 30-year fixed rate mortgage; ensure enough private capital is in place to protect taxpayers; seek to provide the stability and liquidity to withstand future financial crises; and improve transparency and standardization that ensures that community banks and credit unions will have equal access to the benefits of the secondary mortgage market. House Financial Services Committee Chair Maxine Waters (D-CA) and Senate Banking Committee Chairman Mike Crapo (R-ID) have both embraced these principles.

The next steps would be for Congress to take up the legislative elements, while the Administration looks at rule-makings on the regulatory side of things. It’s likely that several aspects will be debated, so the committee consideration of this proposal will be interesting to watch. NLBMDA will re-main engaged on the issue representing the LBM industry and educate Congress and regulators as needed.

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