The GSEs and the Second Trump Administration: Ten Possible Mortgage Program and Policy Changes to Expect (Part 2 of 2)

The second Trump administration (Trump II) has begun to focus on Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that together finance about half of the nearly $13 trillion in first-lien single-family mortgages in the U.S. In doing so, it presumably has found, or will soon find, that it has the authority to directly manage the GSEs, unlike during its first term (Trump I). This means the current administration has the power to make changes in GSE mortgage programs and policies that could materially impact large numbers of current and prospective homeowners, as well as the mortgage and housing industries.

The media has recently heavily focused on the possibility of conservatorship exit by the GSEs. In contrast, there has been little attention given to potentially major changes in GSE mortgage programs and policies. In terms of timing, this focus seems misplaced because such changes can be made and implemented in a matter of months, while exiting conservatorship, if and when decided, would likely take years to implement.  

The necessary background: Why, how, what, who and when

Why does the president have the ability to manage the GSEs? A presidential administration’s ability to directly manage the mortgage programs and policies of the GSEs was never expected or intended but arose from a series of two unlikely events more than a decade apart. The first event occurred in September of 2008 when the government placed the GSEs into conservatorship during the great financial crisis. This allowed its regulator, the Federal Housing Finance Agency (FHFA) – which declared itself to be their conservator – to operate the companies in lieu of their stockholders and boards. The second significant event happened in June 2021, almost six months into the Biden presidency, when the Supreme Court ruled that the FHFA could no longer be independent of the presidential administration. As a result, the president at that time gained the authority to direct FHFA’s affairs like any other part of the executive branch.  

How does this authority work? It takes two simple steps. First, the White House can tell the FHFA what to do in as much detail as it chooses. It is impossible to know whether the White House will provide detailed instructions to the FHFA or just general guidance. If the latter happens, the FHFA will then have significant discretion to execute any such guidance. Second, the FHFA turns around and tells the GSEs what to do. After more than 15 years of conservatorship, I know for sure that the FHFA will closely manage the GSEs in such matters.

What will be the result? The Biden administration, after first gaining this authority in June 2021, gradually changed or added new GSE mortgage programs and policies in line with its policy agenda. This resulted in several changes, such as requiring equitable housing finance plans, reducing GSE guarantee fees (and thus mortgage rates) for low- to moderate-income (LMI[1]) first-time homebuyers (FTHBs), and issuing a tenant protection requirement on apartment house owners receiving GSE financing, among other measures. It is thus to be expected that Trump II, now in the midst of turning its campaign politics and promises into the policies and actions of a new administration, will similarly put its stamp on how the two GSEs operate in the mortgage markets.  

Who will be the key players involved? Unlike the high-stakes decision for conservatorship exit, where a single “go” will have large implications and complex ramifications, changes in GSE mortgage programs and policies will involve a series of specific approval decisions, each of which will produce a targeted impact. The most important officials in this process will be the director of the FHFA, a position to which Mr. Bill Pulte has been nominated, and either the NEC director or his deputy assigned to the housing finance portfolio. The FHFA director will clearly be in charge of execution, while policy decisions will be made by a combination of him and the NEC.[2]  

In Part 1 of this series, I identified three interest groups in the Trump II political coalition that will have a direct interest in – and possible influence over – any changes to mortgage programs and policies. These groups are:

• Small-government conservatives, who will want to shrink the GSE footprint, with some wanting very significant reductions.
• Business interests, in this case the housing and mortgage industries, which will want the GSEs to provide as much easy and low-priced mortgage credit as possible since this approach maximizes the revenues and profits for companies in these sectors.
• Advocates for what may be the largest voting block supporting Trump II – non-college-educated households (“working families”) – who will seek to protect their access to the affordable GSE 30-year fixed-rate mortgage.[3]

Obviously, these groups are not fully aligned in terms of their expectations from the GSEs, so Trump II will have to work its way through balancing their interests, with some inevitable disappointments.

When will the changes be developed? In order to be able to properly recruit and select an appropriate candidate for the FHFA director role, the pre-inauguration transition team needed to outline, albeit only at a high level, the Trump II agenda for the FHFA. Since Bill Pulte was announced as the nominee on January 16, we can assume the core aspects of that agenda have already been developed. Additional work will take place on the administration’s FHFA-related agenda before Mr. Pulte’s confirmation hearing, which is not yet scheduled, so he can be prepared to answer likely questions. It is at that confirmation hearing that the public is expected to first learn what that agenda is.[4]  

The relevant Trump II policy objectives 

I have identified nine policy objectives that are both likely to be important to officials in the Trump II administration and relevant for shaping GSE mortgage policies and programs.  

