The Unassuming Economist

From the IMF’s latest report on the United States:

• FSAP recommendation on housing finance: “Reinvigorate the momentum for comprehensive housing market reform”
• Developments: “Housing finance and the U.S. housing market have not been reformed comprehensively. Since the last FSAP, no legislative or executive action has been taken to reduce substantially the footprint of Fannie Mae and Freddie Mac (“Enterprises”).

As conservator, however, the (FHFA has required market-based credit risk transfers from the Enterprises to the private sector at an increasing level since 2013. Indeed, between their initiation in 2013 and June 2018, the Enterprises have transferred a portion of credit risk on approximately $2.5 trillion of unpaid principal balance (UPB) with a combined Risk in Force (RIF) of about $81 billion. The Enterprises have also jointly developed a common securitization platform. FHFA issued a final rule on the uniform mortgage-backed security in February 2019 to align Enterprise policies and practices that affect cash flows of To-Be-Announced (TBA) eligible mortgage-backed securities. These requirements apply to both the Enterprises’ current offerings and to the new Uniform Mortgage-Backed Security (UMBS), which the Enterprises plan to begin issuing in June 2019. These Enterprise reforms have been accomplished administratively and have not reformed the entire housing finance system, which would require legislative action.

Since 2015, the FHFA has directed the Enterprises to fund the Housing Trust Fund and Capital Magnet Funds (as required by the 2008 Housing and Economic Recovery Act) by transferring a portion of total new acquisitions to these funds, which are administered by the Department of Housing and Urban Development (HUD) and Treasury Department, respectively. FHFA has the discretion to suspend the Enterprise allocations to the affordable housing funds, including the Housing Trust Fund, if the allocations are contributing to the Enterprise’s financial instability.

The Senior Preferred Stock Purchase Agreements (PSPAs) between the Treasury and each Enterprise continue to provide financial strength for the Enterprises. They ensure the ability of the Enterprises to meet their financial obligations and are structured so that they will have minimal net worth as all profits above the capital reserve amount are transferred to Treasury each quarter. The capital reserve amount had been declining by $600 million per year and was scheduled to decline to zero by January 2018. However, on December 21, 2017, FHFA and the Department of the Treasury agreed to reinstate a $3 billion capital reserve amount for each Enterprise to prevent draws on the PSPA due to fluctuations in the Enterprises’ income due to the normal course of business. Despite the new capital reserve, the December 2017 tax cuts caused the Enterprises to draw a combined total of $4 billion at the end of that quarter, reflecting value loss in deferred tax assets that followed enactment of the Tax Cuts and Jobs Act of 2017.

In June 2018, FHFA issued a proposed rule on Enterprise capital requirements. The rule would implement a new framework for risk-based capital requirements and two alternatives for a revised minimum leverage capital requirement for the Enterprises. The capital requirements in this rule would continue to be suspended while the Enterprises remain in conservatorship.

On March 27, 2019, the White House issued a Presidential Memorandum on Federal Housing Finance Reform. The memorandum establishes principles for reform and assigns responsibility to the Secretaries of the Treasury and HUD to develop plans for administrative and legislative reforms for the Enterprises and the housing programs of the federal government. As part of the process, the Treasury Department and HUD are required to consult with the leaders of other government agencies involved in housing finance and economic policy, including FHFA, and must submit the plan to the President for approval.”