The Trump administration has released a plan proposing to wind down government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The proposal was included in a comprehensive plan to reform and reorganize the federal government entitled "Delivering Government Solutions in the 21st Century." In 2017, President Donald J. Trump signed an Executive Order directing the Office of Management and Budget to work on a comprehensive plan to reorganize the Executive Branch. After a year of planning, including getting input from stakeholders, agencies, and the public, the White House has released a proposal intended to make the federal government more responsive and accountable.
According to the Fact Sheet provided, the report outlines the administration’s analysis and recommendations for structural realignment of the Executive Branch. The proposal includes plans to transform the way the federal government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of taxpayer-funded bailouts. Proposed changes include ending the conservatorship of Fannie Mae and Freddie Mac, reducing their role in the housing market, and providing an explicit, limited federal backstop that is on-budget and apart from the Federal support for low- and moderate-income homebuyers.
Other proposed changes affecting the banking and finance sector include the following.
- Consolidate and streamline financial education and literacy programs currently operating across more than 20 federal agencies to ensure effective allocation of Federal financial literacy resources and avoid unneeded overlap and duplication.
- Transition federal agencies’ business processes and recordkeeping to a fully electronic environment, and end the National Archives and Records Administration’s acceptance of paper records by Dec. 31, 2022. This would improve agencies’ efficiency, effectiveness, and responsiveness to citizens by converting paper-based processes to electronic workflows, expanding online services, and enhancing management of Government records, data, and information.
Reaction to proposal. Senate Banking Committee member Bob Corker (R-Tenn), issued a statement on the plan, stating that the proposal "closely resembles the approach we laid out in recent legislative drafts developed on a bipartisan basis in the Senate" and that he is hopeful the reorganization plan help "address the last unfinished business of the financial crisis." Corker added that he agrees that "creating competition is a critical step as we work to shrink Fannie and Freddie and put an end to ‘too big to fail’ mortgage companies."
In response to the proposal to reform GSE principles, the Community Home Lenders Association (CHLA) applauded the administration for calling for the end of the conservatorship of Fannie Mae and Freddie Mac. However, the statement noted that CHLA "continues to have significant concerns about adding GSE guarantors, which could facilitate vertical integration and hurt small lenders and consumers."
According to a statement by Ed DeMarco, president of the Housing Policy Council division of Financial Services Roundtable, the organization is "pleased" with the proposal and is ready to work with the administration "on ending the failed GSE-based system that has resulted in decade-long conservatorships and toward a market-based system that serves homebuyers, fosters competition, and protects taxpayers."
DeMarco stated that the country needs a modernized housing finance system with competitors for Fannie Mae and Freddie Mac, a market based on private capital, and a catastrophic government backstop for the secondary market that provides protection for the taxpayers and the economy. The Housing Policy Council supports action on the issue."
The Mortgage Bankers Association (MBA) commented on the proposal to reform the government's role in housing finance. David H. Stevens, CMB, President and CEO of the MBA, stated that the proposal "includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access."”
FHFA proposes new capital requirements for Fannie Mae, Freddie Mac. In an earlier development, the Federal Housing Financing Authority released a proposed rule on capital requirements for Fannie Mae and Freddie Mac and invited comments on the proposal. The regulatory capital requirements for the Enterprises have been suspended since 2008 and will continue to be suspended, as long as the Enterprises are in conservatorship. The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement for the Enterprises.
By proposing this rule, FHFA is not attempting to take a position on housing finance reform and the proposed rule is not connected to efforts or ideas about recapitalizing the Fannie Mae and Freddie Mac or administratively releasing them from conservatorship. FHFA continues to believe that it is the role of Congress to determine the future of housing finance reform and what role, if any, Fannie Mae and Freddie Mac should play in that reform.
According to the agency’s Fact Sheet: Proposed Rule on Enterprise Capital, after the Enterprises went into conservatorship in 2008, the FHFA identified the need for a new risk management framework for the Enterprises’ business decisions. That framework is the Conservatorship Capital Framework, initially implemented in 2017. The Conservatorship Capital Framework is the foundation for the proposed rule, which will:
- transparently communicate FHFA’s views as a financial regulator about capital adequacy as Congress and the administration work to determine the future of housing finance reform;
- update the existing capital rule by drawing on regulatory developments implemented in response to the financial crisis;
- allow market participants to comment on the proposed capital requirements for the Enterprises and other entities playing the same or similar roles after housing finance reform; and
- help inform FHFA’s views as conservator about refinements that may be appropriate to the framework that will continue to apply as long as the enterprises remain in conservatorship.
The new framework in the proposed rule includes a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going concern buffer components. For single-family and multifamily loans and guarantees, the proposed credit risk capital requirements use look-up tables consisting of base grids and risk multipliers to adjust capital requirements for the risk characteristics of each type of mortgage asset, so that an Enterprise’s required capital will change as the composition of its book of business changes.
The market risk component establishes requirements for the market risk associated with certain assets, ranging from single-family whole loans to commercial mortgage-backed securities. The operational risk component establishes a capital requirement of 8 basis points for all assets and guarantees, and the going-concern buffer component establishes a 75 basis point requirement for most assets and guarantees.
The proposal also includes two alternatives for an updated minimum leverage capital requirement. Under the first approach, the 2.5 percent alternative, the Enterprises would be required to hold capital equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities. Under the second approach, the Enterprises would be required to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets, where trust assets are defined as Fannie Mae mortgage-backed securities or Freddie Mac participation certificates held by third parties and off-balance sheet guarantees related to securitization activities, and nontrust assets are defined as total assets as determined in accordance with GAAP plus off-balance sheet guarantees related to securitization activities minus trust assets.
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