The Trump administration released its housing-finance reform plan this past September. Among other things, it aims to return Fannie Mae and Freddie Mac to private hands. It’s a final push that could dramatically change how homeownership is financed.
The plan, technically proposed by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, calls for the federal government to provide an explicit or implicit guarantee for the government-sponsored enterprises (GSEs) after they are privatized, providing a line of credit in times of emergency, in exchange for a periodic fee. The GSEs wouldn’t begin to recapitalize — and potentially generate capital with stock — until late 2020 or early 2021 at the earliest, Federal Housing Finance Agency (FHFA) director Mark Calabria told Bloomberg News.
The Milken Institute, a nonpartisan, nonprofit think tank, has been following the process closely. Eric Kaplan, director of the institute’s housing-finance program, said reform is no longer an academic or speculative exercise. He spoke with Scotsman Guide about what he’ll be looking for with reform efforts in the coming months.
What do you like about this plan?
One of the key and best features of the plans is that there was collaboration and a thought given to the housing-finance landscape. And not just looking at GSE reform, not just looking at private capital, not just looking at HUD and the government entities. It looked across the board at agency, government, nonagency, and primary and secondary markets.
The plans make an effort to try and create a housing-finance reform [template] that, in an ideal world, would include the actions of both [regulators and lawmakers], but a backup plan of administrative action in the event that Congress can’t act. Because after a decade, it really is high time to put in place many of the reforms that are contemplated.
What would you like to have seen in the plan that is missing?
There are some people who think that it was more prescriptive in some places and less prescriptive in others. At first blush, I think it’s leaving to the agencies and even to Congress the specifics of hammering out the plans, which I think that goes to the credit of the plans.
For example, it leaves to FHFA and Treasury to work out the dynamics of recapitalization of the GSEs, rather than trying to prescribe it. I think it strikes the right balance, but again I’m continuing to dig into the details along with the rest of the industry. Originally, I had hoped it would be more prescriptive, but I’m OK with the level of specificity and where they apply that specificity.
Would you have liked to have seen a timeline for this?
I don’t think a specific timeline would have been feasible because there are so many steps. Executing the steps and achieving milestones are subject to so many uncontrollable forces, market forces, operational forces, the length of time it takes to craft and negotiate the more detailed solutions. Those are all time-consuming and you can’t artificially impose deadlines on them.
Heading into an election year, is this something you could see Congress taking on?
I think most people think that it will be very difficult and highly unlikely for Congress to be able to accomplish housing-finance reform legislation before the end of this [presidential-election cycle]. I think that’s the general consensus among stakeholders. There’s just too much to focus on already. And then you layer the elections on top of that, most people are skeptical it can get done.
What should the mortgage industry be watching for as this process plays out?
Some of the key things, obviously, are the specifics of the GSE recapitalization — the evolution of the plan for the release of the GSEs from conservatorship and what that entails. The execution of those plans, the impact of the QM (qualified mortgage) patch expiration and any revisions to the ability-to-repay and qualified mortgage rule at the [Consumer Financial Protection Bureau]. That’ll be very important.
Other factors, such as market and macroeconomic factors, also impact housing finance generally. Housing supply, credit standards, the ability to access sustainable credits. All of that plays into it. There are factors that you can control; there are factors that you can’t control. That’s the thing about housing finance, right? It’s a spiderweb and that’s why it’s such a complex area, because any one sector can have effects throughout many other parts of the landscape.