The Trump administration is considering bypassing Congress as it looks to privatise the country’s two largest mortgage guarantors, according to people who have been briefed on the plans, following years of failed attempts to remove them from state control.
Steven Mnuchin, the Treasury secretary, is working on a set of proposals that he hopes will end the 10-year government control of Freddie Mac and Fannie Mae, which guarantee most of the mortgages in the $10tn US housing market. Mr Mnuchin has previously said he wanted to achieve this with support from Democrats in Congress, but with Washington as divided as it has been in recent years, officials are considering what options they have to act unilaterally.
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One person who has been consulted on the administration’s thinking said: “They want bipartisan support, but they know that is going to be difficult, especially with so many Democrats running for president. But there are plenty of things they can do without Congress giving its support.” Freddie Mac and Fannie Mae have been in “conservatorship” — which gives the government control of the two entities, but does not put their liabilities on the public balance sheet — since they were bailed out at the height of the financial crisis in 2008. Collectively their balance sheets are worth about $5tn.
In recent years, politicians on both sides have made moves to end this state of limbo. But so far these have foundered as lawmakers argue over how to restore them to the private sector while also making sure they underwrite loans for low-income households but no longer pose a risk to the taxpayer. The Trump administration has put privatisation back on the table, however, making housing reform one of its top goals for this year.
Mr Mnuchin said this month: “Protecting American taxpayers by ensuring the safety and stability of the United States housing finance system is a priority for the Treasury department.” If Mr Mnuchin wants to succeed where others have failed, he needs either to persuade Democrats in Congress to back his plans or to find a way to avoid Congressional approval altogether. Some believe that the Trump administration can secure Democratic support if it guarantees a set amount of money for affordable housing. Mark Zandi, chief economist at Moody’s Analytics, said: “If you had the same affordability regime [as now] and on top of that provided extra money to subsidise an expansion of credit, there is a comfort level at which you get progressives on board.”
Most however believe that agreeing a package that is palatable to Democrats and Republicans is all but impossible, leaving Mr Mnuchin looking for solutions that do not require Congressional backing. One option would be simply to recapitalise the two institutions and allow them to enter the private market as they are. Since 2012, Fannie and Freddie have been required to return all their profits to the Treasury — a policy known as the “net worth sweep”. Investors argue that ending this requirement would allow the two institutions to build up their capital buffers so they no longer present a risk to the taxpayer.
Tim Pagliara, executive director of a group of investors in Fannie and Freddie known as Investors Unite, said: “If they had capital requirements of 2.5-3 per cent, they would have enough money to survive the equivalent of a 500-year flood.” Mr Pagliara points out that since 2008, the pair have returned $292bn to the Treasury in dividends — about 50 per cent more than they have drawn from the government since the crash. Such an option would require the backing of the Federal Housing Finance Agency, which oversees the two mortgage backers. Mark Calabria, the administration’s choice to lead the agency, will testify in front of Congress on Thursday. But in the past he has argued that Fannie and Freddie should no longer have to return their profits to the government, saying the policy has “undermined public trust in the government role in insolvencies”.
Others, however, say new laws are required to make sure Fannie and Freddie continue to fulfil a public service by underwriting loans for poorer people and to make sure there is never a repeat of 2008. Ed DeMarco, the president of the Housing Policy Council and former head of the FHFA, said: “Any administrative effort to remove Fannie Mae and Freddie Mac from conservatorship without legislation falls short on a fundamental goal of housing finance reform.”
One alternative option for the administration is not to remove them from conservatorship at all, but to recapitalise them while under government control and shrink their scope. Recommended The Big Read US housing: how Fannie Mae and Freddie Mac became rental powerhouses Such an option however, is likely to attract anger from private shareholders hoping for a return and from large parts of the banking industry, which does not want to compete with two fully-capitalised government-backed entities.
Given the complexities involved, many believe this administration is no more likely to succeed in privatising Fannie Mae and Freddie Mac than the host of members of Congress who have failed in the past. Nevertheless, there remains an ideological impulse on both sides of politics to end the status quo.
Ron Haynie, who spent 20 years working for Freddie Mac and is now senior vice-president at the Independent Community Bankers of America group, said: “These two enterprises have been all but nationalised. That is something we simply don’t do in this country.”
Source: Financial Times
