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August 7, 2013
Administration Proposes Its GSE Reform Plan
On August 6, 2013, in a speech in Phoenix, Arizona, President Barack Obama weighed in with the Administration's vision for the future of U.S. housing finance. The President's speech was accompanied by a 12 page detailed White House fact sheet, A Better Bargain for the Middle Class: Housing. Many regard this as a watershed event, as the Administration has not previously detailed its views on how to move forward from the conservatorship of Fannie Mae and Freddie Mac, now in its fifth year. In February 2011, the Administration outlined three broad policy options for addressing these Government Sponsored Enterprises (GSEs), but did not provide specifics or a preferred approach.
Acknowledging that the Administration's vision shares many similarities with the bipartisan Warner-Corker bill, recently introduced in the Senate (See FirstBrief July 25, 2013), President Obama also advocated terminating the role of Fannie Mae and Freddie Mac and replacing these entities with a more limited federal entity restricted to performing oversight over private sector securitization activities and providing limited federal catastrophic insurance. The President left no doubt that he believes preserving the 30-year mortgage and maintaining and strengthening direct loan or loan guarantee/insurance for certain underserved borrowers and communities through the Federal Housing Agency are inviolate preconditions to moving forward. The President also emphasized that the system must ensure liquidity in both the single-family and multi-family housing sectors throughout the economic cycle.
The President's support for multifamily housing was notable for its specific references to rental housing and his explicit acknowledgement that homeownership does not suit all Americans at all times. The White House fact sheet specifies that the system must support both construction and rehabilitation of multifamily housing, including rental housing for households at or below the median income and households that recently departed the single family sector.
Additionally, the President advocated that Fannie Mae and Freddie Mac undertake several intermediate actions immediately, as Congress continues to debate these proposals. Many of these actions have already been initiated by the Federal Housing Finance Agency (FHFA) and were first outlined in a speech by its Acting Director late last year:
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Continue the aggressive wind-down of Fannie Mae and Freddie Mac's investment portfolios by at least 15 percent per year.
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Accelerate the reduction of the government's direct credit risk exposure both by issuing more securities enabling private investors to take on the risk of first losses and by encouraging the participation of private insurers to cover portfolio first losses. Freddie Mac's recent $500 million offering of "Structured Agency Credit Risk," debt notes (STACRs) is an example of the former.
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Prioritize the development of a common infrastructure/securitization platform currently underway pursuant to on-going FHFA directives.
Reduce loan limits "in a manner consistent with our housing finance reform principles and market developments."
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Reduce the multi-family footprint of Fannie Mae and Freddie Mac "by limiting support of high-end properties, while exploring ways to serve the unmet mortgage needs of smaller multifamily properties and loan sizes."
Separately, on July 31, 2013, just prior to the August adjournment, by a vote of 21-1 the Senate Banking Committee approved S. 1376, the Federal Housing Administration Solvency Act of 2013, a bill co-sponsored by Committee Chair Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID). This bill had been previously circulated as a discussion draft (See FirstBrief, July 25, 2013) and is intended to strengthen FHA underwriting and promote the long-term solvency of FHA by:
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Raising the minimum for the Mutual Mortgage Insurance Fund's capital reserve ratio to 3 percent.
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Requiring minimum annual mortgage insurance premiums, to be reevaluated annually, to ensure that the premiums cover loans' expected risk and maintain the capital reserve ratio.
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Requiring HUD to evaluate and revise underwriting standards, using criteria similar to the CFPB's Qualified Mortgage rule.
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Requiring HUD to consolidate guidelines for lenders and servicers regarding the requirements, policies, processes, and procedures that apply to loans insured by FHA.
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Providing HUD with new enforcement tools to hold lenders accountable for issuing inappropriate or fraudulent mortgages.
Contact
NAREIT is closely following these Washington developments related to federal support for housing finance and will be reporting significant developments, as appropriate. If you have additional questions, please contact Penny Rostow at vrostow@nareit.com or (202) 739-9431.
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