GSE Reform Moves out of the Starting Gate

By Paul Bubny

September has been an eventful month for Fannie Mae and Freddie Mac, collectively known as the GSEs (short for government-sponsored entities). Much of the momentum behind these events came from the executive branch rather than the legislative branch. As the Commercial Real Estate Finance Council (CREFC) notes in a special report, given the divided state of Congress it’s likely that the current administration will continue taking the lead.

On September 5, the Treasury Department issued the long-awaited plan to end conservatorship for the GSEs and increase competition in the housing finance market.

The following day, according to CREFC’s report, “the United States Court of Appeals for the Fifth Circuit announced a decision that provides cover for the Administration to significantly alter (or suspend) the net profit sweep, which could be the first big step taken to rebuild the GSEs’ capital base.”

Following the Court decision, “Senators discussed next steps for GSE reform with the plan’s architects: Treasury Secretary Mnuchin, Federal Housing Finance Administration (FHFA) Director Calabria and Housing and Urban Development (HUD) Secretary Carson.”

Last but certainly not least, FHFA Director Calabria announced an overhaul of the caps for GSE multifamily loan purchases.”

The GSE reform plan outlines four core objectives in conjunction with its recommendation to terminate the conservatorships. As detailed by CREFC, they include the following:

• Recapitalize the GSEs in the near term and set the stage for an orderly transition out of conservatorship to avoid unnecessary market disruptions and minimize systemic risk
• Shrink the overall size of the GSEs, with a heightened emphasis on mission-driven lending
• Require the GSEs to pay for their federal government guarantees
• Promote a more level playing field among the GSEs and the private marketplace

CREFC notes that in order to advance these four core (and inter-related) objectives, the GSE reform plan enumerates 49 separate recommendations that can be addressed variably through:
• Potentially immediate regulatory and other administrative actions
• Legislative proposals (that would require Congressional approval)
• Directives to study other issues to evaluate potential regulatory and legislative initiatives, such as a review of the benefits of Regulation AB II and the viability of requiring loan-level disclosures for GSE-issues

“Based on statements and actions made by Secretary Mnuchin and FHFA Director Calabria over the past week, the Administration has already begun to reform the GSEs on three fronts,” according to the CREFC report. “The ultimate goal of the Administration is to complete the following items by the end of first-quarter 2020:

• Reframing the GSE’s footprint by contemplating revisions to the multifamily caps and exemptions, including potentially minimizing green programs and lending in areas burdened by regulation such as rent control and strict zoning requirements
• Cessation of Treasury’s net sweep, effectively allowing the GSEs to build capital bases that now stand at a fraction of their pre-crisis levels
• A re-proposed or finalized rule framing out regulatory capital requirements similar to those applied to banks

As Connect Media has already reported, Calabria moved quickly on the caps for agency multifamily loan purchases. The FHFA eliminated all exclusions and set the cap at a total of $100 billion apiece for Fannie and Freddie over five quarters, compared with the previous $35 billion over a 12-month period for each GSE.

As to what happens next, CREFC reported, “Secretary Mnuchin has said that it is the Administration’s preference to work with Congress on comprehensive reform legislation. However, he has also signaled that Treasury would likely wait three to six months for Congress to move on legislation. That said, it is not clear how the secretary would proceed in restructuring the entire U.S. housing finance system (i.e., creating new guarantors) in the absence of legislation that would change the GSEs’ charters.”

For comments, questions or concerns, please contact Paul Bubny