White House Presents Housing Finance Reform

The U.S. Congress is now in receipt of a long-awaited report by the Obama administration on a plan for reforming the country's housing finance market. The crux of the plan is to wind down government-sponsored enterprises Fannie Mae and Freddie Mac and decrease the federal government's role in housing finance.

February 11, 2011
By Barbra Murray, Contributing Editor

The U.S. Congress is now in receipt of a long-awaited report by the Obama administration on a plan for reforming the country’s housing finance market. The crux of the plan is to wind down government-sponsored enterprises Fannie Mae and Freddie Mac and decrease the federal government’s role in housing finance.

“This is a plan for fundamental reform–to wind down the GSEs, strengthen consumer protection, and preserve access to affordable housing for people who need it,” said U.S. Department of the Treasury Secretary Tim Geithner.

As noted in the proposal, the diminishing of Fannie Mae and Freddie Mac’s presence will assist in the return of private capital to the market. The administration’s recommendation to achieve the goal includes phasing in increased pricing at the GSEs in order to end their unfair capital advantages and make them more competitive with the private sector, which, the administration notes “should be the primary source of mortgage credit and bear the burden for losses.” The plan also calls for reducing conforming loan limits; phasing in a 10 percent down payment requirement; winding down the GSE’s investment portfolios; and returning the Federal Housing Administration to its traditional role through changes that will position the private sector to capture more market share.

“We recognize the critically important role that Fannie Mae and Freddie Mac and their employees have played in the housing finance market while they have operated in conservatorship,” as noted in the report. “We look forward to continuing to work with them to find ways to develop and implement the longer term reform solutions that the administration determines together with Congress.”

Part two of the plan entails the mending of fundamental flaws in the mortgage market, a process that has already kicked off with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The administration suggests increasing accountability and transparency in the securitization process and stabilizing the mortgage market to provide a stronger foundation for banks to endure economic downturns and other negative market changes. Additionally, the proposal outlines the need for creating a new task force on coordinating–and potentially consolidating–housing finance programs of the Department of Housing and Urban Development, the Department of Agriculture, and the Department of Veterans Affairs.

The third section of the White House’s plan for housing finance reform involves the refocusing of the government’s support for affordable housing to guarantee that all Americans have access to appropriately priced housing. But, as clarified in the report, the suggestion is not an endorsement for ensuring that all Americans own homes, but rather “that there are a range of affordable options for the millions of Americans who rent, whether they do so by choice or financial necessity.”

It is a sentiment that his shared by many in the housing industry. “From a policy perspective, if the housing crisis has taught us anything it is that some people should always be renters, so there will always be a constituency for rental housing,” Paula Poskon, senior research analyst for real estate, with Robert W. Baird & Co., told CPE.

The administration’s roadmap to achieving the affordable housing availability objective encompasses the reformation and bolstering of the FHA and the establishment of a dedicated, budget neutral, financing mechanism to support homeownership and rental housing objectives. Rebalancing the housing policy to reinforce support for affordable rental housing is also one of the steps outlined for increasing government backing of affordable housing. Among the potential measures is the expansion of “the FHA’s capacity to support lending to the multifamily market, with reforms like risk sharing with private lenders and dedicated programs for hard to reach property segments like smaller properties.”

Part four of the administration’s proposal includes putting in place longer-term reform options for the government’s function in the housing market in the future. Whatever the final decision, Poskon believes that any restructured form of GSEs will likely continue to involve the multifamily housing market. “Multi-family financing is one of the few profitable lines of the GSE’s business,” she said.

“Deciding the best way forward will require an honest discussion with Congress and other stakeholders about the appropriate role of government over the longer term,” Geithner remarked. “The Obama administration looks forward to working to build consensus, on a bipartisan basis, with a wide range of stakeholders on this issue.”

With the release of the White House’s proposal for housing finance reform will soon come the back-and-forth with Congress, as the proposal is debated and, finally, refined into a plan that will be enacted. But it’s the government; it won’t happen over night. “The broad consensus in the housing industry is that nothing is going to change until after the next election.”