Treasury: Comprehensive Housing Finance Reform Must Be Built on Core Principles

Amid many calls from housing industry stakeholders and politicians alike in the last few years to end the FHFA’s conservatorship of Fannie Mae and Freddie Mac, a top Treasury official said on Friday that the Obama Administration believes that any comprehensive housing finance reform that occurs must be built on a set of established core principles.

Speaking at the Consumer Federation of America’s Annual Financial Services Conference in Washington, D.C., on Friday, Antonio Weiss, Counselor to the Treasury Secretary, stated that the housing finance system remains “the great unfinished business” of financial reform. He noted that the Administration stands behind a set of core principles for housing finance reform:

Those core principles include:

• Providing broad access to long-term, fixed rate lending in all communities through all economic cycles.
• Limiting taxpayer exposure to an explicit, appropriately-priced guarantee to ensure against catastrophic risk.
• Maintaining a level playing field for community banks and credit unions, which know how best to serve their customers.

Weiss noted the most significant bipartisan legislative effort at comprehensive finance reform, introduced in 2014 by Senators Tim Johnson (D-South Dakota) and Mike Crapo (R-Idaho), passed out of the Senate Banking Committee but never received a full floor vote. While Weiss said he believed this bill embodied several of the core principles laid out by the Administration, at the same time he noted that many have expressed concerns about the bill.

“Chief among them was a concern that it would not do enough to meet the needs of traditionally underserved markets,” Weiss said. “While the GSEs’ business model is flawed, much of what they do to promote access and affordability is effective. FHFA has reflected a commitment to these important priorities, including their promulgation of duty-to-serve requirements, an essential catalyst to do more to address borrowers with low to moderate income. We believe a new system should build upon the existing policies that are already working.”

Weiss said others believe the bill should have done more to ensure a level playing field between smaller firms and larger financial institutions.

“We recognize that prospects for achieving a bipartisan path forward in the near-term are dim. But we still must lay the groundwork for a future system.”

Antonio Weiss, Counselor to the Treasury Secretary

“Expanding a future housing finance system to include smaller institutions has benefits beyond safeguarding the economy,” Weiss said. “Community banks, credit unions, and local lenders are closer to many borrowers outside the purview of the largest lenders. They are in a unique position to assess and address the credit needs of their customer base. This can lead to more effective risk assessment, and better outcomes for borrowers and investors.”

Weiss reiterated his stance against Treasury allowing for the recapitalization of Fannie Mae and Freddie Mac and releasing them from the FHFA’s conservatorship, stating that “This approach is simply a bad deal for taxpayers and homeowners alike.” Weiss published an editorial in Bloomberg View in October insisting that the so-called “recap and release” of the GSEs would not happen during the final year of the Obama Administration and that it was a bad idea because it would not increase access to the housing market for creditworthy borrowers, taxpayers have not been fully repaid for the $187.5 billion bailout the GSEs received in 2008, and the cost of obtaining a mortgage would go up since it would take decades for the GSEs to build safe and sound levels of capital.

Until housing finance reform that is built on those core principles can occur, the Administration and FHFA have engaged in a series of “administrative actions” to reduce the risk to taxpayers in the housing market, one of which is winding down the legacy investment portfolio of Fannie Mae and Freddie Mac. Weiss also noted the “steady progress” the GSEs have made in implementing risk-sharing transactions that “aim to reduce taxpayer risk and revive the role of private capital in the housing market.”

“We remain committed to working with Congress on housing reform that meets our core principles,” Weiss said. “We recognize that prospects for achieving a bipartisan path forward in the near-term are dim. But we still must lay the groundwork for a future system.”