Compliance Blog

Hi everybody! It's been a while, but I am glad to be back on the NAFCU Compliance Blog. I'm also eagerly awaiting my upcoming vacation because it has been busy here the past couple of weeks. As you all know, last week was NAFCU's Congressional Caucus. It was a huge success! Today, I want to discuss something one of the speakers talked about – the future of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, and housing finance reform. Craig Phillips, Counselor to Treasury Secretary Steven Mnuchin, updated Caucus attendees on the Trump Administration's position and said that the goal is to work with Congress to craft legislation for comprehensive housing finance reform.

Most importantly, Mr. Phillips endorsed NAFCU's interest in and advocacy on housing finance reform. Mr. Phillips said the administration supports a level playing field on pricing and terms regardless of an institution's size and geographic location. This has always been one of NAFCU's primary positions and goals for housing finance reform. NAFCU is very pleased to have the support and endorsement of Mr. Phillips on this important principle and is optimistic that the current administration is on the side of credit unions in this debate.

As he outlined the administration's focus, Mr. Phillips acknowledged the important work credit unions do in their communities. Credit unions have a track record of serving their members by providing high quality mortgage products and services at fair prices. An essential component of credit unions' continued ability to provide such products and services is a steady and reliable source of liquidity through the secondary market, especially through products such as the 30-year, fixed rate mortgage. That's where the GSEs come in. Mr. Phillips said that the administration is committed to achieving long-term, sustainable housing finance reform, which includes:

(1) Removing the GSEs from conservatorship;

(2) Rationalizing the roles of all federal mortgage insurance and guarantee programs (FHA, VA, and USDA) and the mortgage-backed securities (MBS) programs of Fannie Mae, Freddie Mac, and Ginnie Mae; and

(3) Encouraging a vibrant role in the private sector, in part through more tailored regulations which allow bank and non-bank lenders to increase their share of originations.

The GSEs have been in conservatorship for nine years now and have consistently been profitable. All of those profits, however, have been sent to the Treasury Department on a quarterly basis as part of the terms of the government's bailout of the GSEs, based on the rationale of protecting taxpayers. Since the Treasury's initial advance of $187.5 billion to the two companies, both Fannie and Freddie have paid back that money and then some – an additional $83.4 billion to be exact. If another financial crisis strikes and the GSEs still do not have capital reserves, the GSEs could be forced to draw on their Treasury line of credit, at taxpayers' expense. These are the reasons why NAFCU supports allowing the GSEs to begin recapitalizing.

Although Secretary Mnuchin has publicly said that he expects the GSEs to continue to make their dividend payments to the Treasury, FHFA Director Mel Watt has indicated that he is very concerned by the GSEs' lack of capital and the risk it poses to the economy. Allowing the GSEs to rebuild their capital buffers would ensure a more safe and sound economic system, increase investor confidence, and prevent market disruption. This would, in turn, likely mean increased liquidity in the housing finance system. That means more opportunities for credit unions and greater access to the secondary market. NAFCU hopes that Mr. Phillips' endorsement of NAFCU's advocacy on housing finance means that the administration is considering the option of GSE recapitalization.

During his speech, Mr. Phillips also said that Treasury supports the GSEs' release from conservatorship as part of comprehensive housing reform legislation. This is another position NAFCU supports; although NAFCU further believes that any privatization efforts should be gradual to ensure credit unions have uninterrupted access to the secondary mortgage market. Mr. Phillips acknowledged that minimizing the transition is critically important to maintaining a stable market.

In addition, Mr. Phillips said that protecting the interest of taxpayers is critical. He pointed out that part of this mission includes considering an explicit government guarantee for federally-sponsored MBS and adequate protections to make such a guarantee feasible. Yet another position NAFCU supports. An explicit government guarantee on the payment of principal and interest on MBS injects certainty into the market, particularly for investors, and allows for the more consistent movement of liquidity through the mortgage market.

Credit unions provide high quality mortgage products to help their members achieve their dreams of homeownership but cannot continue to do so without guaranteed access to the secondary market. This requires a safe and stable housing finance system. NAFCU is encouraged by Treasury's approach to housing finance reform, as outlined in Mr. Phillips' speech. NAFCU is thankful for Mr. Phillips' support of our interest in reforming the system and is looking forward to collaborating with the administration and Congress to find a solution for our nation's housing finance system. If you are interested in finding out more about NAFCU's position on housing finance reform, please review NAFCU's Housing Finance Reform Principles.