But the proposal could accelerate the administration’s attempts to privatize the mortgage giants, Fannie Mae and Freddie Mac, which continue to play an outsize role in the housing market. Together, the two entities collectively backstop a little less than half of the nation’s $11 trillion mortgage market.
Fannie and Freddie do not make home loans. They buy mortgages from banks that originate them, then securitize them and sell those mortgage-backed securities to investors. That process is meant to reduce mortgage rates by spreading the risk of default and help underserved Americans buy homes.
Even before the crisis, the firms were controversial: They were publicly-traded companies viewed as having the implicit backing of the federal government. Critics said that allowed investors to profit from them while putting taxpayers on the hook for any trouble. Those fears came true in 2008.
When the national housing market began to crash in 2007, and mortgage defaults surged, losses piled up on Fannie and Freddie’s balance sheets. In 2008, the federal government placed the entities into a “conservatorship” — a sort of bankruptcy status run by the government, and pumped nearly $200 billion into them to help keep them solvent.
As the housing market began to recover, President Barack Obama proposed a plan to release the companies from conservatorship but failed to execute it. Members of Congress have also tried, and so far failed, to end government control of the entities.
The latest plan — released by the Treasury and Department of Housing and Urban Development — was ordered up by President Trump in the spring. It includes recommendations meant to limit the federal government’s role in the mortgage market and inject more private competition, which they say will bring down mortgage rates. Officials say it would promote affordable housing and protect taxpayers from bailing out Fannie and Freddie in the event of another housing crash.
But releasing Fannie Mae and Freddie Mac from their federal embrace has proved politically difficult, because the entities effectively subsidize the 30-year fixed-rate mortgages that are most popular among American home buyers. Affordable housing advocates have warned that returning the firms to the private market could threaten those mortgages or make them more expensive and more difficult to obtain for low-income home buyers.
“The administration says it is trying to save taxpayers from the risk of another future catastrophic meltdown, but it is essentially turning the system over to Wall Street,” said Nikitra Bailey, executive vice president of the Center for Responsible Lending.
In a nod to those concerns, administration officials insisted in a briefing on Thursday with reporters that their plans would create more competition in housing finance and would reduce costs for borrowers, not raise them.
While officials said the 30-year mortgage would be protected, the report suggested that such long-term mortgages could remain widely available without government support, or that “the United States could perhaps follow the lead of other countries” and shift toward other types of mortgages, like ones with variable rates.
The report went on to say that “stability in the housing finance system is crucial, and generally counsels in favor of preserving what works in the current system, including the longstanding support of the 30-year fixed-rate mortgage loan.”
To help preserve those traditional loans, the administration said it would support an effort by Congress to provide an explicit, but limited, federal guarantee for mortgage-backed securities, which underpin banks’ lending to home buyers.
Critics say such a move would allow another 2008-like situation to emerge with investors taking risks in the mortgage market and reaping rewards, but leaving taxpayers on the hook in the event of another housing crash.
“The bad part is the plan’s support for an explicit guarantee, which has the danger of expanding housing subsidies even further,” said John Berlau, a senior fellow at the Competitive Enterprise Institute. “I think that would ultimately expand government’s role in housing.”
How the plan’s goals would be met remain vague — for example, the proposal offered options for Fannie Mae and Freddie Mac to raise the capital they would need to go private, such as engaging in a stock offering, but it did not specify which options the administration prefers. Many are recommendations for congressional action that are unlikely to be enacted anytime soon.
Several are likely to draw condemnation from housing advocacy groups. Those include overhauling federal affordable housing requirements and setting restrictions that could discourage the companies from investing as heavily in mortgages for apartment buildings in areas like New York that have adopted rent-control laws. The administration says such laws impede housing development and the report calls upon regulators to revisit Fannie’s and Freddie’s standards for buying multifamily housing loans in rent-controlled areas, asserting that “scarce government subsidies should not be used to offset the adverse effects of these laws.”
Privatization could also bring a windfall for hedge funds and other investors that bought Fannie Mae and Freddie Mac stock after the crisis for pennies, then pushed the administration to hasten the process.
Some recommendations require congressional action, which could disappoint investors who had hoped the Trump administration would move quickly to bolster the companies’ financial cushion, then sell the government’s stakes in them. Treasury Secretary Steven Mnuchin, who has long advocated removing Fannie Mae and Freddie Mac from government control, has also said that he believes that they should be restructured in the context of broader housing finance legislation.
The proposal kicks other key decisions to the Federal Housing Finance Agency, an independent regulator led by a longtime champion of free-market competition in home lending, Mark A. Calabria.
Mr. Calabria has said repeatedly that he has the authority to start the process of returning Fannie Mae and Freddie Mac to private hands without Congress. In a recent interview, he said he expected to take steps this fall to allow the firms to begin building cash reserves by Jan. 1.]
Currently, the entities are required to send all profits to the Treasury Department, above a certain capital limit. Mr. Calabria said he expected that practice to end shortly, though the report did not explicitly call for that. He also said the process of returning Fannie Mae and Freddie Mac to private hands, including raising money from a possible stock offering, could take years.
“There’s a lot of things you need to exit,” he said. “You can’t just do those things over a weekend.”
Any proposal by the Trump administration to make major changes to housing finance laws will probably be met with deep skepticism from groups that have been critical of its effort to scale back government regulations meant to reduce racial, ethnic and income segregation in federally subsidized housing and development projects.
Ms. Bailey of the Center for Responsible Lending said that she feared the Trump administration’s plan would drive up the cost of mortgages for all borrowers. She said this would be particularly painful for rural residents, low- and moderate-income families and communities of color that are already struggling to find affordable housing.
Ms. Bailey said that higher mortgage costs could disrupt the housing market and the broader economy and that the administration should not forget the lessons of the financial crisis.
Congressional Democrats showed little appetite for the proposals. “President Trump’s housing plan will make mortgages more expensive and harder to get,” said Senator Sherrod Brown of Ohio, the top Democrat on the banking committee. “I’m urging the president: Make it easier for working people to buy or rent their homes, not harder.”