Biden Likely to Reverse Trump Housing Finance Reform Plans

When voters cast their ballots for president on Nov. 3, their choices changed the trajectory of Washington, D.C.’s plans to reform the housing finance system and how credit unions will originate future mortgage loans.

President-elect Joe Biden is expected to take a very different approach to housing finance than the Trump Administration.

GSE Background

Fannie Mae and Freddie Mac (government-sponsored enterprises, or GSEs) help credit unions obtain liquidity – beyond their balance sheets – to provide new mortgages for their members. They operated as private companies for most of their histories under a congressional charter to provide a liquid secondary mortgage market. In 2008, the government seized control of Fannie and Freddie when they failed amid the housing crisis and Great Recession.

Since the bailout, their regulator, the Federal Housing Finance Agency, has increased oversight and reigned in their riskiest activities. Industry groups have been urging Congress to enact GSE reform legislation, but given the political dynamics and complexities involved, this appears unlikely to happen.

Through Treasury and FHFA authority, the Trump Administration was working to recapitalize the GSEs with a goal of releasing them from conservatorship – a move that arguably would not have required congressional action. The recent economic turmoil caused by the pandemic, however, complicated those plans.

How Conservatorship ­Benefits Borrowers

Many credit unions rely upon the ability to sell mortgages they originate in the secondary market to the GSEs, which guarantee the timely payment of interest and principal to investors in mortgage-backed securities (MBS) comprised of loans they purchase from lenders. Still other credit unions partner with a mortgage CUSO that facilitates the sales to Fannie and Freddie, allowing them to reduce operating expenses and the administrative burden on their staffs.

Regardless of how a loan is sold to a GSE, its guarantee supports the deep, liquid global market for U.S. MBS, and benefits homeowners through lower mortgage rates and the availability of popular mortgage products like the 30-year fixed rate loan. The MBS market has been very liquid throughout conservatorship, to the advantage of credit union borrowers.

In addition, the GSEs’ time in conservatorship has helped level the playing field for smaller lenders with larger competitors. Prior to conservatorship, the GSEs offered more favorable pricing to large-volume lenders, a considerable disadvantage for smaller lenders. The FHFA eliminated these volume discounts. The GSEs also vastly improved the cash-window loan sale platform, through which smaller lenders sell individual loans or pools of loans.

Biden Plans

Biden is expected to reverse the Trump Administration’s plans to end the conservatorship of the GSEs. As a result, Fannie and Freddie, which back about half of all residential mortgages in the country, will likely remain under government control for the foreseeable future.

Regardless, the COVID-19 pandemic and the challenges faced by homeowners – about three million of whom are in forbearance – likely will take priority over any longer-term housing finance reform goals. The GSEs have demonstrated their importance during the economic crisis as a reliable source of liquidity, helping to facilitate low mortgage rates and spurring record levels of new home purchases and mortgage refinances.

The new administration is likely to use the GSEs to help achieve Biden’s public pledges to give American home buyers greater access to affordable housing. Many Democrats, along with some economists, believe releasing the GSEs from conservatorship would result in higher mortgage rates for millions of American home buyers.

Maintaining government oversight and lower capital requirements, in contrast, would better facilitate a mandate requiring the enterprises to focus on lowering costs to borrowers and purchase more loans, instead of generating higher profits to meet capital requirements – which would be prudent if preparing for a release from conservatorship. For all these reasons, observers anticipate Biden will maintain government control of the GSEs.

Supreme Court Case Impact

Biden’s plans for reforming Fannie and Freddie could prove more difficult if he cannot fire “at will” Mark Calabria, the Trump-appointed director of the FHFA and the regulator that oversees the GSEs.

Oral arguments are set to begin Dec. 9 in a Supreme Court case (Collins v. Mnuchin) that will determine if the structure of the FHFA is unconstitutional. If the high court rules that it is, Biden will be free to replace Calabria who otherwise would serve in his current position until 2024 unless he was terminated “for cause” (only after proving malfeasance in office).

Another case earlier this year in which the Supreme Court ruled that the CFPB’s structure was unconstitutional because there was not a proper check-and-balance on the director’s power hints at a similar outcome in the FHFA case. Like the CFPB, the FHFA has a single director who – as of now – is appointed to a five-year term and cannot be easily removed by a subsequent president.

New Leadership and ­Housing Goals

Even if Biden is unable to replace Calabria with a director who favors government control of the GSEs, he can still wield substantial influence by nominating a new, pro-conservatorship Treasury Secretary and ousting the sitting secretary, Trump appointee Steven Mnuchin. Whoever he installs will likely adopt an approach similar to the Obama Administration in viewing Fannie and Freddie as ways to bolster a broader affordable housing framework.

Since the FHFA works closely with the Treasury, which collects profits from the GSEs as repayment for bailout funds, new leadership there would make it difficult for Calabria to release Fannie and Freddie from their government conservatorship.

In a Biden Administration, the GSEs are likely to remain valuable tools that help combat social injustice and economic inequality by continuing to provide more broadly available, lower-interest mortgages as the new president works to achieve his goal of boosting home ownership.

Greg Spurgeon is SVP, Secondary Marketing for TruHome Solutions based in Lenexa, Kansas.