September 6, 2019

Treasury and HUD’s Housing Finance Reform Plans Contain Few Surprises (or Critical Details)

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  • Administration proposals largely stick to anticipated trajectory of “recap and release” for the GSEs, deferring major reforms to Congress
  • Treasury’s plan calls for eliminating the GSEs’ affordable housing goals via legislation and replacing them with a fee to notionally support affordability that could be easily repurposed during the Congressional budgeting process. This is our greatest concern
  • Enterprise will continue to closely monitor administrative and legislative housing finance reform efforts

Roughly 11 years after Fannie Mae and Freddie Mac were put into conservatorship, and almost six months after the president issued his Memorandum on Housing Finance Reform, the United States Treasury and the Department of Housing and Urban Development have put out their respective housing reform plans. Many will recall Fannie and Freddie, collectively referred to as Government Sponsored Enterprises (GSEs), were put into conservatorship during the height of the foreclosure crisis. 

Much of the initial attention on GSE reform is being paid to Treasury’s plan for “recap and release,” given great interest in the future of the GSEs, but both plans have potentially negative implications for housing affordability and access to mortgage credit for homeowners, rental housing, and support to historically underserved people and places. The devil will be in the details, yet many of those details remain to be determined.

Despite the combined plans running nearly 100 pages with 116 enumerated recommendations between them (split between legislative and administrative activities), there is relatively little in the proposals that is new. The plans largely offer a tacit acceptance of previous legislative efforts in the Senate combined with telegraphing administrative changes to proceed down the anticipated path of recap and release of the GSEs, rather than a more comprehensive approach of “recap, reform, and release” that would actively pair regulatory and statutory changes. 

To sum their position up, Treasury writes, “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 that is limited to the timely payment of principal and interest on qualifying mortgage-backed securities (“MBS”)… Pending legislation, Treasury will continue to support FHFA’s administrative actions to enhance the regulation of the GSEs, promote private sector competition, and satisfy the preconditions set forth in this plan for ending the GSEs’ conservatorships.”

They will move towards recap and release by restructuring the Preferred Stock Purchase Agreements (PSPAs) and implementing capital requirements for the GSEs. This involves bringing in additional private capital in a first loss position, both at the individual mortgage and MBS levels in the single family market. Structurally, their preferred legislative outcome would be to authorize Ginnie Mae to provide the full faith and credit guarantee of timely payment of principal and interest on qualified MBS issued by the GSEs and any new similarly chartered guarantors who might enter the market in the future. The paid-for guarantee would be available for both single- and multifamily MBS. Until such time as the requisite statutory changes are made to allow Ginnie Mae to wrap the GSE securities, however, the Treasury plan calls for imposing a “periodic commitment fee” on the GSEs through a revised PSPA, presumably as a proxy for a paid-for guarantee (but with no details on what that fee might be or how the fee would be determined). They also identify administrative changes that they believe would “level the playing field” to revive the private-label securities (PLS) market. 

Readers should note that merely wishing for additional competitors to the GSEs or even creating them by fiat is no guarantee that sufficient private capital is interested in coming in to compete directly with the GSEs or that multiple guarantors would persist over time; there are now many more opportunities to fine-tune risk and reward in the capital stack—mortgage insurance, CRTs, GSE MBS, Ginnies, etc.—that direct competition as a guarantor isn’t likely to be attractive. Similarly, the PLS market has remained largely dormant because the legal issues around “tranche warfare” haven’t been adequately resolved, and effectively raising prices on GSE mortgages to “crowd in” private capital doesn’t address that shortcoming while making mortgages unnecessarily more expensive to obtain, to the detriment of American families.

For the GSEs’ multifamily businesses, Treasury calls for a revised framework for the GSEs’ footprints that is closely linked to affordability (administratively imposed under a revised PSPA until legislation can be enacted). To that end, with concerns about the rapid rise in GSE market share crowding out private capital, the proposal would call upon the GSEs to focus on mortgages supporting units serving low- and moderate-income (LMI) and other historically underserved renters. They would revisit exclusions to the current caps on the GSEs’ multifamily businesses, including the exemptions for energy efficient mortgages. Notably, they suggest considering measuring GSE mortgages based on long-term affordability and continued occupancy by LMI renters rather than just evaluating affordability at origination. This change could be administratively burdensome to implement and perceived as invasive, as it would require private sector landlords to collect tenant income data on an ongoing basis; collecting that data from tenants could also lead landlords to raise rents on tenants they think could afford to pay more.

