In Short

The Situation: Reforming the U.S. housing finance system has been a frequent discussion topic in the years since the 2008 financial crisis.

The Result: In response to a March 2019 presidential memorandum, the Department of the Treasury ("Treasury") and the Department of Housing and Urban Development ("HUD") issued plans consisting of several dozen legislative and administrative recommendations designed to meet the memorandum's goals and objectives, including to facilitate greater competition, increase private sector participation, and propose other modifications to the roles of the Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, the "GSEs"), Federal Housing Administration ("FHA"), and the Government National Mortgage Association ("GNMA") in the housing finance system.

Looking Ahead: Comprehensive legislative reform continues to be the administration's priority, however, it seems that administrative reforms are more likely to be implemented in the near term.

In September 2008, the GSEs were placed into conservatorships by the Federal Housing Finance Agency ("FHFA"). While the subject of housing reform has continued to be a regular topic of discussion in the years since, comprehensive reform has not occurred.

On March 27, 2019, the President directed the U.S. Secretary of the Treasury to develop a plan for legislative and administrative housing reforms to achieve specific goals and objectives, including, inter alia, ending the conservatorships, facilitating greater market competition, and increasing private sector participation in the U.S. mortgage market. The memorandum also directed the U.S. Secretary of Housing and Urban Development to develop a plan for legislative and administrative reforms to address goals and objectives with regard to the FHA and the GNMA.

On September 5, 2019, Treasury and HUD each submitted a housing reform plan to the White House for approval.

Treasury Housing Reform Plan

The Treasury Housing Reform Plan recommends legislative action to reform the housing finance system, including to replace the existing government support of the GSEs with an "explicit, paid-for guarantee backed by the full faith and credit of the federal government that is limited to the timely payment of principal and interest on qualifying mortgage-backed securities" ("MBS"). Notably, the recommended guarantee would be available to both the GSEs and competitor MBS guarantors that would be approved, supervised, and regulated by FHFA.

Treasury also recommends that FHFA and other agencies implement administrative reforms, including to recapitalize the GSEs, end the conservatorships, and mitigate potential risk from GSE draws on government support. Treasury anticipates, pending legislative changes, the need to retain some government support of the GSEs in the form of commitments set forth in existing Preferred Stock Purchase Agreements, and states that the federal government should be compensated for this support. The Treasury Housing Reform Plan notes that Treasury and the FHFA may also adjust the existing net worth sweep to enable recapitalization of the GSEs and implement other modifications to the Preferred Stock Purchase Agreements, including to limit the scope of future GSE activities.

Treasury explains in the Treasury Housing Reform Plan that "[h]armonizing the regulatory frameworks across market participants will be critical to establishing a level playing field that permits the private sector to resume its historical role as the primary source of funding in the housing finance system." Treasury's recommendations to level the playing field to enable the private sector to more effectively compete with the GSEs are, with one exception regarding a recommended modification to the Truth-in-Lending Act, addressed through administrative reforms rather than legislative action. In other words, these reforms are more likely to be implemented in the near term— with many recommended by Treasury to occur as promptly as practicable.

Relevant to private-label securitization, Treasury recommends that the federal financial regulators should review the regulatory capital treatment of private-label securitization exposures and the risk retention rules for such securitizations; the SEC should review, and revise as necessary, Regulation AB II, which addresses disclosure requirements for private-loan securitization issuers; and FHFA should consider whether to then require the GSEs to conform loan-level disclosures to Regulation AB II.

HUD Housing Reform Plan

The HUD Housing Reform Plan addresses a range of issues, primarily focused on the roles of FHA and GNMA in the housing finance system, and includes recommendations intended to provide greater liquidity to the system, mitigate risk to taxpayers, and refocus FHA on its core mission.

Together with the legislative and administrative recommendations set forth in the Treasury Housing Reform Plan, the HUD Housing Reform Plan could, in relevant part, increase private sector participation in the U.S. housing finance system. HUD explains in the HUD Housing Reform Plan that, "[t]hrough a formalized collaborative approach, FHA and the Federal Housing Finance Agency (FHFA) must work together to ensure that government-supported mortgage programs are not competing and do not crowd private capital out of the marketplace, both in their Single Family and Multifamily programs." For example, HUD recommends that HUD (with regard to FHA) and FHFA (with regard to the GSEs) should coordinate regarding "the appropriate roles and overlap between" FHA and the GSEs, with particular attention to mitigating risk that FHA's government-subsidized premiums and GNMA's full faith and credit MBS guaranty "undercut private sector pricing for large segments of mortgage loans that can be well served by private capital."

Moreover, the HUD Housing Reform Plan, referencing the corresponding recommendation in the Treasury Housing Reform Plan, explains that, subject to congressional authorization, GNMA could extend its explicit guaranty to MBS guaranteed by the GSEs and potential competitor guarantors.

As is the case in the Treasury Housing Reform Plan, many of the HUD Housing Reform Plan recommendations that relate to private sector involvement in the housing finance system generally require administrative, rather than legislative, actions.

Implementation of Treasury and HUD's Recommendations

The Treasury Secretary, in written testimony for a September 10, 2019, hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, described each of the recommendations in the Treasury Housing Reform Plan as "incremental, realistic, and balanced," and also emphasized that the "preference is to work with Congress to enact comprehensive housing finance reform legislation." Similarly, the HUD Secretary's written statement for the same hearing stated that "Congress must work with the Administration" to achieve the goals and objectives addressed in the HUD Housing Reform Plan. Administrative reforms, however, seem more likely than comprehensive legislative reform to be implemented in the near term.

The administrative recommendations vary in when they may be implemented, but that process has started—on September 30, 2019, Treasury and FHFA modified the Preferred Stock Purchase Agreements to effectively pause the net worth sweep in order to permit the two GSEs to retain additional earnings, which is one of the options addressed in the Treasury Housing Reform Plan with regard to recapitalizing the GSEs.

Specifically, Treasury and FHFA revised the definition of "Applicable Capital Reserve Amount" in the two agreements to $25 billion (Fannie Mae) and $20 billion (Freddie Mac), respectively, for the dividend periods from July 1, 2019, and later—thereby effectively increasing the net worth amount necessary to require a dividend transfer. Pursuant to the Preferred Stock Purchase Agreements, a dividend equivalent to the Net Worth Amount in excess of the relevant Applicable Capital Reserve Amount is required to be transferred to Treasury, and prior to the September 2019 revisions, the most recent Applicable Capital Reserve Amount was $3 billion.

Two Key Takeaways

  1. The recommendations set forth in the two housing reform plans could increase private sector participation in the housing finance system and facilitate greater competition.
  2. Comprehensive legislative reform seems unlikely to occur in the near term, however, some of the administrative recommendations can be implemented soon.