What to expect when you're expecting a report on GSE reform
WASHINGTON — Recent expectations have grown that the Trump administration may prepare aggressive action to end the conservatorships of Fannie Mae and Freddie Mac, but some mortgage policy observers are speculating that a much-anticipated Treasury Department report on housing finance reform plans could be short on details.
A March directive by President Trump called on Treasury, as well as the Department of Housing and Urban Development, to report on both administrative and legislative reform options “as soon as practicable.” The findings, which will either be released in one or several reports, are expected to come out starting as early as this month.
“This feels like the most significant movement in GSE or housing finance reform in the last decade,” said Thomas Wade, the director of financial services policy at the American Action Forum. “A lot of what I think this debate has been missing is an articulation as to what the appropriate or desired role of government in housing should be and some degree of urgency from the top.”
Federal Housing Finance Agency Director Mark Calabria has said he is waiting to see those reports before proceeding to make any decisions about how to supervise the government-sponsored enterprises’ exit from conservatorship.
But there is some skepticism about how much the Treasury and HUD findings might change the narrative around charting a future path for the GSEs. A report or series of reports could lay out goals that Calabria and other officials have already outlined without offering clear details about the mechanics to accomplish them.
Several observers stress the limitations on the administration to make lasting reforms without congressional involvement to create more competition in the mortgage market.
“These are very difficult things to do with administrative action — level[ing] the playing field and doing this without really increasing interest rates and facing any political blowback,” said Michael Bright, the CEO of the Structured Finance Association.
The report might merely be a vehicle for the administration to put priorities that officials such as Calabria have already articulated on paper, said Mark Zandi, the chief economist at Moody’s Analytics.
“So far it’s been some speeches, some interviews, some conferences, but nothing comprehensive or consistent,” he said. “I’m not sure we’re going to learn anything new, but I do think we’ll get a more consistent comprehensive sense of what they have in mind.”
Wade agreed that the report will likely not include much beyond “broad mission statements," especially in some areas that administration officials have already highlighted as top agenda items.
“The capital plan and potentially amending the [preferred stock purchase agreements] later this year could potentially be much more important than the results of this report, where I just expect to see fleshing out some of the minor details of the administration’s desired direction without necessarily going into the real crunchy details of something so specific as the [qualified mortgage] patch or the desired amount of capital for the GSEs,” he said.
But if there is any detail provided in the reports, it will likely be about capital and ensuring equal access for all lenders in a future housing finance system, said Ed Wallace, the executive director of the Community Mortgage Lenders of America.
“I don’t think it will go into great detail of the specifics, but it will give you a few specifics from the overall perspective,” he said. “It’s going to look at the generalities, and I think from a 40,000-foot view, but I think in certain instances like retained earnings and equality across the secondary market as far as pricing is concerned, we’re hoping it will be more specific in that.”
Wallace suggested that the report could lay out significant reforms that the FHFA could make administratively to ensure equal access for lenders, such as locking in level pricing or establishing a commitment fee to preserve government backstops.
Any mention of capital retention or capital building in the Treasury and HUD reports will be worth paying attention to, said Wade.
“Dr. Calabria has made it clear that he sees effective capital for the GSEs as being the necessary prerequisite for recap and release or any form of flotation of the GSEs into the market, and so having said that, I think it is absolutely certain that the Treasury and HUD plans will widely have some sort of capital retention plan,” he said.
The FHFA has yet to finalize a proposed capital framework that would be implemented upon the GSEs’ exit from conservatorship. Former FHFA Director Mel Watt proposed the risk-based capital requirements last year, and Calabria has said he is still reviewing the framework.
Calabria has also said that he would begin negotiating changes to the preferred stock purchase agreements governing Treasury's shares in Fannie and Freddie in September or October, if the reports are completed during the summer as expected.
In 2012, the FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.
“Assuming the report is released in the next few weeks, the next step would be for the FHFA to put forward its capital framework for Fannie and Freddie … and then by early next year in 2020 they’ll end the profit sweep and allow the GSEs to start retaining earnings and building capital,” said Zandi.
The priority of capital rebuilding could even supersede the administration’s other priority of limiting the scope of Fannie and Freddie in the market, Wade said.
“I think we’re going to see significantly less in the way of this footprint reduction than many in the industry would like, because I think systemic risk will be sacrificed at the altar of profitability and capital retention,” he said.
The administration will also need to answer the question of what would qualify as capital for the GSEs, said Bright.
“You want to de-risk them, you say that you want them to play a smaller role in the economy, but that you also want them to have more capital and it’s unclear exactly yet what counts as capital,” he said.
The report will also most likely preserve a role for Congress in the reform process, while still outlining what administrative actions don’t require legislation, said Wallace.
“I think Congress will have to play a role for it to be accepted,” he said. “From where I sit, Congress wants to be a part of a solution and I think from what I’ve heard Director Calabria wants Congress to be a part of the solution.”
Bright said the administration would be overshooting if the report minimized a congressional role. There would be a “pretty significant market reaction” if the report were to insist that the administration unilaterally privatize Fannie and Freddie, he said.
“I hope that it’s a thoughtful addition to the discussion that adds an element that says there’s a lot that Congress has to do, but there are some things that make sense to be done administratively and those are as follows and we’ve thought through a few of them and we think we can take some steps,” he said. “That would be a good outcome, if it’s something along those lines, so it’s sort of measured in terms of its goals.”
Ultimately, some sort of compromise is essential for any reform plan to work, said Wallace.
“I think it’s so anticipated people on both sides of the fence are going to have their opinions of it,” he said. “The key will be whether or not the sides can objectively move forward. ... If they don’t try and work together, it’s not going to.”