GSE reform was back in the news recently with the introduction of a new white paper from the leading think tank, The Milken Institute, and a newly released GSE recapitalization plan backed by some of Wall Street’s most influential firms.
Milken’s Michael Bright and Ed DeMarco coauthored the latest in a series of papers examining GSE reform, this time focusing on rental housing and pathways to homeownership. Highlights of the paper include an endorsement of a government backstop for multifamily mortgage backed securities, along with preservation of the loss-sharing arrangements used by Fannie Mae and Freddie Mac in their K-Series and DUS programs. The paper also recommends separating the multifamily lines of business from Fannie Mae and Freddie Mac into independently owned and operated private companies. Issues yet to be defined include loan eligibility for access to the government guarantee.
Importantly, the research spends considerable time examining the root causes of housing affordability challenges, reaching similar conclusions outlined in NMHC testimony on March 22, 2016 before the House Committee on Financial Services Housing and Insurance Subcommittee as well as those of a variety of policy stakeholders, including the previous Administration’s September 2016 toolkit, which stated, “The rental market in America today is frequently inhibited by local land use, zoning, and building restrictions that, while well-intentioned, can impede the creation of affordable rentals.”
The research makes an important distinction by acknowledging that federal policy must pair with new approaches to regulation at the state and local level in order to adequately address housing affordability. This view is drawing increasing agreement in Washington and around the country by a variety of policymakers. For instance, as reported by the Wall Street Journal, Colorado Governor John Hickenlooper (D) recently signed legislation intended to “release a pressure valve with the rental market and first-time owners seeking their first property.”
Also last week, hedge fund manager John Paulson’s Paulson & Co. and Blackstone announced support for a proposal to recapitalize and ultimately release Fannie Mae and Freddie Mac through a series of taxpayer repayment steps, rebuilding of reserve capital, additional capital contributed from the capital markets, and a government sell off of its preferred shares. However, as the Jumpstart GSE Reform Act, a piece of legislation that prevents the administration from selling off its stake in Fannie and Freddie without the approval of Congress for at least two years, is still preventing such an action without Congressional approval, there is no clear path forward for the proposal at this time. It is notable though that since Blackstone CEO Steve Schwarzman, the world’s largest real estate asset manager, chairs President Trump’s economic advisory council and that John Paulson gave substantial contributions to candidate Trump during last fall’s election, it is reasonable to assume the proposal will receive at least consideration within the Trump administration. Further, the investment bank tasked with developing the proposal, Moelis & Co., hired former House Majority Leader Eric Cantor when he was upset in a primary election in 2014. While it remains unclear whether Cantor would be involved in advocating for the proposal on Capitol Hill, it is worth noting that he has maintained relationships with both his former colleagues.