On March 27, 2019, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan for comprehensive reform to the housing finance system which “continues to face significant and fundamental challenges” that have persisted since the financial crisis of 2008.
In response, the U.S. Department of Treasury released plans detailing recommendations to reform the housing finance system. The U.S. Department of the Treasury Housing Reform Plan (Treasury Plan) contains 49 recommendations . The majority of the recommendations focus on administrative reforms that would not require Congressional approval. The Treasury Plan also notes that it would prefer Congress to enact comprehensive housing finance reform legislation, and that it 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).”
The most impactful recommendation is to end conservatorship for Fannie Mae and Freddie Mac (the GSEs). Preconditions for ending conservatorship and options for recapitalizing the GSEs are detailed, along with an administrative recommendation that each GSE should be permitted to retain earnings in excess of the $3 billion capital reserves currently permitted.
The Treasury Plan provides that ending the GSEs conservatorship is a critical step to reducing Government influence. By acting as conservator, the Federal Housing Finance Agency (FHFA) has “far-reaching influence over who gets a mortgage loan, the pricing and terms of the loan, how it is originated, how it is serviced, what happens upon a borrower default, and which market participant may participants may participate in the housing finance system.”
The Treasury Plan also supports the Consumer Financial Protection Bureau’s proposal to simplify the qualified mortgage (QM) rule by eliminating the QM patch for GSE-eligible loans as a way to create a more level playing field between the GSEs and private sector competitors. The plan states that the “QM patch gives the GSEs a competitive advantage over portfolio lenders and other market participants to the extent that mortgage lenders face lower risks under the ATR rule for underwriting GSE-eligible loans, particularly if they actually sell those loans to the GSEs.” It is further suggested that the QM patch puts the GSEs in a quasi-regulatory role that would be inappropriate if continued on a permanent basis or after the end of the GSEs’ conservatorships. The QM patch is scheduled to expire on January 10, 2021.
An administrative recommendation is also made regarding rent control, which has been the subject of recent legislation in states with high-cost areas, specifically New York and California. The Treasury Plan indicates that regulatory barriers such as rent control contributes to rising housing costs and interferes with local housing markets as it tends to decrease the supply and quality of available housing.
The plan states “Treasury recommends: FHFA should revisit the GSEs’ underwriting criteria for acquisitions of multifamily loans secured by properties in jurisdictions that adopt rent-control laws or other undue impediments to housing development.” If implemented by FHFA, it would appear GSEs would scrutinize and likely restrict eligibility for loans in rent-controlled areas.
Overall, the Treasury Plan lacks specifics regarding some of the recommendations and does not contain any timeline for implementation. It remains to be seen how long the changes may take and which recommendations will be implemented by Congressional action or administrative steps.
