In the waning days of the Trump Administration, Treasury Secretary Stephen Mnuchin and Federal Housing Finance Director Mark Calabria put in place
The change put in place by Mnuchin and Calabria is intended to create momentum for the GSEs’ eventual release from conservatorship and constrain their activities, both objectives supported by conservatives. The only problem, to quote Jim Parrott of Urban Institute, is that the PSPA is a really bad deal for taxpayers.
“By increasing the capital levels again and allowing the GSEs to pay yet more of their dividend in senior preferred shares, the taxpayer appears to come out on the short end of the stick. FHFA and Treasury will have to write down the taxpayer position well below where it is today for the GSEs to attract new private capital,” Parrott writes in a recent Urban Institute paper.
The fact that the PSPA may cost taxpayers hundreds of billions of dollars may be more than merely a fiscal point. In fact, the new agreement could lead to some very serious consequences for the housing market and the U.S. economy. Conservative zealots such as Director Calabria, who oppose a government role in housing, may have given President Biden an opening to restore full control to the Treasury over the GSEs.
The Biden administration has an aggressive agenda for subsidizing housing, particularly in the context of providing affordable housing and using home ownership to combat structural economic inequality. Vice President Kamala Harris talks of giving low-income families down payments towards a home purchase as a gift from the taxpayer.
Behind the entire discussion about housing affordability, equality of economic outcomes and “fairness,” loom the policies of the Federal Open Market Committee. The FOMC’s purchase of trillions in mortgage-backed securities since March of last year forced interest rates to record lows, pushed lending volumes to levels not seen since the mid-2000s, and sent home prices soaring due to a supply squeeze in affordable homes.
Fed policy inflates home prices and diminishes affordability for all Americans. Sadly, the dysfunctional politics of Washington dictate even more housing subsidies and ever higher home price inflation, something that ought to concern members of both political parties. President Biden thinks that Americans should not spend more than 30% of their income on housing, but he needs to talk to Fed Chairman Powell and the other members of the FOMC.
Of note, a number of observers are predicting a mortgage insurance premium cut at the Federal Housing Administration given the Biden administration's focus on affordability. This is a profoundly bad idea. The secondary market execution for FHA, VA and USDA loans is already very competitive with the conventional loans.
A MIPS decrease will force up FHA loan volumes further and squeeze prices for more affordable homes along with it. Instead, President Biden should seek to accelerate home building outside of the larger cities, where physical conditions and aging housing stock makes social distancing impossible.
President Biden reportedly plans to ask Congress for $40 billion in housing spending this year and $640 billion over the course of a decade. To help families buy their first homes and build wealth, the Biden Administration seeks a refundable, advanceable tax credit of up to $15,000, in effect a repackaged version of the Harris proposal to give poor families a down payment to buy a home.
But here is the punch line: If these new policy initiatives are not adopted by Congress, say Washington insiders, the Biden Administration may seek to push the GSEs into receivership. The radical step of receivership allows the Biden Administration to use the GSEs for policy purposes, end private ownership and the litigation now before the courts. Because of the new PSPA, restoring 100% government control makes sense financially because it eliminates the need for building capital in the GSEs.
“There’s a better than 50% chance that the GSEs end up in receivership and never come out of conservatorship,” one Washington insider tells NMN. “The government will prepare a pre-pack receivership, create new companies with fresh capital and an explicit guaranty from Treasury, and liquidate Fannie and Freddie. The litigation and other claims, and the insurance responsibility for the existing conventional MBS, reportedly are left behind in the receivership.”
The assumption of course is that there will not be more than a momentary market impact of putting Fannie Mae and Freddie Mac into receivership, but that is a considerable assumption. A more realistic scenario is that the conventional loan market would be disrupted for several weeks or even months as global investors back away from MBS issued by Fannie Mae and Freddie Mac in favor of 100% guaranteed Ginnie Mae securities.
If the Biden White House chooses the nuclear option and puts Fannie Mae and Freddie Mac into receivership, be ready for an extended period of disruption in the credit markets, including the to-be-announced market for MBS. Conventional MBS is already viewed as inferior to Ginnie Mae MBS in the world of secured finance, thus this change will further impact investor confidence.
The irony of this incredible situation is that conservatives wanted to rein in the role of the U.S. government in housing, but the flawed Mnuchin/Calabria PSPA creates an incentive for the Biden Administration to do the opposite. The onerous terms of the new PSPA for taxpayers gives progressives the opportunity to reclaim full control of the GSEs, all the while claiming to protect the taxpayer from greedy Wall Street hedge funds!
Choosing the nuclear option of putting Fannie and Freddie into receivership, no matter how well orchestrated, will damage the conventional market. More, if a GSE receivership is combined with a cut in the MIPs over at the FHA, then look for the Ginnie Mae market to grow to $3 trillion or more over the next several years.
To shift new production volumes to the FHA, even as delinquency rates are in the mid-teens due to COVID, is another profoundly bad idea whose time has apparently come. In the event that President Biden takes the nuclear option with the GSEs, look for the Ginnie Mae market to grow to one third of all mortgage loans vs less than 20% today. Only in Washington.