The section “Additional Support for Affordable Housing” leads with a discussion of regulatory barriers to affordability, calling out jurisdictions with rent control, specifically noting recent legislation in New York and Oregon. They suggest revisiting the GSEs MF underwriting criteria in those jurisdictions. Note that they don’t make a similar push to restrict lending in suburban jurisdictions with large minimum lot sizes or other exclusionary zoning regulations that are “undue impediments to housing development.” This section reflects FHFA Director Calabria’s long-held beliefs about the degree to which regulatory barriers are the primary reason for affordability challenges and will likely receive substantial push back, if for no other reason than property valuations already reflect the effects of legal regimes and market conditions. Of greater concern, but no real surprise, is a call for eliminating the GSEs’ affordable housing goals and replacing them with a “more efficient, transparent, and accountable mechanism” in the form of a fee that would (notionally) be appropriated for HUD’s affordable housing programs. We strongly oppose this.

In her statement on the administration’s plan, House Financial Services Committee Chairwoman Waters wrote of this provision, “One of the most egregious parts of this proposal—and one which could cause significant damage for low-income persons and communities of color—is the replacement of the affordable housing goals with a fee that would fail to adequately support affordable housing. This would hamper the ability of millions of underserved families to achieve the dream of homeownership.” 

The proposals direct FHFA and HUD to develop and implement an understanding of how to minimize overlap between the GSE and FHA footprints (in the single family market), basically trying to move high LTV and high DTI borrowers to FHA and shift refinancing and repeat FHA borrowers to the GSEs. The question of relative footprints has been a perpetual issue, but a resolution that addresses liquidity and affordability needs throughout the business cycle remains elusive while the cost of being wrong is likely very high. Nonetheless, the timing of the effort is designated as coming before the PSPA amendment, which is presumed to be imminent. This timing may reflect it being a priority for Treasury Secretary Mnuchin. 

In addition to the Treasury proposal that is getting most of the attention, HUD also released its housing finance reform proposal today. It mirrors the Treasury proposal with respect to discussions of relative footprints and the expanded role Ginnie Mae could play in guaranteeing GSE MBS. Beyond that, there are recommendations for reducing risk in the FHA book (primarily on the single family side), including  through tiered pricing on its insurance, focusing primarily on loans receiving down payment assistance; raising capital in the insurance fund above the statutory 2 percent requirement; changes to the reverse mortgage program which has continued to be a drain on FHA’s reserves; and a proposal to convert FHA to a government owned corporation under HUD’s auspices, which would give it greater capacity to hire and retain staff and additional administrative flexibility. 

The HUD proposal calls out three specific administrative reforms for FHA Multifamily: coordination with FHFA to minimize overlap with the GSEs; allow development on sites with noise levels above 75 decibels, making it easier to finance transit-adjacent properties and those in walkable, urban settings; and raising the threshold for environmental reviews from 200 to 300 units to expedite development timelines. Legislatively, the proposal calls for eliminating the RAD cap (we have a forthcoming paper that makes the same recommendation). It also asks Congress to appropriate additional funds to overhaul FHA Multifamily’s aging IT systems, which have long been viewed as an impediment to timely and effective risk management. 

The section in the HUD proposal on eliminating regulatory barriers to affordable housing focuses almost exclusively on increasing adoption of manufactured housing. It does not address multifamily affordability needs or other mechanisms for expanding the supply of affordable housing, such as financing retrofits of single family homes to incorporate accessory dwelling units.

In short, the proposals do relatively little to change the trajectory housing finance reform is taking while offering a reference point for forthcoming administrative actions. Details on critical elements within the administrative sphere—like specific changes to the PSPA or how the affordable housing goals will be measured—remain to be determined. As such, we will continue to closely monitor administrative and legislative activities and their impacts on housing affordability, access to credit, and systemic stability and work towards ensuring the country’s housing finance system supports the full range of housing needs.

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