On Thursday, the Executive Office of the President released its Reform Plan and Reorganization Recommendations [1], which included a proposal to "remove the Federal charter from the statute and fully privatize the GSEs."
While the 132-page document proposes changes to many different areas of the federal government, one section, in particular, will be of interest to housing and mortgage professionals, titled "Reform Federal Role in Mortgage Finance."
In outlining the reasons for this proposal, the report lists increasing competition, increasing transparency and accountability, aligning incentives and reducing overlap, and providing more assistance to those in need.
The proposal calls upon policymakers to "pursue an approach that would level the playing field with the private sector to decrease the Federal subsidies supporting housing," and states that competition to the duopolistic role held by the now privately-owned GSEs would be essential reform to decrease moral hazard and risk to taxpayers.
As these systems are currently organized, Fannie Mae and Freddie Mac are private companies that are congressionally chartered, a status that the proposal claims has been viewed as conveying "an implicit Federal backstop," a factor lowering the organizations' cost of capital, as compared to "similarly-sized institutions." This proposal aims to not only reorganize the GSEs, but to affect the operations of other Federal programs as well, such as HUD, FHA, VA, and USDA.
The combination of these entities results in a "complex and overlapping network of cross-subsidization, without clear accountability as to who is paying for, and who is receiving, housing subsidies." The reorganization proposal states that this results in distortions in home pricing that could hinder the goal of homeownership.
In order to combat this, the following actions are submitted:
- Increase competition: By removing the Federal charter from and fully privatizing the GSEs, other private companies would be able to enter and begin competing in this market space. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight, ensuring an equal playing field for all competitors.
- Increase transparency and accountability: This proposal would give guarantors access to "an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances." In order to ensure the continued availability of mortgage financing, regulators would set fees to create an insurance fund, resulting in reduced implicit taxpayer exposure.
- Align incentives and reduce overlap: Secondary market liquidity would become the focus for the GSEs to provide mortgage loans to qualified borrowers, while HUD would assume primary responsibility for affordable housing objectives. Mandates would be enacted to define appropriate lending markets served, in order to avoid cross-subsidization and open the private sector to equal opportunity for all competitors.
- Provide more targeted assistance to those in need. Affordable housing fees transferred to HUD would enable FHA to maintain "responsible and sustainable support for homeownership and wealth-building" while providing more targeted assistance to low- and-moderate-income homebuyers.
All items listed in this proposal are noted as being "on-budget and accountable," as well as apart from the Federal support for low- and-moderate-income homebuyers.
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