This post is the sixth in our Housing America Series, aimed at elevating the need for housing policy reforms—from housing finance to affordability—as we move through a pivotal federal election and transition.
While the election has surely changed the dynamics of housing finance reform, it is too early in the transition to know in exactly what ways. But that shouldn’t stop us from engaging in the popular Washington parlor game known as “informed speculation.”
What We Know
First, let’s review what we know about President-elect Trump’s campaign and transition team on a few key issues:
Recap and Release: Many of the president-elect’s advisors are strong opponents of the Treasury Department’s net worth-sweep, and include a plaintiff in ongoing litigation about the legality of the third amendment to the Preferred Stock Purchase Agreements. One might surmise that this should increase the new administration’s support for enabling the government-sponsored enterprises (GSEs) to rebuild capital as a possible prelude to their eventual re-privatization. While eliminating the sweep could be done without an act of Congress, it would require approval by the new Treasury secretary and the current director of Federal Housing Finance Agency (FHFA), Mel Watt, whose term has two more years to run. Director Watt has suggested he wants to replenish the GSEs’ diminishing capital buffers, but there is no indication he supports recap and release as a reform strategy. Further muddying the waters is that we are only half-way through a congressionally-imposed two-year cooling off period that would make it very hard to execute recap and release.
Conforming Loan Limits: We can expect that the new team would also support shrinking the GSEs’ footprint by reducing conforming loan limits at least back to pre-recession levels. This would breathe much-needed life into sputtering efforts to rebuild a private, non-government-guaranteed mortgage securitization channel. While FHFA can do this with the stroke of a pen, Director Watt is on record that doing so would reduce access to credit, which means the GSEs’ oversized market presence is not likely to change under his watch.
We can expect that the Trump administration will support shrinking the GSEs’ footprint by reducing conforming loan limits at least back to pre-recession levels.
Comprehensive Legislative Reform: The full dimensions of the election’s implications for legislative reform will become clearer as the new administration and Congress get organized and staffed. However, Senator Mike Crapo’s (R-ID) likely ascension to the chairmanship of the Senate Banking Committee increases the prospects that the Johnson-Crapo reform bill will serve as a starting point for the next round of congressional debate about the GSEs’ future. At the same time, however, it is important to recall that the bipartisan majority that supported moving Johnson-Crapo out of the Senate Banking Committee consisted of six Democrats and seven Republicans, with all nine dissenters hailing from both parties’ respective wings. The makeup and membership of the committee is changing. It is yet unclear whether the voices of progressive Democrats will be less influential or the influence of more conservative Republicans is likely to grow.
To be sure, assuming that Johnson-Crapo will be the Senate Banking Committee’s starting point presupposes continued bipartisan support for some key elements marking the contours of a future housing finance system. The Bipartisan Policy Center previously reviewed these elements, including an explicit government guarantee, a ten-basis point affordability and access fee, and more, extensively in a recent post.
Only time will tell whether the Trump administration will side with the more conservative congressional voices in the Republican caucus calling for the elimination of all forms of federal mortgage backstops, outside of a pared down role for the Federal Housing Administration. Yet notwithstanding any post-election reconsideration of the key elements of bipartisan consensus in Johnson-Crapo, there remain a host of other issues that could derail another run at comprehensive GSE reform, including: capital requirements, the appropriate contours of the mortgage “credit box,” and the effects of reform on the average cost of mortgage credit. But none are more fraught with fault lines than those having to do with how the new secondary market regime addresses access and affordability.
At its core, the legislative battle over access and affordability is about three big questions:
- What is the extent to which the reformed system will feature loan-level risk-based pricing? Said another way, will the cost of a mortgage be closely related to the likelihood of default, so that borrowers with blemished or poor credit will pay more for their loan than borrowers with a clean credit record?
- Will the provision of affordable rental homes and mortgages to low- and moderate-income families and underserved communities continue to be achieved through the existing affordable housing goals and “duty to serve” regimes, or by other means more acceptable to conservatives?
- How best should policymakers address the needs of American families whom the private market cannot serve?
In considering legislative dynamics in the next Congress, many progressives will likely find the status quo preferable to a reformed regime. This is because the GSEs in conservatorship feature less than full risk-based pricing, mandatory affordable housing goals, and a statutory duty to serve underserved markets, none of which were part of the Johnson-Crapo consensus. Unfortunately, we are likely to see another legislative stalemate that keeps taxpayers on the hook for future GSE bailouts the next time the economy sours, unless the Johnson-Crapo centrist majority can be expanded through creative efforts to address access and affordability needs. A good starting point for this effort is to lock in the substantial affordable housing resources previously agreed to in Johnson-Crapo.
Some Republicans who signed on to Johnson-Crapo would have preferred no government backstop in the reformed system, but compromised because the new regime would put the government in a far more risk-remote place than under the current system. While these same Republicans opposed efforts to chip away at risk-based pricing and to impose, what they considered, rigidly-defined affordable housing goals, they did vote for an annual ten-basis point fee on the outstanding balance of guaranteed securities to support broad market access, affordability, and other public policy goals.
When fully phased in, this fee would raise more than ten times the resources for affordable housing than under the current GSE affordability fee (the 4.2 bps fee authorized in the Housing and Economic Recovery Act of 2008 on each dollar of new GSE business). It would provide valuable resources for the production and preservation of affordable rental housing, homebuyer education and counseling, down payment assistance programs, and—importantly—credit repair, which can significantly lower mortgage costs (to the tune of thousands of dollars a year) and help families at the fringe of the market qualify for appropriately-priced, affordable mortgage credit.1 Building on this key provision of Johnson-Crapo will be critical to achieving a successful legislative outcome.
1 To illustrate the importance of helping families repair their credit in a risk-based pricing system, on a home with a $200,000 loan with 3 percent down, a borrower can save $700 in first year costs by improving her credit score from 620 to 640, while moving from 620 to 680 would save her a whopping $2,500 a year. Based on author’s calculations. Data on LLPAs from Fannie Mae. Data on mortgage insurance premiums from Genworth Mortgage Insurance.
KEYWORDS: GSES, MORTGAGE, FEDERAL HOUSING FINANCE AGENCY, FEDERAL HOUSING ADMINISTRATION, FANNIE MAE, FREDDIE MAC, TIM JOHNSON, MIKE CRAPO, SENATE BANKING COMMITTEE, DEPARTMENT OF TREASURY, MEL WATT, JOHNSON-CRAPO BILL, 114TH CONGRESS, HOUSING AMERICA SERIES, THE NEXT AGENDA SERIES