On February 11, the Obama Administration released its plan for reforming the nation’s mortgage finance system and “winding down” Fannie Mae and Freddie Mac, as well as shrinking the federal government’s overall role in housing finance. To view the Administration’s complete report, click here.
The Administration’s plan has four broad components, including: 1) winding down Fannie Mae and Freddie Mac and helping to bring private capital back to the market; 2) fixing fundamental flaws in the mortgage market; 3) better targeting government support for affordable housing; and 4) implementing long-term reforms.
The first part of the Administration’s plan of winding down Fannie Mae and Freddie Mac involvement and bringing back private capital to the market would include:
- Increasing Fannie Mae and Freddie Mac guarantee fees as if they were held to the same capital standards as private banks or financial institutions.
- Reducing conforming loan limits and allowing existing levels to reset as currently scheduled on October 1, 2011 to the levels established in the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289). To view the current conforming loan limits as well as the HERA-based limits, click here.
- Phasing in 10 percent down payment requirement for any mortgage that Fannie Mae or Freddie Mac guarantee.
- Winding down the investment portfolio of Fannie Mae and Freddie Mac at a rate of no less than 10 percent per year.
- Returning the Federal Housing Administration (FHA) to its “traditional role” and encouraging the private sector to increase market share as Fannie and Freddie contract at the same time put into place a 25 basis point (0.25 percent) increase in the price of FHA’s annual mortgage insurance premium, which will be part of the administration’s FY2012 budget request.
Second, the administration’s plan would focus on “fixing fundamental flaws” in the housing finance market, which include:
- Increased consumer protections through full implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203).
- Increased accountability and transparency in the securitization process. The administration and the Securities and Exchange Commission (SEC) are developing stricter disclosure requirements and to require originators and securitizers to keep greater “skin in the game.” The administration is working on rules to requiring originators and securitizers retain five percent of a security’s credit risk. The administration will also provide an exemption for qualified residential mortgages (see title IX of the Dodd-Frank Act), which are loans that meet certain underwriting standards. The SEC will establish an Office of Credit Ratings to improve ratings disclosure methodologies and deregister ratings agencies that perform poorly. To view SEC actions in the area click here.
- Servicing and foreclosure reforms, including national standards for mortgage servicing; reforming servicing compensation to ensure servicers have proper incentives to invest time necessary to help borrowers avoid foreclosure; and allowing primary mortgage holders to restrict the amount of debt that can be secured by the property.
The Administration’s plan also calls for better targeting support for affordable housing including:
- Reforming FHA to include lowering the maximum loan-to-value ratio for qualifying mortgages.
- Greater support for affordable rental housing to include increased FHA lending within the multifamily housing market.
- Dedicated funding for affordable housing. Specifically, a “budget-neutral” financing mechanism to support homeownership and rental housing objectives that current policies do not adequately address.
The final facet of the administration’s plan is implementation of longer-term reforms. The plan lays out three options, including:
- Option 1: A privatized system of housing finance with the government insurance role limited to FHA, USDA and the Department of Veterans’ Affairs (VA)
- Option 2: similar to option 1, but with an additional guarantee mechanism that would come into play during times of crisis.
- Option 3: A privatized system with FHA, USDA and VA assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.
While it is unclear how Congress will respond to the administration’s plan, Rep. Scott Garrett (R-NJ), the House Financial Services Subcommittee Chairman overseeing Fannie Mae and Freddie Mac, who has called for a complete elimination of the government-sponsored enterprises (GSEs), stated “I’m encouraged to see the administration included a number of reform ideas that track closely with my own.” To view his response, visit click here.
Garrett has indicated he intends to pursue four overarching objectives in developing GSE reform legislation, including: protecting American taxpayers; ending bailouts; returning private capital to the housing market; and decreasing government exposure to housing. He has also called for eliminating GSEs’ mandate to promote affordable housing.
MHI will be conducting further analysis of this plan and Congressional action.
For more information, MHI members can contact Jason Boehlert at email@example.com or (703) 558-0660.