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GSE Reform: Calhoun Proposal Envisions Utility Model with Affordability Focus

March 7, 2022

A recent Brookings Institute webinar entitled “The Path Forward for Housing Finance” examined the prospects and plans for GSE reform. Specifically, the event discussed a proposal by Michael Calhoun and Lewis Ranieri that would reimagine the GSEs as utilities and redirect the government’s equity in Fannie and Freddie to affordable housing.

Click here for the GSE reform plan. Click here for a replay and transcript of the event.

Reform Plan Highlights: Affordable Focus
Originally introduced in February 2021, the Calhoun Ranieri Plan would end the GSE conservatorship with the emerging entities structured as utilities. A key feature of the utility model is the GSEs would operate as private entities but have limits on their profits. The plan urges FHFA and the GSEs to further its affordability focus with the following steps:

• Extend forbearance and increased support for homeowners;
  
  
• Expand availability of credit to lower wealth households (largely single-family focused):
  • Expand low down payment mortgages
  • Remove credit overlays
  • Increase purchase of small balance loans and eliminate surcharges
  • Eliminate price differentials, including those based on “national catastrophe risk”
    
    
• Increase affordable housing supply:
  • Increase availability and workability of loans to purchase and rehab single-family homes;
  • Increase assistance and quality of manufactured housing;
  • Provide financing for homeownership and rental housing developers through construction-to-permanent loans;
  • Target new rental unit financing to projects that have the greatest impact on housing for lower income residents.

Utility Model
According to the proposed plan, the GSE transition to utilities (private entities with limits on profits) would be smooth since they have essentially operated as utilities while under conservatorship. Calhoun and Ranieri argue that certain administrative reforms have made them more utility-like, including shrinking the retained portfolio, prohibiting volume discounts to large lenders, restructuring guarantee fees to reduce costs to lower income borrowers, and the use of credit risk transfers.

A utility model, according to the authors, would balance the special position and focus with the ability to earn a profit:

In terms of oversight and structure, the plan proposes the following elements for consideration:

• Return paid to private shareholders must be sufficient to attract investors, but not excessive;
  
  
• Smaller lenders should not be charged more to access GSE financing;
  
  
• National equal pricing for homebuyers;
  
  
• Regulatory oversight to ensure GSEs do not unfairly compete to earn excessive returns; and,
  
  
• Continue to limit the GSE’s retained portfolio.

In terms of converting the GSEs to utilities via legislation or regulatory action, the plan is somewhat “process neutral”. However, the authors recognize the difficulty in achieving legislative reform and argue that the remaining reform can be done by the FHFA Director under existing authority and using Treasury’s leverage via the Preferred Stock Purchase Agreements (PSPAs) to ensure the private entities are duty-bound to an affordability mission rather than a profit mission.

Although it is difficult to get excited about GSE reform more than a decade after the GSEs were placed into conservatorship, Calhoun is known to have close ties to FHFA, Treasury, and the White House, which leads many to pay closer attention to his proposals on housing finance reform.

In addition, a below-the-radar plan like this can help the Administration to show results on housing affordability and energize their supporters before the midterm elections this November. The Administration will have until January 2025 to make administrative changes to GSE conservatorships, even if no legislative alternative develops in Congress.

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