First, there are policy objectives long recommended by small-government conservative commentators, many of which have support among Republican members of Congress.[5]  These include:

• Shrink the footprint of the GSEs, i.e., reduce their very large market share and their influence on mortgage markets. 
• Tighten GSE credit policies, which conservatives have long criticized as too loose.
• Reform or eliminate specific targeted credit access programs (e.g., affordable housing goals), which are seen as potential sources of excessive credit losses.[6]

Second, the housing and mortgage industries have their long-running policy objectives:

• Keep mortgage rates as low as possible, with generous programs to expand access to credit, in order to enlarge the market overall. 
• Prevent the GSEs from expanding into or negatively impacting the “primary markets,” which representatives of the mortgage industry define very broadly.[7]

And third, the recent Trump II election campaign and actions taken by his administration since inauguration make it clear there will be four additional policy objectives to consider:

• Help working families be able to buy and maintain their homes by preventing any increases in their housing costs; ideally, housing costs would even decline some.  
• Eliminate diversity, equity and inclusion (DEI) or similar programs that are believed to be based on racial or ethnic preferences.  
• Counter the so-called “deep state” by eliminating GSE programs which were approved by government officials without clear authorization from congressional legislation.  
• Increase government efficiency, reducing expenses as much as possible.

Again, these policy objectives do not all point in the same direction, as the three interest groups described above have views that will obviously conflict at times. It is unclear how Trump II will work through this challenge.  

Ten possible mortgage program and policy changes to monitor

Trump II will undoubtedly make changes in GSE mortgage programs and policies, just as the Biden administration did. However, it is not necessarily easy to predict how such changes will play out given the differing viewpoints within the Trump II political coalition. To help understand these potential changes, I have compiled a list of ten program and policy topics to monitor, as any changes to them will reveal how the administration intends to put its stamp on the GSEs while balancing the different views within its coalition.

1. Will guarantee fees (G-fees) be significantly increased, and if so, why?  The average G-fee charged by the GSEs, given how it feeds so directly into the mortgage rate that so many middle and working-class borrowers pay, is one of the most politically and policy-sensitive numbers in housing finance. There is a significant risk that G-fees will be increased under Trump II for one of several possible reasons, thereby raising mortgage rates. First, small-government conservatives have long called for the FHFA to take such action to crowd in private capital.[8]  Second, Congress may force the mortgage rate higher by adding to its existing, but not well-known, 0.10 percent per annum G-fee-related tax[9] to generate revenues in order to offset proposed tax cuts.  And third, the FHFA may raise the rate to bring the return on stockholder equity earned by the GSEs to a market level (around 9 to 10 percent). This step is likely a necessary prelude to privatization and ending the conservatorships.[10] Regardless of the reason, any such increase will make homeownership more expensive, and thus runs directly counter to the interest of working families. Any increase in G-fees would also face significant opposition from the mortgage and housing industries. Additionally, such an increase would contradict President Trump’s past statements about wanting to reduce the cost of homeownership.

2.  Will the LMI first-time homebuyer G-fee reductions made by the Biden administration be retained or reversed?  The FHFA announced in 2023 that G-fee pricing would be significantly reduced for FTHBs who qualify as LMI or participate in other LMI-centric programs. This was unsurprisingly done in response to the pressure of rapidly increasing home prices, which are making it harder for working families to buy their first home. However, this also created a new group of recipients of additional GSE subsidies; given that there is little transparency on such matters, it is unclear how much this was funded by higher G-fees on other borrowers versus lower profits flowing to taxpayers.[11] While one can see a lot of support for this pricing policy in the industry and among working families, this was done without any specific legislative authority. Instead, the FHFA created a new subsidy program using its conservatorship powers alone, which is possibly funded with taxpayer money. This scenario fits the Trump campaign’s “deep state” narrative. It is therefore unclear if the G-fee reduction will be left as is, modified in some fashion, or simply eliminated.

3.  Will the single-family “credit box” be tightened?  The range of credit risk that the GSEs find acceptable in the mortgages they buy is known in industry parlance as the “credit box.” The GSE credit box has for many years been criticized by right-leaning think tanks for being overly expansive, leading to a larger-than-necessary footprint and creating the potential for large losses at the GSEs, as was seen during the 2007-2008 financial crisis.[12] This raises the question: Will the FHFA under Trump II look to tighten the credit box, even if doing so reduces access to credit for working families, a core of Trump’s political coalition?  Given the favorable risk environment for mortgage lending in recent years, [13]  there is no hard evidence of losses to validate the view that the credit box has been too expansive recently. If there is any substantive tightening of the credit box, it will be immediately apparent, as the mortgage industry will quickly and loudly express its dissatisfaction. A tightening of the credit box would be a strong indicator that small-government conservatives are dominating Trump II’s decision-making, at least on this issue, rather than the administration prioritizing the needs of working families or the mortgage industry.   

