GSE Reform Discussion Back on the Table but Many Hurdles Remain

Friday, December 16, 2016 by Zelman & Associates

Filed under: mortgage

We previously offered our initial perspective on what the Trump Presidency would mean for the housing market, including our view that GSE reform, while more likely under a Republication administration, would be unlikely in the next two years.

Last month, Trump nominated Steve Mnuchin to be Secretary of the Treasury and within short order, Mnuchin stated that GSE reform was on the “top 10 list” of priorities and that the incoming administration “will get it done reasonably fast.” Obviously, this raises the question of whether our initial stance was too complacent.

Based on numerous conversations with key contacts within the housing finance system, we believe that Mnuchin’s role at the Treasury does mark an important shift in policy as it raises the possibility of recapitalizing the entities and “releasing” them back into the private markets after more than eight years of conservatorship and the failure of numerous proposals that involved completely winding down the GSEs and replacing them with new entities.

However, with many other substantial legislative efforts seemingly higher on the White House’s to-do list – including tax reform, infrastructure spending, immigration, the Affordable Care Act and international trade – the idea that a topic as debatable as the GSEs and the functioning of the entire mortgage finance system can be tackled over this time period still appears remote.

We point out that the current system is working efficiently, the entities are generating cash for the Treasury and housing is playing a critical role in the economic recovery. Politicians will not want to be viewed as disrupting that tailwind. More so, there are significant complexities to GSE reform including the right amount and source of new capital, outstanding lawsuits against the government’s sweep of profits and the proper pricing of the government’s implicit guarantee.

We expect to learn more about the new administration’s priorities in January and suspect that the initial euphoria of potential GSE reform is likely to shift to the backburner, which we interpret positively for the housing market as it limits uncertainty around mortgage credit.

GSE Reform Discussion Back on the Table but Many Hurdles Remain

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