FHFA Shares GSE Reform Proposals with Banking Committee
Federal Housing Finance Agency (FHFA) Director Mel Watt last week sent Senate Banking Committee leaders an outline of FHFA’s proposal for housing finance reform. This is the first time that FHFA has shared its own comprehensive recommendations for housing finance reform.
Watt has previously declined to publicly share his views on housing finance reform, arguing that his role as FHFA director is solely to carry out whatever legislation is passed by Congress. In a letter sent to Senate Banking Committee Chair Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) that accompanied the outline, Watt explains that he decided to develop reform proposals after several Banking Committee members urged him to play a larger role in the debate. While FHFA has shared certain elements of is proposal to lawmakers previously, this is the first time the agency has shared its recommendations in their entirety.
In the outline, FHFA recommends that Congress include in housing finance reform an explicit federal guarantee for certain mortgage-backed securities (MBS). The agency proposes that Congress spin off Fannie Mae and Freddie Mac into privately-owned utilities that issue government-guaranteed MBSs. A federal regulator (either FHFA or a successor agency) would have the authority to charter other “secondary market entities” (SMEs) to issue government-backed securities, though the proposal warns that chartering too many SMEs could cause the firms to weaken their underwriting standards to compete for business.
All SMEs would have to operate as shareholder-owned utilities that would be prohibited from engaging in any activities unrelated to their mortgage guarantee business. The regulator would set strict capital and liquidity requirements for all SMEs and also limit the SMEs’ rate of return and employee compensation. SMEs would be mandated to transfer a significant portion of the credit risk for the loans they guarantee to private investors, though the regulator could relax such requirements during market downturns.
One of FHFA’s objectives for the housing finance system is to support financing for affordable single-family and multifamily lending. To this end, FHFA proposes that the SMEs have a national mandate to promote access to affordable mortgage credit in all markets, including rural and other underserved markets. The proposal points out that a national presence is likely necessary to establish the diversified pool of mortgages necessary to sell MBSs in the to-be-announced (TBA) market.
FHFA also calls for all SMEs to be subject to certain obligations to support affordable single-family and multifamily housing. The proposal recommends that SMEs’ affordable housing obligations provide a benefit comparable to the obligations currently placed on Fannie Mae and Freddie Mac (the affordable housing goals, Duty-to-Serve requirements, and contributions to the Housing Trust Fund and Capital Magnet Fund).
Members of the Senate Banking Committee are currently working to develop bipartisan housing finance reform legislation. NCSHA will continue to work with Committee members to advocate for a housing finance system that includes a strong commitment to supporting affordable housing and engages state HFAs as preferred affordable housing partners.