4.  Will the GSEs stop purchasing single-family mortgages on second homes and investment properties? There has long been a push by small-government conservatives and many Republican members of Congress to “shrink the footprint” of the two GSEs.[14] However, an across-the-board reduction will not be supported by the mortgage industry or advocates for working families. Thus, if Trump II wants to shrink the GSE footprint, a potential starting point could be to stop the purchase of mortgages on second homes and investment properties. The logic behind this is that such purchases should never have been made in the first place because, as the argument goes, they are simply not within the scope of the GSE’s mission to support homeownership. This will shrink their footprint – albeit only modestly – but crucially leave working families unimpacted.[15]

5.  Will the GSEs stop purchasing larger single-family mortgages that are still within the statutory “conforming loan limit” (CLL)? The CLL is the largest mortgage size that the GSEs are legally permitted to purchase.[16]  Currently, the “base CLL” is $806,500 for a single-family home, but in certain high-cost areas it can be as high as $1,209,750, i.e., up to 50 percent higher than the base limit.[17]  So, a second approach Trump II might decide to take to shrink the GSE footprint could include setting its own loan limit at a level below the current CLL – perhaps something like 20 to 25 percent lower –  which again leaves working families unimpacted.[18] The mortgage and housing industries are unlikely to support any such shrinkage, of course.[19]  

6.  Will the FHFA scale back the GSE “affordable housing goals” and “duty to serve” [20] programs?  Congress, over time, has created through legislation these two major targeted access-to-credit programs. However, legislation gave the FHFA considerable discretion to implement them and set the required goals for the GSEs. It is at the discretion of the new Trump-appointed FHFA director to possibly and significantly reduce the scale and scope of these two programs. Small-government conservatives have a long-standing poor view of the affordable housing goals program, often blaming it for significant losses that helped push the GSEs into conservatorship.[21]  However, both programs are designed to support working families, including those in rural areas, who are of course part of the Trump political coalition. Thus, any changes announced in the goals of these two programs will reveal how much Trump II is protecting LMI households versus adhering to a small-government conservative policy playbook.  

7. Will the GSE “equitable housing finance plans” be fully or just partially canceled?  Prior to 2021, the GSEs operated several targeted access-to-credit programs aimed mainly at LMI households. They included both those mandated by legislation (as described just above) and also those established by the FHFA as conservator.[22] Starting in 2022, new requirements on the GSEs mandated the development and implementation of “equitable housing finance plans.”  These plans benefit specific racial/ethnic groups, in particular Black and Latino communities. While the Trump II presidential executive order to eliminate such programs has already been issued, there is a major complicating factor: the equitable housing finance plans are actually umbrella designations that reference many specific programs and policies, of which only some are explicitly racial/ethnic in nature. It remains to be seen whether only the latter programs will be canceled, or if all the listed programs will be discontinued in a “throw out the baby with the bath water” implementation. 

8.  Will using “bank statement scraping” technology to expand borrower credit information be discontinued?[23]   The GSEs have launched a variety of programs to expand access to credit through technological innovation to move beyond solely using traditional sources of credit information; this is often called “alternative credit data.” Here are, for example, two such programs which employ bank statement scraping technology. In one case, it is used to establish and verify income for those who do not receive W-2s, a demographic that is working-families-intensive. In the second case, the GSEs collect information about prospective FTHB’s apartment rental payment histories, which historically do not appear on credit bureau reports. In both cases, more people can be properly evaluated and, if warranted, approved for a GSE loan purchase. There seems no obvious reason why Trump II would end or curtail such programs, as they provide working-family households a better chance of buying a first home. However, small-government conservatives have a tendency to view innovations like this as a sub-rosa way to weaken credit criteria.[24]  As a result, the future of such programs has some uncertainty.  

