The tide of housing-finance reform is expected to drastically shift under the new administration after President Joe Biden officially clinched his win in the 2020 election, with Biden’s proposed $640 billion housing plan focusing on increasing affordable housing. While he is not expected to continue the Trump administration’s efforts to privatize Fannie Mae and Freddie Mac, a Supreme Court case filed by shareholders of the two entities may bring that battle to the forefront sooner than anticipated.
HOUSING-FINANCE REFORM UNDER BIDEN
In early 2020, Biden released his housing plan with an anticipated cost of $640 billion over 10 years with a focus on increasing affordable housing, bolstering tenant and homeowner rights, and providing housing assistance.
His plan includes a new “Bill of Rights” for homeowners and renters to prevent mortgage brokers from issuing predatory loans and advancing foreclosures when homeowners are in the process of receiving loan modifications, while also giving borrowers the right to seek financial redress from mortgage lenders and services if those rights are violated. He also plans to reinstate a risk-sharing program developed to allow HUD – to be led by Rep. Marcia Fudge, a democrat from Ohio – and housing finance agencies to “provide risk-sharing arrangements to provide more insurance and credit for FHA multifamily loans,” according to the HUD website.
A notable inclusion in his plan is developing a new Affordable Housing Fund with a proposed cost of $100 billion, including $65 billion proposed for new incentives to develop and rehabilitate low-cost housing where there’s a shortage and boosting the existing Housing Trust Fund, which preserves and constructs housing designated for low-income families, by $20 billion.
The Housing Trust Fund has been funded entirely by Fannie Mae and Freddie Mac through assessments on new business, for which the fund has allocated between $219 million and $276 million each year for eligible projects between 2017 and 2019, with an increase to $322.5 million in fiscal year 2020. Biden’s proposed increase, amounting to an additional $20 million each year if applied over the 10-year period, a poses a challenge for the two acquiring sufficient capital to exit the conservatorship, an effort supported not only by the Trump administration, Treasury Department, and the FHFA, but also Fannie Mae and Freddie Mac leadership and shareholders as well
THE PRIVATIZATION OF FANNIE MAE AND FREDDIE MAC
Along with reinstating the risk-sharing program eliminated under Trump, Biden is not expected to continue the Trump administration’s efforts to release Fannie Mae and Freddie Mac from the federal conservatorship instituted in 2008.
In January 2019, Trump appointed Mark Calabria, who supported ending the conservatorship, as director of the Federal Housing Finance Agency (FHFA), the agency established to oversee Fannie Mae and Freddie Mac when they were placed under federal control. In September 2019, the Treasury Department released its plan for ending federal control of Fannie Mae and Freddie Mac and returning them to government-sponsored entities.
While the current administration has made headway towards releasing the two from conservatorship, including raising the capital limit the two can accumulate from $3 billion each to a combined $45 billion in 2019, the signature of Treasury Department Secretary Steven Mnuchin is needed to dissolve the conservatorship. While Mnuchin has indicated his support for releasing the two entities in due time, with the need to acquire sufficient capital that the FHFA ruled should amount to $280 billion and enact potential regulations on how they operate, he recently noted in an interview with the Wall Street Journal that he would be unlikely to sign off on ending the conservatorship before Trump leaves office, stating that he did not want to “do anything that jeopardizes taxpayers and puts them at additional risk.”
With sources indicating that Biden would be unlikely to continue the push towards ending the conservatorship, especially with the predominant focus on handling the ongoing coronavirus pandemic, Fannie Mae and Freddie Mac will likely remain under government control.
FANNIE MAE AND FREDDIE MAC’S DAY IN COURT
Despite federal officials’ hesitation to make the privatization of the two entities a main focus at this time, a case now before the Supreme Court may force a quicker resolution to the issue, potentially throwing the housing industry into turmoil with the two guaranteeing over half of the $11 trillion mortgage industry.
In Collins v. Mnuchin, shareholders of Freddie Mae and Freddie Mac allege that the makeup of the FHFA is unconstitutional, with a single director not under proper presidential control as they’re elected for a five-year term and are unable to be removed by the president except “for cause.” They also argue that a third amendment to the agreement between the Treasury Department and the FHFA issued in 2012 funneling all proceeds from the two mortgage giants above a $3 billion capital reserve back to the Treasury Department to repay bailout funds was an overstep. Since 2008, shareholders have gone without dividends, and they’re arguing that it’s time for the Treasury Department to stop collecting payments and allow dividends to be reissued. In the lawsuit, the shareholders allege that the two entities have overpaid the Treasury Department by $124 billion, and that both Fannie Mae and Freddie Mac are entitled to a $29.5 billion tax credit going forward.
While the Fifth Circuit Court of Appeals awarded a win to the plaintiffs in September 2019, they only ruled to void that third amendment to allow dividends to be paid out again to shareholders without a $124 billion refund or ruling the entire structure of the FHFA invalid. But depending on the Supreme Court’s ruling, there is a potential for the FHFA’s actions since the 2008 bailout to be ruled invalid, not only allowing Biden to replace Calabria and stopping payments to the Treasury Department, but also requiring that $124 billion “overpayment” to be returned. The Supreme Court ruled in favor of plaintiffs for a similar case earlier this year, ruling the make-up of the Consumer Financial Protection Bureau unconstitutional due to the president not being able to remove its single director without due cause, but chief justices expressed hesitation about whether they could rule the entire structure of the FHFA invalid and expressed concern about the implications about doing so during oral argument for Collins v. Mnuchin on Dec. 9.
The Supreme Court is not expected to issue its ruling on Collins v. Mnuchin until June 2021.
FANNIE MAE AND FREDDIE MAC SERVICES
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