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Financial Press


How Biden and Trump differ on housing-finance reform

For more than a decade, housing-finance giants Fannie Mae

 and Freddie Mac

 have remained in conservatorship after being bailed out amid the Great Recession.

Fannie and Freddie’s shareholders have been kept in limbo throughout those years — they’ve watched as the enterprises’ profits were swept to the Treasury Department to repay the federal government, and they’ve gone without a dividend in that time.

Glimmers of hope have emerged for Fannie and Freddie’s investors during the Trump administration. Last April, Vice President Mike Pence’s former chief economist, Mark Calabria, was confirmed as the director of the Federal Housing Finance Agency, the main regulator overseeing Fannie Mae and Freddie Mac. Since assuming that post, Calabria has worked to begin recapitalizing the two enterprises after ending the years of profit sweeps.

Also last year, Fannie and Freddie’s investors notched a court victory when the Fifth Circuit Court of Appeals ruled that the structure of the FHFA was unconstitutional. That case is set to be heard by the U.S. Supreme Court in coming weeks.

But with former Vice President Joe Biden leading in the polls, the presidential election could determine the fate of Fannie Mae and Freddie Mac — and the broader housing-finance ecosystem.

The Supreme Court’s decision will prove crucial

On Dec. 9, the Supreme Court is set to hear oral arguments in Collins V. Mnuchin, a case that will determine whether the structure of the FHFA is constitutional. Fannie and Freddie shareholders brought the lawsuit in question. In 2012, the FHFA began sweeping the profits of the two mortgage giants to the Treasury Department to repay the funds the government used to bail them out.

The case, in many ways, mirrors one the Supreme Court has already decided. Earlier this year, the court ruled that e Consumer Financial Protection Bureau’s structure was unconstitutional. Like the CFPB, the FHFA has a single director, who as of now is appointed by the president for a five-year term, but cannot be removed by a subsequent president.

Most observers expect the Supreme Court to rule similarly in the FHFA case — particularly with conservative judge Amy Coney Barrett expected to be named to the court.

But that outcome could endanger the prospects of Fannie Mae and Freddie Mac being recapitalized and released from their government conservatorship.

Biden is likely to take a different perspective on housing-finance reform

Last year, the FHFA and the Trump administration presented a comprehensive plan for reforming Fannie, Freddie and the broader housing-finance system. Many of the proposals they made required congressional action — but some did not, including allow Fannie and Freddie to begin retaining the profits they earn.

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Allowing Fannie and Freddie to retain their profits and recapitalize is meant to ensure that they have resources to fall back on were they to encounter another financial downturn.

“The Trump administration has clearly indicated its intent to end the conservatorships administratively if they cannot reach a legislative solution,” said Ed DeMarco, president of the Housing Policy Council and the former acting director of the FHFA. “The Biden campaign has not addressed the issue but conventional wisdom is that a Biden administration is unlikely to pursue that route.”

Most observers expect that Biden would move to replace Calabria, especially if granted the ability to fire him by the Supreme Court. Whoever he would install would likely take an approach similar to the Obama administration in holding Fannie and Freddie responsible for advancing certain affordable-housing goals.

“If Biden wins, they’re going to be a tool to help with racial justice and economic inequality once again,” said Brandon Barford, a partner at Beacon Policy Advisors. “So I don’t think there’s any desire to have them be released under a Biden administration, or necessarily to have them hold higher capital, because that makes the pool they have to purchase mortgages smaller.”

Some have argued that the Biden administration might even go a step further. Edward Pinto, director of the Housing Center at the American Enterprise Institute, predicted that Biden would keep Fannie and Freddie in conservatorship “and likely move them towards a utility-style regime.”

Some have argued that if the federal government were to treat Fannie and Freddie as utilities, the risk to taxpayers and concerns related to how profitable the enterprises are would be reduced. As a result, Fannie and Freddie could focus on lowering costs to borrowers.

The pandemic could scuttle any hopes of housing-finance reform

Whoever is elected in November will come up against a major hurdle in reforming how Fannie and Freddie operate. “Whatever near-term challenges homeowners face in 2021 due to the pandemic likely will take priority over longer-term housing finance reform,” DeMarco said.

As of now, some 3 million homeowners are still in forbearance on their mortgages as a result of the pandemic — but at the height of the forbearance wave back in June, as many as 4.3 million borrowers were in forbearance, according to data from the Mortgage Bankers Association.

Generally speaking, a smaller share of borrowers with loans backed by Fannie and Freddie went into forbearance, as compared with borrowers with loans backed by HUD. Nevertheless, extending that forbearance came at a cost. During a speech at a mortgage industry conference last week, Calabria said that Fannie and Freddie’s response to the pandemic has cost them $6 billion, including $4 billion in loan losses from projected forbearance defaults.

The FHFA plans to begin charging a fee for some refinance loans to recoup those losses. And Calabria noted that matters could have been worse. The extra capital he allowed Fannie and Freddie to retain starting last year helped to offset the financial impact from the pandemic, he said.

But with the economy still on shaky footing, an uptick in forbearance requests and eventually foreclosures remains possible. And solvency of Fannie and Freddie could hang in the balance.

“In their current condition, Fannie and Freddie will fail in a serious housing downturn,” Calabria said.

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