September 6, 2018

Housing Finance Reform Returns on the 10th Anniversary of the GSEs’ Conservatorships

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Ten years ago today, Fannie Mae and Freddie Mac – collectively, the Government Sponsored Enterprises or GSEs – were taken into conservatorship by their regulator, the Federal Housing Finance Agency (FHFA). 

On and off over the past decade, successive Congresses and administrations have tried to implement reforms to the housing finance system and end the GSEs’ state of limbo. On the tenth anniversary of the conservatorships, House Financial Services Chairman Jeb Hensarling (R-Texas) and Rep. John Delaney (D-Maryland) have introduced the latest bipartisan bill to resolve the status of the GSEs and move towards a system intended to reduce systemic and taxpayer risk by mandating private capital serve as a buffer in front of an explicit, paid-for government guarantee of principal and interest to investors in mortgage-backed securities (MBS). 

(Chairman Hensarling has also indicated his intent to reintroduce the PATH Act, which would eliminate the GSEs and shrink the role of the Federal Housing Administration (FHA) so it works only with first-time homebuyers and low-income buyers. Under that legislation, all MBS would be privately issued and trade on a private platform subject to government regulation, with the exception of those loans currently eligible for Ginnie Mae securitization.)

Throughout the process of housing finance reform, Enterprise has laid out principles by which we will evaluate proposals. We believe that any reform effort must seek to:

  • Ensure stable access to affordable single-family and multifamily credit for all eligible borrowers, both across geographies and throughout the business cycle,
  • Promote broad access to sustainable homeownership for all creditworthy families, and
  • Expand support for rental housing that is affordable to low- and moderate-income households.

To achieve those ends, we have offered five specific policy recommendations for achieving those overarching goals:

  1. Establish an explicit, limited and paid-for government guarantee on qualifying single-family and multifamily mortgage-backed securities, with private investors taking a loss before taxpayers.
  2. Preserve the current multifamily businesses at Fannie and Freddie while ensuring that those businesses continue to focus on affordable rental housing.
  3. Establish an annual assessment of at least 10 basis points on all government-insured, mortgage-backed securities to fund affordable housing activities.
  4. Ensure broad access to the mortgage market for all eligible borrowers and support small lenders and small multifamily properties, particularly those in low-income urban and rural areas.
  5. Preserve the dual mission of the FHA – promoting broad access to homeownership for low- and moderate-income families while providing countercyclical support to the market as needed – while taking steps to shore up the agency’s long-term financial health. 

The bipartisan legislation currently being circulated would dramatically expand the role of Ginnie Mae in the secondary market. Currently, Ginnie Mae is authorized by statute to guarantee timely payment of principal and interest to investors in MBS backed by federally insured or guaranteed loans (primarily those insured by the FHA and Veteran’s Administration) and Rural Development loans. The proposed legislation would establish “Ginnie Mae Plus” and authorize it to guarantee MBS issued by private entities, with the critical stipulation that private capital “credit enhance” the loans -- that is, serve as a buffer to absorb losses before Ginnie Mae’s reserves would be touched. 

Under this approach, MBS issuers with access to Ginnie Mae’s platform would be able to package conforming, credit-enhanced loans into guaranteed MBS. Taxpayers would ultimately be protected against losses because of loan-level requirements (5 percent downpayment minimum, maximum 85 percent loan-to-value, and conforming loan limits), the credit enhancer’s capital stack, a rainy-day private capital reserve that eligible credit enhancers would have to pay into, and reinsurance on the private capital reserve.

Unlike the PATH Act, which would eliminate the GSEs, the bipartisan Hensarling-Delaney bill would eliminate the GSEs’ charters and move them through receivership, potentially seeing them emerge as one of (an assumed) many credit enhancers.

While this bill offers a detailed vision for the future state of the secondary mortgage market for single-family loans, the bill provides only scant details on the multifamily market, saying:

The sponsors recognize the importance of multifamily financing in providing housing options and affordable rental properties and seek to preserve what works in the market today. The sponsors believe that the current multifamily business of Fannie and Freddie will continue to function within the new multi-family housing market as entities with an explicit government guaranty of their multifamily securities provided by Ginnie Mae.

This position is one Enterprise has long supported.

The treatment of access and affordability in the future system is more aspirational than operational. It was heartening to see the bill seek to fund activities that support affordability (in this case by levying an annual fee assessed on outstanding mortgage balances) and targeting funding levels that are “substantially more” than what is currently provided to the National Housing Trust Fund and Capital Magnet Fund, but the goal that the funds be “targeted directly to individuals” gives considerable pause considering the financing needed to produce and preserve significant amounts of affordable rental housing. 

The draft language takes a similarly light touch with respect to promoting broad access to the system and ensuring affordability. It speaks to the need for Ginnie Mae and FHFA as regulators to ensure that market participants are “appropriately providing access to mortgage credit,” but it does not establish (or even consider) any minimum performance standards or threshold levels of service to underserved markets and borrowers as a prerequisite for access to the valuable Ginnie Mae platform and federal guarantee. 

As Congress re-engages on the issue of housing finance reform, we look forward to working with both chambers, our partners and other stakeholders to ensure that we create an affordable and sustainable mortgage market that meets the needs of owners and renters.

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