Latest GSE reform offers blueprint without Congress
WASHINGTON — As the housing market anxiously awaits the Trump administration's plans for the future of Fannie Mae and Freddie Mac, the list of outside proposals for reforming the government-sponsored enterprises keeps growing.
The latest blueprint, released this month, comes from four housing finance experts at the Milken Institute, including former officials in both the Obama and George W. Bush administrations. Their plan, which could be carried out administratively without legislation, is notably more middle-of-the-road than other proposals.
It would not end the GSE conservatorships; the authors say Congress should do that. While their proposal does not eliminate the GSEs, it would shrink their scope. The two mortgage giants would be recapitalized, but would still reimburse the government — through a "commitment fee" — to provide taxpayer protection.
“The action steps outlined in this Milken Institute paper do not lead to the end of the conservatorship absent legislation because we do not see a viable path by which administrative measures can fix critical flaws in the GSE charters — and fixing these flaws should be viewed as a necessity,” the authors of "Blueprint for Administrative Reform of the Housing Finance System" wrote.
The paper was written by Eric Kaplan, director of the Milken Institute's Center for Financial Markets, and three fellows at the think tank: Michael Stegman, a senior housing policy adviser in the Obama administration; Phillip Swagel, who served in the Bush Treasury Department and teaches at the University of Maryland; and Ted Tozer, the former president of Ginnie Mae under President Obama.
The blueprint is part of an already crowded field of GSE reform proposals intended to catch policymakers' attention. In November, Moelis & Co. LLC, which serves as a financial adviser to some Fannie and Freddie shareholders, updated a plan that similarly would not require legislation but would rebuild the GSEs' capital to enable them to leave conservatorship. The White House presented its own proposal in June as part of a larger proposal to restructure the government, but that was short on details.
Meanwhile, the latest plan is also not the first blueprint from the Milken Institute. While at the think tank, former Federal Housing Finance Agency Director Ed DeMarco and Michael Bright — who recently stepped down as acting head of Ginnie Mae — released a plan in 2016 that would expand Ginnie's role as a backer of mortgage-related securities.
The new report’s release comes just after Comptroller of the Currency Joseph Otting took the helm of the FHFA as acting director, and as Mark Calabria — the administration’s nominee as permanent director — awaits Senate confirmation. Both have the potential to make major changes at the agency to constrain Fannie and Freddie, in the absence of any legislative deal to reform the GSEs.
The authors of the Milken blueprint will be “engaging with industry and government stakeholders in coming months to advance the recommendations in the report,” according to a release from the think tank.
The blueprint is being pitched as including proposals either already in the works or that have bipartisan backing, including the FHFA's completing the proposed capital rule for the GSEs, implementing transparency on GSE pricing, completing the work on the uniform mortgage-backed security, providing the Federal Housing Administration with more funding for technology upgrades and strengthening the Federal Housing Finance Oversight Board.
“There are a lot of pieces in the Milken proposal that we think set the stage for legislative action, which we believe is needed,” said Robert Broeksmit, the president and CEO of the Mortgage Bankers Association.
But other ideas raised in the plan could prove more contentious, including the suggestion that Fannie and Freddie be allowed to rebuild capital while in conservatorship. Currently, the GSEs are required to deliver nearly all of their profits to the Treasury Department while being allowed to retain a limited $3 billion capital buffer.
“It can help set Fannie and Freddie up for whatever endgame may come down the pipe, especially if they do it according to a well-crafted capital rule,” Kaplan said.
Under the proposal, the GSEs’ dividend payments to Treasury would be replaced with a periodic commitment fee that would “continue to compensate Treasury for the hundreds of billions of taxpayer dollars that backstop the GSEs’ debt and mortgage-backed securities guarantees.”
“The rebuilding of capital should be conditioned on no release without fixing the charter flaws,” added Kaplan. “That leaves open any number of scenarios with what ultimately happens to the preferred shareholders, whether there’s a resolution through the courts or some sort of settlement that is a product of action under the Preferred Stock Purchase Agreements.”
This recommendation echoes what many have said for some time: that the FHFA should direct Fannie and Freddie to develop capital restoration plans. The agency has the authority to so do under the Housing and Economic Recovery Act of 2008.
“As a practical matter, while you’re figuring this out, it’s a positive thing,” said Scott Olson, the executive director of the Community Home Lenders Association. “The buffer right now is not enough.”
However, the MBA remained strongly opposed to the suggestion that Fannie and Freddie should rebuild capital while in conservatorship, calling the move neither “necessary” nor “a positive development.”
“The end state includes an explicit federal guarantee that is paid for — and that is perhaps what they’re alluding to in terms of paying a commitment fee — but as long as the guarantee remains legally an implicit one, even though they have access to a tremendous line of credit with the Treasury, that’s really not a sustainable, explicit, paid-for guarantee, which is where we believe things need to get,” said Broeksmit.
Both Broeksmit and Olson strongly opposed the paper’s suggestion for how to reduce the government's role in housing. The proposal calls for Fannie, Freddie, the FHA and the Department of Veterans Affairs to restrict cash-out refinancing and second home financing.
“The private sector can provide loan products for these purposes, subject to applicable guardrails and consumer protections,” the Milken proposal says. “There is no need for a government guarantee with the concomitant taxpayer risk for an activity that does not further the societal goal of affordable homeownership.”
This, in part, would help to tailor the footprint of the GSEs, according to the paper.
“We do not share Milken’s apparent view that cash-out refis and second homes can be serviced exclusively outside of the GSEs,” said Broeksmit. “There are things that still need to be done to ensure that private capital would be there through all cycles and in all parts of the country to pick up any slack of any reduction in the GSE footprint, and that remains our view.”
There aren’t enough assurances that the private market is robust enough to handle those kinds of loans, agreed Olson.
“You’ve got to look at what the market needs and make sure that the components of the market are fulfilling that, so I would be wary before you threw that out,” said Olson. “Especially since there’s been a lot of reforms to address the problems in this sort of cash-out mania of a decade ago.”
He added that the proposal could have explored more fully the idea of having multiple guarantors. The MBA has previously supported a future system that would allow for more guarantors to enter the MBS market, and the White House’s plan from June also highlighted the idea.
“They sounded like they talked about more competition but they didn’t really have a robust argument about increasing the number of charters significantly,” Olson said.
But overall, Kaplan said, the bipartisan team of authors worked to moderate their own views in order to come up with a proposal that would appeal to a broad audience and at the same time leave room for Congress to act on its own accord.
“At the end of the day housing in itself doesn’t know from politics and there’s mechanics to it,” he said. “There’s a science to it and so we tried to be very cognizant of that in coming up with our proposals.”