There is hope of housing finance reform that works for Americans

The Trump administration released its long awaited housing finance reform report and it is a game changer. The report makes clear that it is game over for the status quo of leaving Fannie Mae and Freddie Mac in their conservatorship limbo. Instead, it sets forth concrete steps to recapitalize and release the two entities. This has been a move that investors, particularly vulture investors who bought in after the two companies entered into their conservatorships, have clamored for.

It is not, however, one that is in the best interests of homeowners and taxpayers. The report recognizes that there are better alternatives. Indeed, it explicitly states that the “preference and recommendation is that Congress enact comprehensive housing finance reform legislation.” But the report also states that the conservatorships, which are more than a decade old, have gone on for too long. So the report throws down a gauntlet to Congress that if it does not take action, the administration will begin the formal process of implementing the next best solution.

The Senate Banking Committee held a hearing on housing finance reform this week. Unfortunately, it appears that Republicans and Democrats are staying in their respective corners. Even if there was a bipartisan effort, the odds of any meaningful reform being legislated before the next election is essentially close to zero. That means that we are now on a long runway toward “recap and release” and only a future Congress can change the current planned flight paths of Fannie and Freddie.

Many, including some in the Trump administration, believe that a better system has more competitors for Fannie and Freddie. Such a system would spread all sorts of risks among financial institutions instead of concentrating it in two entities that have had more than their fair share of bailouts and scandals. It would prevent these two companies from returning as 800 pound gorillas in the halls of power as they concentrated so much money and influence in the hands of so few.

The proposal takes pains to say that homeowners will face few changes in a reformed mortgage market. But Democrats worry that the proposal will take homeownership off of the table for some low and middle income American who could otherwise benefit from it. There are also serious questions about whether the proposal can provide meaningful protection from future taxpayer bailouts, notwithstanding its claims to the contrary.

While there are lots of criticisms of the proposal, it is important to note that its reform options are severely limited by statute. Only Congress can create new competitors to Fannie and Freddie. As a result, Federal Housing Finance Agency Director Mark Calabria, has limited options that he can pursue administratively. In many ways, recap and release is the only meaningful option he has, other than maintaining the flawed status quo, and he appears to be using it to focus the mind of Congress.

Lawmakers need to take this proposal much more seriously than the vague one issued by the Obama administration back in 2011. The Trump administration report outlines concrete steps to move forward with recap and release through complete rulemaking procedures to clarify how Fannie and Freddie should operate their businesses once they exit their conservatorships, change the way that the two companies compensate the Treasury Department for the support it provides to them, and reset fees on home mortgages to match up with public policy goals. 

Still, many additional steps will need to be taken to actually release the two companies. This will take many months if not years as the Federal Housing Finance Agency tends to act slowly and deliberately when taking big steps to change the course of the Fannie and Freddie. It is in the interest of no one, particularly those up for reelection, to screw up the operations of two companies that issue securities comprising more than 40 percent of residential mortgage debt. Congress has enough time to act before this next best solution can be fully implemented.

We are in the opening stages of the long endgame for housing finance reform. In many ways this is a relief for housing wonks because Congress has punted for so long on resolving the last major financial reform issue outstanding from the financial crisis. The proposal, however, is not in the best interest of the nation. Congress should now heed the call of the administration and take up housing finance reform to meet the needs of Americans before we glide into a solution that awards vulture investors first, homeowners second, and perhaps taxpayers last of all.

David Reiss is a professor at Brooklyn Law School and is the director of academic programs at the Center for Urban Business Entrepreneurship.