One Way Or Another, The GSEs Are Targeted For Change
As part of a larger sweeping government reorganization plan, the Administration is seeking to increase private market competition in the mortgage finance system. Meanwhile FHFA wants to establish new capital requirements in the enterprises’ mortgage guarantees and portfolio holdings.
WASHINGTON, DC–Fannie Mae and Freddie Mac have been in the spotlight over the past several days as two separate proposals call for major change for the GSEs.
The most recent was from the Trump Administration last week when the Office of Management and Budget released a sweeping government reorganization plan that included combining the Department of Education and Department of Labor and the privatization of the US Postal Service. A less-noticed part of that plan were measures that would reshape the housing and multifamily finance ecosystem. The second GSE-related proposal, separate and earlier from this plan, has been made by the Federal Housing Finance Administration.
Both have major ramifications for the GSEs but it is the FHFA proposal that is most likely to be put into place, at least in the short term.
“In the absence of legislation, measures accomplished through the FHFA and the Treasury are the only path available to meaningful change for the GSEs, who are in the tenth year of conservatorship,” the CRE Finance Council wrote in an analysis of the proposal.
Overhauling The Federal Role In Housing Finance
The White House’s plan released last week would take Fannie Mae and Freddie Mac out of conservatorship, fully privatize them and have them focus on secondary market liquidity for mortgage loans. It also calls for “providing an explicit, limited Federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers.”
In other words the plan would give guarantors access to an explicit guarantee to the MBS they issue.
It would also create or appoint a new federal entity for regulatory oversight of the fully privatized GSEs, which would have the authority to approve new guarantors.
New Risk-Based Capital Requirements
The FHFA proposal was published in the Federal Register earlier this month and is now open for comments. As CREFC explained, “the proposal outlines separate treatment for single family and multifamily exposures (single family currently accounting for 72% and multifamily for 8% of the total risk-based capital requirements) and applies credit and market risk charges where appropriate to whole loans, guarantees, and securities held in their portfolios.”
CREFC also noted that “the proposal represents one of the more important planks that can be used to implement GSE reform administratively.”
FHFA’s reasoning is that because the GSEs’ assets and operations are exposed to different types of risk they need to have risk-based capital requirements that would provide a “granular and comprehensive approach for assigning capital requirements to individual assets and guarantee categories.”
The proposed risk-based capital requirements cover credit risk, including counterparty risk, market risk and operational risk.
It is too early in the process to forecast how exactly these capital requirements will affect GSE lending but much as the Basel III’s HVCRE requirement did, they will surely introduce some changes.