On March 27, 2019, the White House released a memorandum on federal housing finance that instructed the Treasury Secretary to develop (i) a “Treasury Housing Reform Plan” that addresses the roles of the government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac – and (ii) a “HUD Reform Plan” for certain programs of the Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), and Ginnie Mae. Once completed, the Secretary is to submit the plans for approval by the Assistant to the President for Economic Policy. Plans that follow the memorandum could, but not necessarily would, result in significant changes to the federal role in mortgage finance and affordable housing.
The memorandum sweeps broadly across the federal housing finance system and does not include the level of detail in the reforms that Senator Mike Crapo (R-ID), the Chairman of the Senate Banking Committee, outlined in February of this year (the “Crapo Proposals”). The President’s memorandum and the Crapo Proposals generally are not inconsistent, although the plans ultimately resulting from the President’s memorandum could depart in various respects from the Crapo Proposals.
Although many of the goals in the President’s memorandum are general in nature and have been proposed before, including termination of the GSE conservatorships, the objectives identified in the memorandum warrant attention. The Treasury Housing Reform Plan implementing the President’s memorandum is to address the following :
- Preservation of the 30-year fixed-rate mortgage loan;
- Equal access to the federal housing finance system for lenders of all sizes, charter types, and geographic locations;
- Creation of a cash window for loan sales;
- Authority for the Federal Housing Finance Agency to approve guarantors of conventional mortgage loans in the secondary market;
- Possible changes to the GSEs’ policies on loan limits, program and product offerings, credit underwriting parameters, and the use of private capital to transfer credit risk;
- Size and risk profiles for the GSEs’ retained mortgage and investment portfolios;
- Greater definition or clarification of several activities of the GSEs, including their roles in multifamily mortgage finance and affordable housing, and of the mission of the Federal Home Loan Bank system and its role in supporting federal housing finance (the Crapo Proposals would require Fannie and Freddie to sell off their multifamily businesses, but the President’s memorandum does not include this specific requirement); and
- Evaluation of the “QM Patch,” which exempts GSE-backed loans from certain requirements of the qualified mortgage definition under the rules of the Consumer Financial Protection Bureau.
Termination of the conservatorships would require the GSEs to make ongoing payments to Treasury as compensation for explicit and implicit guarantees provided to them. There would also be new restrictions relating to Fannie’s and Freddie’s “core” statutory mission, “appropriate” limits on the size of their investment and retained mortgage portfolios, and “heightened” prudential requirements and increased capital requirements.
The HUD Reform Plan is to address another set of housing finance issues, including:
- The financial viability of the Home Equity Conversion Mortgage program;
- The risks and benefits associated with down-payment and other assistance to first-time homebuyers;
- The role of FHA in multifamily mortgage finance;
- Diversification of FHA lenders through increased participation by registered depository institutions;
- Enhancements to Ginnie Mae participation requirements and standards to ensure Ginnie’s safety and soundness and to protect borrower and investor interests; and
- Reduction of abusive and unsound loan origination or servicing practices for loans in the Ginnie Mae program.
The Crapo Proposals offer more specific reforms than the HUD Reform Plan. Those Proposals would replace existing affordable housing goals and duty-to-serve requirements with a Market Access Fund and would require mortgage guarantors to contribute to the new fund, as well as the current Housing Trust Fund and Capital Magnet Fund, through a ten-basis-point assessment on the total annual loan volume guaranteed. The Crapo Proposals also would cause Ginnie Mae to operate a common securitization platform and a new Mortgage Insurance Fund. The President’s memorandum does not address these issues.