Trump GSE reform plan -- more guarantors, no affordable housing requirements

June 25, 2018

Tucked inside the 135-page Delivering Government Solutions in the 21st Century:  Reform Plan and Reorganization Recommendations released by the Trump Administration on June 21, 2018 are three pages of recommendations for reforming the mortgage finance system.  The good news is that they support a federal role in supporting US mortgage markets through a full guarantee of qualified mortgage backed securities, access to this guarantee by primary market lenders of all types and sizes, and an explicit fee on outstanding securities to fund badly needed support for low income rental housing.  The bad news is it would set up a system of private guarantors with no apparent obligation to fully serve or support LMI borrowers and communities, leaving this responsibility entirely to the federal government through the mortgage programs at FHA, Rural Housing Services and the VA.

This plan follows the general outlines of successive proposals that have been presented since 2008, including the Bipartisan Policy Center's Housing Commission recommendations, the 2014 Corker-Warner and Johnson-Crapo legislative drafts, the more recent 2018 Corker-Warner efforts and even the Obama Administration in one of its options in its 2011 housing finance reform paper.  

Fannie and Freddie would lose their congressional charters.  The US Government would issue guarantees on securities issued by fully privatized Fannie and Freddie, as well as other guarantors approved by a federal regulator.  Taxpayers and government insurance "...would be protected by virtue of the capital requirements imposed on the guarantors, maintenance of responsible loan underwriting standards, and other protections deemed appropriate..." by their regulator. 

The plan would not require these new private guarantors to shoulder any responsibilities for assuring mortgage access for low and moderate income borrowers and communities.  Instead, the plan would shift that responsibility entirely to FHA, Rural Housing Services (RHS) and the Veterans' Administration (VA).  As stated in the proposal, "the newly fully-privatized GSEs would have mandates focused on defining the appropriate lending markets served in order to level the playing field with the private sector and avoid unnecessary cross-subsidization.  A separate fee on the outstanding volume of the MBS issued by guarantors would be used specifically for affordable housing purposes, and would be transferred through congressional appropriations to, and administered by, HUD." (emphasis added).

There is a long-standing expectation that private entities that enjoy the federal government's support for their businesses have a reciprocal duty to ensure those benefits are shared as widely and equitably as possible.  Thus Fannie and Freddie have housing goals to gauge their success at serving LMI borrowers and communities, a fee to support affordable housing and community development, and a duty to serve specific underserved markets.  Regulated, insured primary market lenders have Community Reinvestment Act (CRA) obligations to ensure they serve the full needs of the communities they are chartered to serve.

This draft appears to break that tradition.  

I have advocated for a more inclusive approach to the federal government's support for homeownership and mortgage finance before.  FHA and its sister federal mortgage actors need to be seen as part of the broad federal solution set, operating together with private capital to assure the broadest possible service. But private entities enjoying the government's support must be held to an expectation they will serve the market as fully as possible, not just to maximize their returns and shift the entire burden of serving low wealth borrowers with less than perfect credit to federal insurance programs.  

There is little chance the Administration's proposal will lead to any legislative action this year.  But its decision to wade into the mortgage reform pool at last is significant, even if buried in their reorganization plan and released with little fanfare.  Its apparent decision to divorce issues of access and affordability from the new guarantors it hopes will compete with newly privatized Fannie and Freddie is disappointing.