Affordable housing cuts, CFPB funding: Takeaways from Trump budget

WASHINGTON — The Trump administration wants to eliminate several affordable housing programs and force some independent agencies to seek congressional funding, yet is also seeking to increase the funding for a division of the Treasury Department tasked with combating financial crimes.

As part of the president's proposed 2021 budget released Monday, the government-sponsored enterprises would suspend their funding of the Housing Trust Fund and the Capital Magnet Fund, and the community development block grant program would be eliminated.

The budget, which is more of a policy document than an accurate picture of funding levels, would also subject the Office of Financial Research, the Financial Stability Oversight Council and the Consumer Financial Protection Bureau to the appropriations process, which the Trump administration has pushed for in previous budget requests.

Funding for community development financial institutions would also be reduced as the administration is increasingly looking for state and local governments to take on more responsibility for housing affordability.

Here are the key financial services takeaways from the budget:

GSE housing trust funds on the chopping block

Freddie Mac Headquarters As Fannie, Freddie Allowed To Boost Capital Buffers By Billions
Signage stands outside the Freddie Mac headquarters in McLean, Virginia, U.S., on Tuesday, Oct. 1, 2019. Freddie and Fannie Mae will be allowed to boost their capital by billions of dollars to protect against potential losses, a key step in the Trump administrations push to free the mortgage giants from U.S. control. Photographer: Andrew Harrer/Bloomberg
Echoing the 2020 budget proposal, the Trump administration again called for eliminating Fannie Mae and Freddie Mac’s contributions to the Housing Trust Fund and the Capital Magnet Fund.

Fannie and Freddie are currently required to set aside an amount equal to 4.2 basis points of each dollar of unpaid principal balance to submit to both funds annually.

But the White House believes that state and local governments “are better positioned” to address housing affordability, the administration said in this year’s budget.

“Housing for low-income families is currently funded by multiple funding sources, including federal, state and local governments, as well as the private and nonprofit sectors,” the budget said. “The result is a fragmented system with varying rules and regulations that create overlap and inefficiencies, as well as challenges to measuring collective performance.”

In its 10-year projection for the federal budget, the administration estimated that the Treasury Department’s preferred stock in the government-sponsored enterprises will stay at $112 billion over the coming decade, despite ongoing efforts at the Federal Housing Finance Agency to revise the preferred stock purchase agreements and free Fannie and Freddie from government conservatorship.

However, “any reform of the housing system likely will impact 2021 Budget projections in ways that cannot be estimated at this time,” the White House said in the budget.

“We believe that Trump's budget team has decided that it will not adjust its budget expectations for Fannie Mae and Freddie Mac until there is an actual change in their status,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, in a note. “As FHFA and Treasury have not unveiled such a change, the budgeting stays the same.”

Subject CFPB, FSOC and OFR to the appropriations process

Consumer Financial Protection Bureau Headquarters Ahead Of House Financial Services Committee Hearing
A man exits the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., U.S., on Tuesday, March 5, 2019. House Financial Services Committee Chair Maxine Waters will hold a hearing this week on the semi-annual review of the CFPB. Photographer: Andrew Harrer/Bloomberg
Similar to previous proposals, the administration’s budget would establish a congressional appropriations process for the Consumer Financial Protection Bureau, Financial Stability Oversight Council and Office of Financial Research.

Currently, the CFPB derives its funding largely from the Federal Reserve. But under the budget proposal, Fed transfers to the CFPB would go down by $110 million starting next year, and congressional appropriations for the agency would begin in 2022.

The funding of the bureau has been a target for Republican lawmakers for years, yet any legislative effort to add the agency to the congressional appropriations process would undoubtedly get blocked by the Democratic-controlled House. Meanwhile, the budget also envisions a reduction of about 200 full-time equivalent positions on the CFPB workforce — a cut of 11.6%.

Meanwhile, the FSOC and OFR now set their own budgets and are able to assess fees on certain financial companies. Under the Trump budget proposal, those assessment fees could be used to offset other spending.

