Treasury Housing Finance Reform
In September of 2019, The US Department of Treasury submitted a document to reform GSE’s. The proposal included both administrative and legislative reforms aimed at ending the conservatorship of both Fannie and Freddie. The Department provided over 50 recommendations outlined below.
Legislative Reforms
  • The existing Government support of each GSE under its Senior Preferred Stock Purchase Agreement (“PSPA”) with Treasury should be replaced with an explicit, paid-for guarantee backed by the full faith and credit of the Federal Government that is limited to the timely payment of principal and interest on qualifying MBS
  • The explicit Government guarantee should be available to the re-chartered GSE and to any other FHFA-approved guarantors of MBS collateralized by eligible conventional mortgage loans or eligible multifamily mortgage loans
  • These guarantors would credit enhance the mortgage collateral securing the Government-guaranteed MBS, such that the Federal Government’s guarantee would stand behind significant first-loss private capital and would be triggered only in exigent circumstances; and
  • The reformed regulatory framework should not create capital arbitrage or other regulatory incentives that bias mortgage lenders toward securitizing their loans through guarantors. In particular, similar credit risks generally should have similar credit risk capital charges across market participants.
Administrative Reforms
    • Treasury expects that it will be necessary to maintain limited and tailored Government support for the GSE by leaving the PSPA commitment in place after the conservatorship;
    • To facilitate a recapitalization of the GSE, Treasury and FHFA should consider adjusting the variable dividend (also known as the “net worth sweep”) required by the terms of Treasury’s senior preferred shares;
    • To facilitate a recapitalization of the GSE, Treasury and FHFA should consider adjusting the variable dividend (also known as the “net worth sweep”) required by the terms of Treasury’s senior preferred shares;
    • In parallel with recapitalizing the GSE, FHFA should begin the process of ending the GSE’ conservatorships; and
    • The continuation of limited Government support for the secondary market should not be regarded as a federal preference for mortgage lending through the GSE.
    Department of Housing and Urban Development Reform Plan
    Working with the Federal Housing Authority(FHA) and the Federal Housing Finance Agency (FHFA), HUD in response to the Presidential Memorandum produced a plan that would roll back the programs risk portfolio while accomplishing a 4 part plan.  This plan includes the main goals of:
    • Refocusing the FHA to its Core Mission;
    • Protecting American Taxpayer;
    • Providing FHA and GNMA the Tools to Appropriately Manage Risk; and
    • Providing Liquidity to the Housing Finance System.
    Think-Tank Policy Positions
    • Mortgage Brokers Association: GSE Reform
    • Bipartisan Policy Center: Building on the Johnson Crapo Consensus
    • Johnson Center-Harvard University: GSE Reform Model
    • Center for Responsible Lending: A Framework for Housing Reform
    • Urban Institute: GSE Reform is Dead-Long Live GSE Reform!
    Senate Banking Housing Finance Reform
    To start the 116th Congress, Senate Banking Chairman Mike Crapo (R-ID) made GSE reform one of his top priorities. In February 2019 he released an
    outline of goals for housing reform
    , the main priorities include:
    • Reduces the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors;
    • Preserves existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital;
    • Establishes several new layers of protection between mortgage credit risk and taxpayers;
    • Ensures a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards; and
    • Promotes broad accessibility to mortgage credit, including in underserved markets.
    This Framework is a compilation of former Senate Banking bills sponsored by Senator Crapo. GSE reform has been a longstanding priority for the Senator. In 2014,
    Crapo introduced bipartisan legislation
    in which Fannie Mae and Freddie Mac would be eliminated and replaced by a new independent agency, the Federal Mortgage Insurance Corporation (FMIC), which would have supervision and examination powers over the loan guarantors and aggregators in the new system. The proposal would set up a securitization platform of FMIC-wrapped mortgage-backed securities (MBS) with an explicit government backstop, but would require private capital to bear a 10% first loss piece.
    FHSA Enterprise Regulatory Framework
    In an initial step from the Trump Administration to roll back Federal ownership of Fannie and Freddie, the FHFA in June 2020, released a proposal that would start the process of rolling back the 2008 emergency actions of development of the conservatorship and in November accepted the new rule. The proposal borrows heavily from bank capital rules established under the Basel III regime.
    The proposal under its risk-based provisions would require Fannie and Freddie to maintain total capital of not less than eight percent of risk-weighted assets, Tier 1 capital of six percent of risk-weighted assets, and common equity Tier 1 capital of not less than 4.5 percent of risk-weighted assets. Core and Tier 1 capital would be required to be no less than 2.5 percent of adjusted total assets.
    The proposal will:
    • Require Fannie and Freddie to retain capital equivalent to 4 percent of their assets under normal economic conditions;
    • The two companies combined would have to hold a little over $240 billion to support their $6.1 trillion in combined assets; and
    • The companies together currently hold about $23.5 billion in the capital
    The proposal would also require the agencies to calculate capital requirements under standard and advanced approaches and hold capital according to whichever calculation has the larger result. The proposal would establish enforcement procedures for FHFA to oversee and police capital levels and sanctions if capital levels fall behind prescribed levels.  In order to avoid restrictions on capital distributions and discretionary bonus payments to employees, the agencies would have to hold a capital conservation buffer in addition to regular capital requirements. The buffer provision could demand even more capital than the minimum requirements. Finally, the proposal would establish that the agencies can retain profits in order to begin to build capital to the levels required under the proposal. Under a “profit sweep” arrangement established under conservatorship, all profits earned by the agencies are effectively required to be paid to the Treasury.
    Mark Calabria,  Director of the Federal Housing Finance Agency
    recently announced results of an interagency
    review of mortgage giants Fannie and Freddie and the potential dangers they pose to the mortgage market.  A major outcome of the study was the unanimous support for "
    capital building
    " a position laid out in the BDA's  2019 GSE White Paper.
    The review gives Treasury and the FHFA “the explicit support of the other financial regulators to both finalize the capital rule this year and advance policies that will lead to capitalization of the GSE's."
    Calabria, who has long pushed for great scrutiny of the mortgage market, applauded the announcement during an open meeting of the council. “
    I commend the council for its historic acknowledgment that [Fannie and Freddie’s] activities could pose risk to financial stability
    Calabria said. “Today’s announcement is an important and necessary step to reform and protect the housing finance system so that they [companies] can continue serving the market during crises.”
    The council — which is led by Treasury Secretary Steven Mnuchin — unanimously endorsed the review’s findings.
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    Current Proposals