For once, all parties are in agreement on an issue: the government-sponsored entities Fannie Mae and Freddie Mac need to be reformed, or at the very least removed from conservatorship. There’s political will – but is there a way?
U.S. Treasury Secretary Steve Mnuchin last week testified before the Senate Committee on Banking, Housing and Urban Affairs, assuring legislators that the Trump administration is committed to doing something about the state of the GSEs. He wasn’t terrible clear on what that something is or will be.
“This has been an unresolved issue for far too long and one we are committed to fixing,” Mnuchin said.
Which is great, as far as it goes, but it doesn’t go very far. Mnuchin did say he supports preservation of the 30-year fixed-rate mortgage, but did not comment on whether the government should back conventional mortgages.
Mnuchin’s support for the 30-year fixed is a welcome sign. The loss of that product offering would have a profound effect on the U.S. housing market at a time when we can ill afford it. While housing preferences may have changed in the decades since the product was introduced, and demographic differences indicate that, particularly in urban areas, a buyer now is highly unlikely to stay in the home long enough to pay off the mortgage, the 30-year fixed is still the backbone of the mortgage industry.
He indicated the administration intends to bring the details of its proposal to Congress in the latter half of the year.
GSE reform is at this time taking a backseat to the administration’s other priorities, including comprehensive tax reform and overhauling Dodd-Frank regulations, both of which require the Treasury’s involvement.
Tax reform may find some friends on both sides of the aisle, but revising or axing Dodd-Frank isn’t likely to go smoothly. The Treasury would be well served to seize the moment for GSE reform while it’s politically expedient to do so. Hopefully six months won’t see too much change in the political environment, although that’s not a bet we’d want to me.
GSE reform was always going to open the proverbial can of worms. The many vested parties will all have proposals, many of which have been in the works for years – indeed the Mortgage Bankers Association recently published a white paper addressing this very topic.
At a bare minimum the GSEs must be removed from conservatorship, but how they will function – and how they will be required to function – after that point deserves careful attention and bipartisan input. The MBA’s proposal the that Fannie and Freddie be held to the same capital reserve standards as banks is a good place to start. If indeed the issue is again addressed later this year, all parties involved in the discussions should give it due consideration.
Mnuchin also said that the administration “will ensure that there is both ample credit for housing and that we do not put taxpayers at risk.” In this divided political landscape, that’s a sentiment we can all get behind.
