WASHINGTON — Just as the Trump administration appears focused on releasing a framework to overhaul the housing finance system, Senate Banking Committee Chairman Mike Crapo on Friday signaled Congress wants to reassert its role in the reform effort.
The legislative outline released by the Idaho Republican is another stab by lawmakers to reform the government-sponsored enterprises following a string of failed attempts. Crapo’s latest plan also shifts some attention away from whatever administrative overhaul the White House and acting Federal Housing Finance Agency Director Joseph Otting are readying without Congress.
“In our view, a role for Congress is critical to effectuate these important changes,” Michael Bright, the president and CEO of the Structured Finance Industry Group and a former acting president of Ginnie Mae, said in a letter to Crapo supporting his plan.
Otting has reportedly said the administration may unveil a plan in the coming weeks possibly to end the conservatorships of Fannie Mae and Freddie Mac. But Crapo’s plan focuses on more comprehensive structural changes to the housing finance system, which require legislation.
Crapo’s framework suggests turning Fannie and Freddie into private guarantors while allowing for other private guarantors to compete with the mortgage giants, using Ginnie Mae to provide a government backstop.
It was not immediately clear if Crapo’s plan has enough congressional support to be enacted, but it is worth noting that he previously authored the most successful GSE reform bill to date since the 2008 conservatorships. The bill he helped spearhead with then-Chairman Tim Johnson, S.D., in 2014 — when Crapo was the committee’s ranking Republican — passed the Banking Committee but never made it to the Senate floor.
Since then, Ginnie Mae has drawn more attention as part of a potential GSE reform solution. Crapo’s new outline follows a House bill co-introduced by former Financial Services Committee Chairman Jeb Hensarling and a Milken Institute white paper co-authored by Bright that all point to a more expanded role for Ginnie. Just last year, former Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., tried to revive Senate discussions around a plan to expand Ginnie’s role.
Here is a closer look at how Crapo’s plan would revamp the housing finance system and affect the continuing GSE debate.
Analysts said Crapo’s latest effort is a significant step, but whether it can pass Congress is another story.
“We believe this outline is a major step forward. It builds upon the various think tank and other proposals that were published over the prior two years. It also is a relatively simple plan, which lowers transition risk and makes it easier to explain on Capitol Hill,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, in a note. “Yet the odds are stacked against enactment in this Congress. Housing finance reform will require a level of bipartisanship that we believe cannot occur in an election year.”
Crapo’s outline for housing finance reform could point to an upcoming fight between the administration and Congress for the final say on what happens to Fannie Mae and Freddie Mac. In response to the news that the White House would release a reform plan, some lawmakers reacted with confusion, claiming the administration had not consulted with them.
While the administration can take a number of steps to reduce the footprint of Fannie and Freddie, some of the heavy lifts in reform are up to Congress, such as establishing an explicit guarantee or making changes to the GSEs’ charters. Some have pushed for Congress to lead the way on reform.
“An opportunity exists to make meaningful changes that enhance consumer access to credit, add financial stability guardrails, and ensure a more vibrant and liquid secondary market that does not put taxpayers at direct risk of loss,” said Bright.
Still, others argue that Congress hasn’t been able to come up with a solution in 10 years, so the administration should pursue changes on its own instead of waiting for legislation that may never come.
Treasury Secretary Steven Mnuchin said Crapo’s framework was aligned with the department’s goal of ensuring safety and stability of the housing finance system.
“The outline for housing reform legislation released by Chairman Crapo is a productive first step toward that goal, and I applaud him for his efforts,” Mnuchin said.
A system with multiple guarantors
Crapo’s outline would make use of multiple guarantors. They would include Fannie and Freddie, but the two mortgage giants would be privatized and have to compete with other private guarantors. The multifamily arms of both GSEs would be spun off and operate as independent guarantors.
However, insured depository institutions would not be permitted to be guarantors in an aim to limit the role of the largest commercial banks and increase competition.
Eligible securitized mortgages would ultimately be backed by an explicit, paid-for government guarantee. Approved guarantors could buy mortgages from the primary market and guarantee them through a securitization platform operated by Ginnie Mae.
Crapo’s plan would also put a restriction on the percentage of all eligible mortgages that a guarantor could support, though the outline did not include specifics on what the market share cap would be.
Guarantors would be required to maintain a to-be-determined minimum level of capital dependent on requirements enforced by the FHFA.
The FHFA would also be allowed to require guarantors to engage in approved credit risk transfers, and could take these into consideration when setting capital requirements. Fannie and Freddie implemented credit risk transfer programs in 2013, shifting some of their exposure on targeted loan acquisitions to private investors.
The framework would also continue to let borrowers use private mortgage insurance for loan-to-value ratios over 80%.
Ginnie Mae leads the way
Crapo is recommending that the technology and infrastructure that Fannie and Freddie are currently developing as part of the common securitization platform — which is set to debut in June — be sold or transferred to Ginnie Mae, which would operate the platform and provide the explicit government guarantee.
Ginnie Mae would also operate a mortgage insurance fund holding necessary reserves to cover potential losses, but Crapo did not include details on a minimum reserve ratio.
In the event that this mortgage insurance fund were to be depleted and Ginnie were forced to turn to the Treasury Department for funds, guarantors would be charged higher insurance premiums to pay back Treasury and rebuild reserves.
In response to similar GSE reform proposals that center on using Ginnie Mae for an explicit government guarantee, many stakeholders have questioned if Ginnie Mae has the infrastructure and resources to take on such a role.
At a hearing in September after Hensarling announced his proposal, Rep. Carolyn Maloney, D-N.Y., said she was unconvinced that Ginnie Mae has the capacity to handle such a role.
“I am really questioning and rather skeptical that Ginnie Mae is equipped to handle this type of responsibility or that the Ginnie Mae model would work for a deeper, larger mortgage market,” she said.
A new role for FHFA
Under Crapo’s plan, the FHFA would be in charge of chartering, regulating and supervising guarantors, as well as establishing requirements relating to capital standards, leverage, liquidity, resolution plans and stress tests.
The agency would also be required to approve the guarantors’ pricing and credit risk transfer structures.
However, under this framework guarantors would be allowed to fail, and the FHFA would retain resolution authorities to resolve an insolvent guarantor.
Notably, Crapo also recommended that the FHFA replace its single director with a bipartisan board of directors. The agency’s leadership structure has come into question after an appeals court in Texas ruled that the single director structure was unconstitutional.
New structure for affordable housing funds
Crapo’s framework would establish a Market Access Fund to replace the current affordable housing goals and duty-to-serve requirements, and would “provide grants, loans and credit enhancement to address the homeownership and rental housing needs in underserved and low-income communities.”
The Market Access Fund along with the Housing Trust Fund and the Capital Magnet Fund would be collectively funded through a 10-basis-point fee.
Crapo’s inclusion of affordable housing provisions could get Democrats on board with his proposal, but some might still be skeptical that a new grant program could really take the place of current affordable housing benchmarks.
“Failure to put working people first would threaten access to affordable homeownership and rental housing, put the viability of the 30-year mortgage at risk, and hit lower income communities, communities of color and rural Americans particularly hard,” Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee, said in a statement responding to Crapo’s proposal.
The National Community Reinvestment Coalition explicitly blasted the plan, saying the creation of a new funds would abandon the GSEs’ housing goals.
“This is a reckless plan to get rid of affordable housing goals that have made homeownership possible for millions of creditworthy Americans since the goals were mandated in 1992,” Jesse Van Tol, the coalition’s CEO, said in a statement. “In the midst of an affordable housing crisis, with homeownership rates at near record lows, this plan makes no sense.”