With the 117th Congress now underway, it’s an excellent time to take stock of possible policy shifts resulting from the new balance of power between Capitol Hill and the White House.
One unresolved question is how long Fannie Mae and Freddie Mac will continue to operate under the conservatorship put in place 12 years ago.
The Trump White House was unsuccessful in exiting Fannie and Freddie from conservatorship, but did make changes that enable the GSEs to accumulate more capital while limiting the risks they can take.
- Why it matters: Until September 2019, the GSEs had to send nearly all of their earnings to the U.S. Treasury to compensate the government for the capital it made available to Fannie and Freddie in response to the 2008 financial crisis. Under the amendments to the agreement between the Treasury Department and the FHFA, they can now retain their earnings and strengthen their capital positions.
- Issued in November, FHFA’s final capital rule requires the GSEs to hold a cumulative $283.4 billion in risk-based capital. A majority of that will likely have to be raised by third-party investors, but a significant share will be generated organically from GSE earnings.
The amended contract between Treasury and the GSEs codified some restrictions to operations already ongoing and added some new ones to prevent the GSEs from increasing the credit risk that they hold:
- Volume discounts for large lenders are banned. FHFA Director Mark Calabria already prohibited the practice; the agreement codifies it.
- High-risk loans are limited. For instance, a maximum of 6% of purchase-money loans can have two or more of these characteristics at origination: a combined loan-to-value ratio greater than 90%; a debt-to-income ratio greater than 45% and a credit score less than 680.
- GSE purchases of loans secured by second homes and investment properties are capped.
Leading Republicans on the committees with jurisdiction for the GSEs, Rep. Patrick McHenry, R-NC, and Sen. Pat Toomey, R-PA, lauded the agreement in a January joint statement calling it “a positive step towards the long-overdue exit from conservatorship from Fannie Mae and Freddie Mac.”
On the other hand, criticism from top Democrats was harsh. The new Chairman of the Senate Banking, Housing and Urban Affairs Committee, Sen. Sherrod Brown (D-OH), said: “At the 11th hour, the Trump administration has decided it’s time to jam through changes to the GSEs and leave it to (the Biden Administration) to deal with the consequences.”
The Senate Housing Committee’s New Chairman
“You will always hear me call it, ‘Banking and Housing,’” Brown said of the committee he leads. “Housing was a word left out of this committee’s title for far too many years and it won’t be left out anymore.” (New York Times)
At a January news conference about Congressional priorities, Brown said housing issues were too often overlooked when Republicans ran the Senate Banking, Housing and Urban Affairs Committee. He pledged things will change now that Democrats lead the committee. “Housing determines so much in people’s lives. It determines closeness to a grocery store … the school district your children live in,” he said.
This article was originally published on Arch MI’s Housing Policy Insights blog page, which provides news and commentary on the issues shaping the housing industry’s future. Send your comments and questions to author Kirk Willison.