–Limited Federal Guarantee Would Remain, Backing Shareholder Capital
WASHINGTON (MaceNews) – The following is an excerpt of the U.S. Treasury Department Housing Finance Reform Plan unveiled late Thursday, describing those portions of the proposals that can be implemented by the White House without congressional approval:
Administrative Actions
To ensure stability in the housing finance system pending comprehensive housing finance reform legislation, Treasury expects that it will be necessary to maintain limited and tailored Government support for the GSEs by leaving the PSPA commitment in place after the conservatorships. The Federal Government should be compensated for its continued support through the periodic commitment fee, as originally established by the PSPAs. Each GSE should be recapitalized with significant first-loss private capital so that Treasury’s ongoing commitment under each PSPA could be drawn upon only in exigent circumstances.
To facilitate recapitalization of the GSEs, Treasury and FHFA should consider adjusting the variable dividend (also known as the “net worth sweep”) required by the terms of Treasury’s senior preferred shares, as well as the other approaches set forth in this plan. In parallel with recapitalizing the GSEs, FHFA should begin the process of ending the GSEs’ conservatorships. Although applicable law does not prescribe a specific end point for the conservatorships, no conservatorship is meant to be permanent. An eventual end is also necessary to reduce the far-reaching Government influence over the housing finance system inherent in FHFA’s management of the GSEs through the conservatorships.
Even after recapitalization, taxpayers will still bear some risk of a future draw on the PSPA commitment. The PSPAs should be amended to enhance Treasury’s ability to mitigate the risk of a draw on the commitment after the conservatorships. Other PSPA amendments should ensure that each GSE continues to be subject to appropriate mission and safety and soundness regulation after the conservatorship, for example, to require each GSE to maintain a nationwide cash window and provide equitable secondary market access to all lenders. Still other amendments should conserve the remaining PSPA commitment by limiting future GSE activities to those that have a close nexus to the underlying rationale for Government support. The GSEs should also continue to support affordable housing for low-and moderate-income, rural, and other similar borrowers.
As described in the reform plan of HUD, and consistent with the Presidential Memorandum, FHA and the Government National Mortgage Association (“Ginnie Mae”) have primary responsibility for providing housing finance support to low-and moderate-income families that cannot be fulfilled through traditional underwriting. Consistent with its charter, each GSE’s role should be to perform activities relating to mortgages on housing for low-and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities. As set forth in this plan and HUD’s reform plan, FHFA and HUD should develop and implement a specific understanding consistent with these defined roles for the GSEs and FHA so as to avoid duplication of Government support.
Finally, continuation of limited Government support for the secondary market should not be regarded as a federal preference for mortgage lending through the GSEs. To achieve a level playing field between the GSEs and other private sector competition, the regulatory frameworks governing the GSEs and other market participants should be harmonized, and in particular, the QM patch should be replaced with a bright line safe harbor that does not rely on the GSEs’ practices.