9. Will Biden-era FHFA initiatives to lower borrower-paid closing costs be continued?  In the last year-plus of the Biden administration, there was a focus across several agencies, including the FHFA, to reduce home purchase closing costs. Historically, these costs have significantly been driven by requirements from GSEs, such as for full appraisals,[25]  lender title insurance, and the need for three credit reports for each mortgage loan purchased. Trump II may want to pursue the same goal, since closing costs are often as large or larger than a downpayment for many FTHBs,[26]  thus creating a significant barrier for working families trying to buy their first home [27]  The FHFA’s efforts to reduce closing costs naturally led to strong opposition and lobbying from business interests. It is simply unclear how Trump II will balance its business orientation with its commitment to working families as it decides whether and how to address today’s high closing costs.

10. Will there be efforts to eliminate GSE duplication and overlap with the Federal Housing Administration (FHA) – and also possibly the Department of Veterans Affairs (VA) – in the name of reducing government spending?  It has long been noted how the government, through various actions going back to the 1930s, ended up with multiple mortgage agencies: the two GSEs, the FHA, and the VA.[28]  Today, there is some sharing to reduce the expense of running multiple, similar organizations. An example is Ginnie Mae doing securitization for both FHA and VA; similarly, during conservatorship, the FHFA mandated that the two GSEs develop their own shared securitization utility, called Common Securitization Solutions. Nevertheless, there are definitely additional ways to obtain more savings. Given Trump II’s emphasis on efficiency via the Department of Government Efficiency (DOGE), it is an important area to watch to see if the administration is going to break through long-established practices to potentially reduce government expenses. Such changes could have significant impact on many mortgage programs and policies.

Conclusion

Trump II seems eager to make major government changes quickly (his supporters refer to this approach as “shock and awe” while his detractors label it as “chaotic”), and that approach could well be applied to GSE programs and policies in the near future. In addition, it’s plausible to assume these changes could come without much preparatory homework. In terms of the timing of any such changes, they could begin when the nominated FHFA director, Bill Pulte, is confirmed – or perhaps start even earlier if a Trump-appointed acting director is installed.  

This article describes ten issues to watch closely, as they are where Trump II will, in my view, likely show its hand in the range and depth of changes in mortgage programs and policies it intends to make. It is difficult to predict what those changes will be, though, given the different political and policy views of the various groups within the Trump II political coalition. On one side there are those looking to keep homeownership affordable, specifically for working families; on another there are industry groups advocating for various types of subsidies to promote home building and sales as much as possible. Finally, there are influential small-government conservatives pushing to shrink the footprint of the GSEs. All surely cannot be made happy.

 

Footnotes

[1] ”Low-to-moderate income” may seem to be a general concept, but it has a specific quantitative meaning in federal government activities relating to affordable housing. It refers to a household earning no more than 80 percent of the “area median income” (AMI), where the “area” is a county or other geographic unit as defined and calculated by the U.S. Department of Housing and Urban Development.   

[2] The U.S. Secretary of the Treasury is key to conservatorship exit decision-making but is likely to play a rather limited role in terms of changes in GSE mortgage programs and policies.  

[3] The GSEs are key to providing the typical homeowner with access to the standard “American” mortgage. This type of mortgage has a 30-year fixed rate, allows borrowers to prepay at any time for any reason without any penalties, fully amortizes over its term, and is available for loan-to-value ratios well exceeding 80 percent. In addition, the interest rate on these mortgages is low compared to other consumer loan products, in part because of indirect government subsidies.  

[4] The Biden-era director of the FHFA, Sandra Thompson, resigned the day before inauguration day. This meant the senior civil servant became the acting director. If the Trump II administration subsequently appoints its own acting director to bridge the time until Mr. Pulte presumably is confirmed, that individual may begin implementing changes. That could also reveal what the Trump II agenda is, even ahead of Mr. Pulte’s confirmation hearings.  

[5] For a representative discussion of this viewpoint, see “The Next Housing Bust,” by Pinto and Pollock, published in September 2021 by the American Enterprise Institute. https://www.aei.org/op-eds/the-next-housing-bust/.

[6] Ibid, paragraphs 8 and 9.  

[7] The “primary market” refers to the primary mortgage market, with the GSEs limited to roles as secondary market mortgage companies. However, the mortgage industry attempts to categorize many other activities as a “primary” market activity, despite the absence of a primary-versus-secondary market distinction for those activities. An example would be arranging title insurance, called a “primary market activity” by the mortgage industry despite there being no such thing as a primary title insurance market versus a secondary one.  

[8] Such crowding in was a stated objective of the conservatorship during the years when Ed DeMarco was acting director (2009 to 2013). One result was the FHFA ordering a series of G-fee increases designed to crowd in private capital and thus reduce the size of the GSEs. Shrinking the footprint was also a key objective of the Trump I Treasury Housing Reform Plan (see https://home.treasury.gov/system/136/Treasury-Housing-Finance-Reform-Plan.pdf), although the phrase was never explicitly used.  

