It’s hard to mentally prepare oneself for the 2020 election when every second of the past three-plus years has been polluted with the kind of anxiety, desperation, dishonesty, spite, cynicism, condescension, and empty pageantry that is normally reserved for the final run-up to election day. This year’s contest feels like it has been slowly staggering toward the American populace like a drugged elephant, blindly smashing everything in its path before ultimately tipping over on November 3 and crushing whatever’s left of the country.
Whatever side you’re on, readers, MPA hopes you’ve escaped thus far with your sanity and soul intact. Also, please vote.
While Donald Trump and Joe Biden continue painting each other as existential threats to democracy, it’s important to remember that Americans are voting for a candidate’s platform, not his personality. One issue that has received little attention thus far in the election cycle is housing, specifically the future of GSEs Freddie Mac and Fannie Mae. As with most issues, Trump’s and Biden’s views on managing the enterprises have virtually nothing in common.
Tim Rood, head of government and industry relations at SitusAMC, says the difference between the two is simple enough: The Trump Administration has expressed a desire for the federal government to relinquish its conservatorship over Fannie and Freddie, which Rood describes as a plan to “de-risk” the enterprises, while the Democrats would extend conservatorship as a means of ensuring the agencies remain instruments for achieving public housing policy.
The two plans are starkly different. One may not, technically, even be describable as a “plan”. Here’s how they break down.
First, let’s address those quotation marks. Trump’s strategy for managing the GSEs is rooted in the administration’s 49-point white paper released in September 2019. But because the tweaks laid out in the paper could have such far-ranging effects for both the enterprises and borrowers, many of them need to be thoroughly studied before becoming policy. Much like Trump’s long-promised healthcare and infrastructure plans, his ideas for Fannie and Freddie have progressed only a degree or two past the brainstorming phase.
“Somebody characterized the government white paper on GSE reform as a ‘plan of a plan,’” Rood says. “They need to do dozens of studies to figure out what the heck they want these things to be and what the implications of some of these changes mean for the market, the GSEs, and the government. Until they wrap their arms around that, it’s kind of naïve to think that they can click their heels, nod their head, and – poof! – the GSEs are out of conservatorship.”
There are a lot of unknowns in Trump’s strategy. If elected, his administration will need to finalize a new capital framework for the enterprises to adhere to. It will also have to explain how restructuring the GSEs – possibly by using Ginnie Mae as the ultimate issuer of securities while Fannie and Freddie become aggregators – will impact stakeholders.
There has also been talk about reducing the scope of loan products offered by Fannie and Freddie, with the GSEs potentially exiting the second home, investment, and cash-out refinance markets, which could undermine Fannie and Freddie’s mandate of ensuring reasonably-priced mortgage credit is available to every market segment. Rood says the products on the chopping block have added importance: they subsidize the “riskier, more mission-critical loans that the enterprises are intended to serve.”
Another aspect of Trump’s plan is to allow private operators to compete for business with the GSEs. While the concept of more choice tends to get sold as a boon for consumers, Rood lacks confidence in the private space’s willingness to assist underserved borrowers or continue providing access to capital when the housing market inevitably corrects.
“There’s really no evidence that private capital is durable,” Rood says. “They’re always going to be there during good times, but they scare like cattle when times get tough.”
Unlike Trump, Biden hasn’t released any suggestions that specifically target the enterprises, but Rood says his housing plan as a whole is ambitious.
“It’s unprecedented in the scope that they’re looking at,” he says.
Biden intends to use Fannie and Freddie as a means of getting more low- to moderate-income earners and other underserved borrowers, like minorities and newly arrived immigrants, into homes. Making this happen will involve removing the barriers these groups tend to come up against, like the GSEs’ appraisal and credit systems, which don’t take credit reports into consideration, and their outdated automated valuation models.
“They’re actually looking at ways for [the enterprises] to create their own credit systems and appraisal systems to eliminate some of those biases,” Rood says, adding that Biden’s suggestions for creating alternative proxies for credit-worthiness would, in theory, be easier to implement than the “whole new set of requirements, rules and algorithms” that may grow out of the Trump plan.
Biden also has plans to create up to two million affordable housing units, the construction of which could be facilitated by Fannie and Freddie’s robust multifamily lending programs. But those homes, along with Biden’s other ambitious infrastructure plans, will cost taxpayers plenty – somewhere in the neighborhood of four to six trillion dollars.
“It’s one thing to get those things passed in terms of spending bills, but it’s quite another thing to find a way to pay for them,” Rood says.
Nationalizing Fannie and Freddie in some form, however, would result in tens of billions of dollars in dividends pouring into the Treasury Department every year, helping offset the costs. Rood says initiatives that generate real revenue while also satisfying a critical public policy purpose “are hard to come by in Washington.”
Which approach benefits the housing market?
As Rood explains, Trump’s plan, tied as it is to monetary policy, isn’t likely to drive more home sales come 2021. Interest rates are about as low as they can go, and incomes aren’t rising fast enough to keep pace with surging home prices, meaning demand will ultimately recede.
Biden is hoping to increase demand by widening the credit box and bringing more homeowners into the market. That’s tricky. More buyers mean more competition for the country’s dwindling housing stock, so if Biden succeeds in making mortgage credit more accessible, one wonders if this new cohort of buyers will actually be able to afford what’s on offer.
Rood says that if new housing supply was introduced responsibly, “you should modulate that sort of appreciation,” but with the U.S. currently seeing approximately two million new households formed every year, it would take a miracle for supply to keep up with demand.
“They’ll do anything they can to prop up home values,” Rood says of Trump and Biden. “Which one will be successful in the end is debatable.”