Urban Institute Paper Looks at Administration’s ‘Perplexing Plans’ for GSE Reform

A new paper published by the Urban Institute and written by Laurie Goodman, Jim Parrott and Mark M. Zandi is titled “The Trump Administration’s Perplexing Plans for Fannie and Freddie”. Its abstract states:

“The Treasury Department offers a plan to reduce the dominance of Fannie and Freddie and release them from conservatorship. The authors explain why the plan is based on a misconception of the source of the GSEs’ dominance and would result in less access to mortgage credit, greater risk to the taxpayer and no end in sight for the system’s reliance on a too-big-to-fail duopoly.”

Start the story here, then read the full piece on the Urban Institute site.

The Trump Administration’s Perplexing Plans for Fannie and Freddie

BY LAURIE GOODMAN, JIM PARROTT AND MARK ZANDI

On September 5, the Trump administration finally released its long-awaited plans to reform the nation’s housing finance system. They came in the form of two proposals: one from the Treasury Department, focused primarily on reforming Fannie Mae and Freddie Mac, the government-sponsored enterprises; and another from the Department of Housing and Urban Development, focused primarily on reforming the Federal Housing Administration and Ginnie Mae. In this paper, we assess the Treasury Department’s proposal.

Treasury lays out a general recommendation for legislative reform but devotes most of its attention to what it would do administratively, whether Congress acts or not. This administrative course is an aggressive one, in which Treasury would work with regulators
to reduce the dominance of Fannie and Freddie and then release them from conservatorship. It is also a perplexing one, as it would decrease access to credit, increase the credit risk exposure of the taxpayer, and create a significant drag on the economy, all while leaving unresolved the central structural problem of the system: its dependence on a too-big-to-fail duopoly. It is also not clear that the plan would work, since its efforts to reduce the dominance of Fannie and Freddie would make it difficult, perhaps impossible,
to attract the investment needed to get Fannie and Freddie out of conservatorship.

Treasury’s approach

The desire to reduce the dominance of the GSEs is of course widely shared, leading to dozens of reform proposals over the years. In most of these, the focus has been on reducing their dominance within the government-supported segment of the market, either
by forcing them to compete with more guarantors or by pushing many of the GSEs’ functions into a utility that expands competition elsewhere in the guarantor channel. The central notion behind these approaches has been that the government’s support of this channel of mortgage lending gives it a material advantage over other channels. To reduce the GSEs’ dominance of the housing finance system as a whole, then, one would have to reduce their dominance of the government-backed channel.

That is not the approach that Treasury takes. It supports a multiguarantor system, at least rhetorically, but its vision of such a system is primarily to have Congress allow the Federal Housing Finance Agency to charter new guarantors. There is little focus on reducing the significant barriers to entry that would prove prohibitive to meaningful entry by new guarantors.

Prior multi-guarantor proposals would have expanded the common securitization platform to reduce the GSEs’ infrastructure advantage or set market caps on the GSEs to give new entrants more room to compete. Treasury proposes to ease new entry by opening up some GSE data to competitors and possibly reducing guarantee fees and other regulatory requirements for new guarantors. Although such steps might open the door to niche entry, they cannot be expected to reduce the dominance of the GSEs in any meaningful way.

Treasury focuses instead on reducing the GSEs’ dominance by exposing them to competition from outside the government-backed channel, from banks and the private-label securities market. Contending that the primary reason Fannie and Freddie dominate these competitors is that they are more lightly regulated, Treasury looks to open them up to meaningful competition by leveling the regulatory playing field.

The most important regulatory difference, in Treasury’s view, is the GSEs’ capital treatment, which allows them to underprice their competition. Treasury thus proposes to require all market participants to hold the same capital against the same risk and thus compete on equal footing. The administration suggests other regulatory differences as well, such as how regulators handle the qualified mortgage rule and issuer disclosure requirements. These differences too should be removed, with all market participants regulated in the same way for the same risks …

Read the rest of the piece on the website for The Urban Institute