[9] Congress passed legislation in 2012 that included a 0.10 percent per annum tax be added to the G-fee on GSE mortgages purchased, which is collected by the GSEs along with its G-fees and remitted directly to Treasury. It had a ten-year lifespan but was renewed in 2022 for another ten years to raise revenue.  

[10] The return earned on required stockholder’s equity, prior to 2020, was at a market rate. At that time, the FHFA, under Director Calabria, instituted a new capital requirement in 2020 that was much higher, reducing the return earned down to the 6 to 7 percent range. Alternatively, the FHFA can prepare the GSEs for privatization by reducing that higher capital requirement as an alternative to raising the G-fee. Given how today’s capital requirement is much higher than is consistent with the results of the official stress tests of the GSEs, it arguably would make more sense to reduce the capital required than to raise G-fees.

[11] Currently, profits earned by the two GSEs accrue almost entirely to the benefit of the U.S. Treasury, which in turn represents the taxpayers. 

[12] Unsurprisingly, left-leaning think tanks have the opposite view, believing the credit box is too tight already. 

[13] The average loan-to-value ratio currently stands at 50 percent for Fannie Mae and 52 percent for Freddie Mac, both of which are record lows based on today’s home prices rather than the prices at the time each loan was purchased. In addition, the government-mandated stress tests for the two companies have consistently shown for several years almost no losses over the nine-quarter scenario of the tests. See the FHFA’s report on the stress test results, page 6. https://www.fhfa.gov/sites/default/2024-02/Final_2023-Public-Disclosure_FHFA_SA.pdf.  

[14] As a reminder, the FHFA under acting Director Ed DeMarco very specifically had this objective.  

[15] It is the viewpoint of many left-leaning organizations that these products should not be discontinued, but priced up, creating additional profits that can then be used to further subsidize various other mortgage programs. In fact, this was done explicitly by the Biden-era FHFA. However, there is no transparency on such internal cross-subsidies, so we cannot evaluate whether the additional profits on second home and investment property mortgages are indeed critical to those other programs.  

[16] The conforming loan limits are all adjusted each year as specified in legislation, based upon the average increase in home prices. 

[17] In 1980, the base CLL was $93,750, or 1.45 times the median house price, but by 2023 (the latest available) it had inflated to 1.79 times the median house price, or $726,200. (Median house prices can be found at  https://fred.stlouisfed.org/series/MSPUS#0, converted from quarterly to annual data.)  The base CLL would be $588,000 if the 1.45 ratio was in place today.  

[18] Setting its own limit below the CLL, it can be argued, would require legislation, as the CLL is specified in congressional legislation. However, there is a legal view suggesting that the GSEs could apply a lower limit on their purchases without needing changes in legislation. This is based on the idea that while the law caps the size of mortgages the GSEs can buy, it does not oblige the GSEs to purchase mortgages up to that cap. 

[19] An example of how this could be implemented gradually to avoid market disruption is by freezing the CLL at its current level until the 1.45 times ratio is reached in the future.

[20] “Duty to serve” is a catch-all name for the legislation, as it specifies that the GSEs should take actions (as developed to meet FHFA requirements) in three specific areas of housing:  rural, manufactured housing, and affordable housing preservation. 

[21] See Ibid, “The Next Housing Bust”: Pinto and Pollock (n. 5), paragraphs 8 and 9.

[22] Given that Black and Latino households have lower incomes on average than white and Asian ones, such LMI-centric programs naturally disproportionately benefit those racial/ethnic groups.

[23] In all cases, permission of the prospective borrowers is obtained.  

[24] A recent and visible example of this is the claim that the use of automated valuation models, instead of full appraisals, will degrade GSE credit quality. See https://www.aei.org/research-products/report/prevalence-of-appraisal-waivers-at-the-gses-including-cltv-statistics/.  

[25] They now do not always require full appraisals as alternatives were developed during COVID-19 that are still used in many instances.  

[26] Historically, the downpayment requirement was 20 percent. Today, mortgages are reasonably available with a downpayment of just 5 percent (from the GSEs) or even only 3.5 percent (from the FHA). Qualifying for special programs can make it even lower.

[27] See my article on this very topic. The article concluded that many closing costs were higher than should be expected in a normally competitive marketplace. https://www.furmancenter.org/thestoop/entry/why-federal-down-payment-assistance-and-closing-cost-reform-are-two-sides-of-the-same-coin. 

[28] I have ignored the very small mortgage operation of the U.S. Department of Agriculture.