The Trump administration proposed sweeping changes to the U.S. housing finance system on Thursday, including a plan to release from government control the two companies behind about half of the country’s mortgages.
The long-awaited blueprint would scale back the federal government’s dominant role in housing — a move that could rattle the $11 trillion mortgage market heading into an election year, even as concerns rise about a looming recession.
Altogether, the federal government has guaranteed more than two-thirds of new mortgages each year since 2008 and about 95 percent of all mortgage-backed securities issued since then. The bulk of that activity comes from Fannie Mae and Freddie Mac, the government-sponsored enterprises which the Treasury Department seized during the 2008 financial crisis to avert catastrophic losses.
Ending government control of Fannie and Freddie — a goal of lawmakers from both parties almost since they were taken over — is at the center of the proposal. The two companies do not make home loans; rather, they buy mortgages from lenders and repackage them as guaranteed securities to sell to investors. That frees the lenders to make more loans, boosting the market and making borrowing more affordable.
Although Treasury outlined recommendations for legislation to overhaul the way the companies operate, it plans to release the companies with or without Congress, which is unlikely to take up comprehensive housing finance reform anytime soon because the issue is so divisive.
“While Treasury prefers legislation, further reform should not and need not wait on Congress,” a senior Treasury official told reporters Thursday.
That stance will draw protests from lawmakers, including Sens. Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio) and other Democrats, who want to ensure that housing affordability is the top priority in any overhaul.
“President Trump’s housing plan will make mortgages more expensive and harder to get,” Brown, the top-ranking Democrat on the Senate Banking Committee, said in a statement. “I’m urging the President: Make it easier for working people to buy or rent their homes, not harder.”
Treasury said the government would continue its financial backstop for Fannie and Freddie and called on Congress to charter new companies to compete with them. Still, it left many of the details of releasing the companies — such as the capital levels they would need and what would happen to Treasury’s holdings in the companies — to be hashed out in talks with their regulator, the Federal Housing Finance Agency, starting this fall.
Those details, the official said, “are left to the recapitalization plan. As a result, I think it would be a bad assumption by any of the various interested parties to try to assume how they would fare under that recapitalization plan.”
FHFA is expected to release a rule on Fannie and Freddie’s capital requirements this fall, a condition of their release.
Right now, the companies are each allowed a $3 billion capital cushion — the rest of their profits are swept to Treasury each quarter.
That could change as soon as this year: “Treasury and FHFA should consider moving up the capital buffers, so that could be a near-term” action, the Treasury official said.
The blueprint would also limit Fannie and Freddie’s activities to reduce their share of the market, though it does not specify a target market share. The companies would be able to hold fewer mortgages on their books, for instance.
But the Trump administration would preserve a requirement that Fannie and Freddie serve rural markets.
More ambitious reforms require congressional action. Treasury’s legislative proposals include creating an explicit catastrophic government guarantee.
“Although Treasury does not believe a government guarantee is required, Treasury would support legislation that authorizes an explicit, paid-for guarantee backed by the full faith and credit of the federal government,” the plan states.
In the meantime, Treasury’s financial backstop for the GSEs will remain.
“To ensure stability in the housing finance system … Treasury expects that it will be necessary to maintain limited and tailored government support for the GSEs by leaving the [Senior Preferred Stock Purchase Agreements] in place after the conservatorships,” the proposal states.
Fannie and Freddie would compensate the government for that support with a periodic commitment fee, and the stock purchase agreements would be amended “to enhance Treasury’s ability to mitigate the risk of a draw on the commitment.”
The Department of Housing and Urban Development on Thursday also released a housing finance reform proposal addressing the roles of the Federal Housing Administration, which supports low- and moderate-income homebuyers, and Ginnie Mae, the government-run corporation that guarantees payments to investors on loans made through federal programs.
The plan outlines steps to reduce risk in the FHA portfolio and update agency’s technology. HUD also signed off on Treasury’s proposal to have Ginnie provide a guarantee on GSE securities.
Meanwhile, the Treasury plan also contains some recommendations sure to be welcomed by banks. The department called on FHFA to work with bank regulators to address the “potentially unwarranted gap” between tough capital rules for banks that hold and service mortgages, and less stringent rules for Fannie and Freddie.
Treasury also said disclosure requirements mandated by the SEC for privately issued mortgage-backed securities puts private-label securities at a disadvantage compared to Fannie and Freddie, which don’t face the same requirements. The SEC should reconsider how much data they require under that rule, and FHFA should then consider requiring the GSEs to conform to it, Treasury said.
Treasury also suggested that Congress replace the companies’ statutory affordable-housing goals — saying “the goals were a contributing factor to the GSEs’ risk taking and losses in the lead up to the financial crisis” — with a levy to fund affordable housing programs administered by HUD.
Victoria Guida contributed to this report.
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