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Treasury Department Releases Plans for GSE Reform

The U.S. Department of the Treasury released Thursday its plan to reform the housing finance system. 

According to the department, the Treasury Housing Reform Plan consists of a series of recommended legislative administrative reforms aimed to “protect American taxpayers against future bailouts,” preserve the 30-year-fixed-rate mortgage, and help guide Americans toward the path to homeownership. 

“The Trump Administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said U.S. Treasury Secretary Steven T. Mnuchin in a release by the department. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”   

Fannie Mae and Freddie Mac suffered significant losses due to their structural flaws and lack of sufficient oversight during the financial crisis of 2008. The GSEs received more than $190 billion from the Treasury Department. 

In response to today's announcement, Fannie Mae issued the following statement: "We are reviewing today’s announcement. We appreciate the Administration putting forward a housing finance reform plan. As always, we are committed to being as helpful as possible to policymakers as they consider the future of the GSEs and housing finance. We remain focused on providing market liquidity, serving our customers, and addressing America’s housing needs.”

President Donald Trump issued a Presidential Memorandum on March 27, 2019, directing the Secretary of the Treasury to develop a plan to address the “last unfinished business of the financial crisis.” 

“As a direct result of the Trump Administration’s pro-growth policies, unemployment is at 50-year low and American families are earning higher incomes and enjoying more opportunities than seemed possible just a few years ago,” said Secretary of Housing and Urban Development Ben Carson in a release. “There is still one piece of unfinished business from the financial crisis: housing finance reform. These changes to our housing finance system will help more American families achieve their dream of owning a home.”

The release states that the Treasury Housing Reform Plan includes around 50 recommended legislative and administrative reforms, defining a limited role for the Federal Government in the housing finance system. 

Sources confirmed to DS News the announcement of the plans earlier Thursday. Sources noted that they expected the announcement to be light on detail, but consistent with the Trump administration’s previously discussed plans for the GSEs. 

Also, one source said it is doubtful that this plan would actually end conservatorship by the end of Trump’s presidency. 

The 44-page document released by the Department of the Treasury Thursday was developed in conjunction with the Federal Housing Finance Agency, the Department of Housing and Urban Development, and other government agencies. 

U.S. Senator Mike Crapo (R-Idaho), and Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, said he released a housing finance reform outline aimed to fix the "flawed housing system," by establishing stronger levels of taxpayer protection, preserve the 30-year-fixed-rate mortgage, and increase competition among mortgage guarantors and promoting access to affordable housing.

"The Treasury Department’s report makes many legislative recommendations that are consistent with my outline by attracting private capital back into the market, protecting taxpayers against bailouts and promoting competition," Crapo said. "My preference is to fix the housing finance system through legislation and I look forward to working with all of my colleagues as we move forward.  At the same time, it is important for the Administration to begin moving forward on key administrative reforms outlined in the Treasury Department and HUD reports.  Fannie Mae and Freddie Mac contributed to the housing bubble and subsequent crash and are too big to fail.  Eleven years after being bailed out and put into conservatorship, it is time to make the hard decisions and strengthen our housing finance system.”

Mark Calabria, FHFA Director, said he applauds the Treasury's effort for comprehensive finance reform. He added these plans are an important step toward meaningful, lasting housing finance reform.

"After nearly 11 years, ending the conservatorships of Fannie Mae and Freddie Mac is now a top priority for this Administration and the FHFA," Calabria said. "I look forward to working with the Administration and Congress to chart a path forward that achieves the following objectives: Creating a competitive mortgage market with a limited government role; ensuring taxpayers never again have to rescue Fannie Mae and Freddie Mac; and paving the way for sustainable and affordable housing for homeowners across America.”

The plan states that the housing finance system is in “serious need of reform.”

“The GSEs remain in conservatorship more than 10 years after the financial crisis, and they continue to be the dominant participants in the housing finance system,” the Treasury Department’s plan states. “Although they remain critical to the functioning of that system, they are not yet subject to capital and other regulatory requirements tailored to the risks they pose to financial stability.  This lack of reform has left taxpayers exposed to future bailouts.”

Among the legislative reforms listed, the plan states the existing government support of each GSE under its Senior Preferred Stock Purchase Agreement with the Treasury should be replaced with an “explicit, paid-for guarantee” backed by the Federal Government limited to the timely payment of principal and interest on qualifying MBS. It also states that the guarantors should be supervised and regulated by the FHFA. 

The plan also states the Treasury expects that it will “necessary” to maintain limited and tailored government support for the GSEs by leaving the PSPA commitment in place after the conservatorship. 

“The Federal Government should be compensated for its continued support through the periodic commitment fee, as originally established by the PSPAs,” the plan says. 

Plans have been in the works for months, as Reuters reported earlier this year that a The Trump administration’s plan for Fannie Mae and Freddie Mac would likely be released in September. The U.S. Treasury put plans for the GSEs on hold as it dealt with other issues.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.

About Author: Mike Albanese

Mike Albanese is a reporter for DS News and MReport. He is a University of Alabama graduate with a degree in journalism and a minor in communications. He has worked for publications—both print and online—covering numerous beats. A Connecticut native, Albanese currently resides in Lewisville.

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