“To improve their effectiveness and ensure greater accountability, the Budget proposes to subject the activities of FSOC and OFR to the appropriations process,” the budget said. “In so doing, currently authorized assessments would, beginning in 2022, be reclassified as discretionary offsetting collections and set at a level determined by the Congress.”

Cuts to affordable housing programs

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A worker constructs framing for affordable housing in the Brooklyn Basin in Oakland, California, U.S., on Tuesday, Nov. 12, 2019. On Nov. 19, California will sell $500 million in debt to fund services for mentally ill homeless people, in an inaugural offering for the state and will be among the largest U.S. muni deals to be classified as social bonds. Photographer: David Paul Morris/Bloomberg
Similar to past spending proposals, the president’s budget recommended eliminating the community development block grant program, which supports affordable housing for low- and moderate-income families.

The 2021 budget referred to the CDBG program as “wasteful” and said state and local governments were better suited to address affordability issues.

“The Budget eliminates CDBG, a program that has expended more than $150 billion since its inception in 1974, but has not demonstrated sufficient impact,” the budget says.

“Studies have shown that the allocation formula, which has not been updated since 1978, is ineffective at targeting funds to the areas of greatest need, and many aspects of the program have become outdated.”

HUD has previously proposed replacing community development block grants with the opportunity zone program, which Congress passed in 2017 as part of the tax reform bill.

The White House also recommended cutting funding for community financial development institutions.

The budget proposed ending funding for the CDFI Fund discretionary grant and direct loan programs, which would save $248 million in spending, the Trump administration said.

“More than two decades ago, the CDFI Fund was created to jumpstart an industry at a time when CDFIs had limited access to private capital,” the budget said. “The CDFI industry now has ready access to the capital needed to extend credit and offer financial services to underserved communities, eliminating the need for federal grants.

Budget increase for Fincen

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Visitors take photographs outside the U.S. Treasury building in Washington, D.C., U.S., on Tuesday, Aug. 13, 2019. The Trump administration announced today it will delay until mid-December the 10% tariff on some Chinese products on many holiday-shopping lists, with the president acknowledging that the levies would have hurt consumers. Photographer: Andrew Harrer/Bloomberg
Amid a sea of proposed budget cuts, the fiscal year 2021 budget requests additional funds for the Treasury Department’s Financial Crimes Enforcement Network, or Fincen. The proposal calls for $127 million, an increase of $1 million from the previous year.

The increase, the White House says, would allow Fincen to better “prevent and address financing of terrorism, money laundering, and other crimes,” as well as “increase its value to law enforcement agencies, and expand its efforts to combat emerging virtual currency and cybercrime threats.”

Fincen has slowly been ramping up its operations in recent months, cracking down on foreign money laundering and taking a closer look at the role of cryptocurrencies in financial crime.

In late 2018, amid an effort by Congress to reform anti-money-laundering laws for the nation’s banks to simplify compliance, Fincen Director Ken Blanco voiced an appeal on behalf of law enforcement for Congress not to narrow the scope of the reporting by banks about suspicious activities.

Funds for FHA tech upgrades

Exteriors Of The U.S. Department Of Housing And Urban Development Headquarters
Signage stands outside the U.S. Department of Housing and Urban Development (HUD) headquarters in Washington, D.C., U.S., on Friday, Aug. 23, 2019. HUD this year accused Facebook Inc. of enabling and encouraging bias based on race and religion by restricting who can see housing-related ads on its platforms and across the internet. Photographer: Andrew Harrer/Bloomberg
The 2021 budget requests $20 million for funding technology improvements at the Federal Housing Administration and modernizing single-family information technology systems. The Department of Housing and Urban Development has long bemoaned FHA’s outdated technological infrastructure and has lobbied Congress for funding to update its systems.

Though Congress has appropriated what FHA officials refer to as a “down payment” on tech upgrades, they acknowledge that much more funding is needed to completely modernize its aging infrastructure.

The administration is also looking to pass legislative proposals that would strengthen FHA’s reverse mortgage program, which has been strained the agency’s Mutual Mortgage Insurance Fund.