A powerful housing trade group is wasting no time in pushing the Trump administration and Republican-led Congress to address one of the last unresolved issues from the financial crisis, outlining a proposal Tuesday to overhaul mortgage-finance giants Fannie Mae and Freddie Mac.
The Mortgage Bankers Association plan would make Fannie and Freddie privately-owned utilities and cap their returns on capital. It would also turn the government’s implicit backstop of the companies into an explicit guarantee of the mortgage-backed securities they sell to investors.
The group’s paper is an attempt to influence any effort President Donald Trump and lawmakers make to reform the U.S. housing-finance system, which crashed in 2008 and has been stuck in limbo under government control ever since. The fates of Fannie and Freddie are crucial to the $10 trillion mortgage market, and to investments in the companies’ shares worth billions of dollars.
The companies don’t make mortgages; they buy them from lenders, wrap them into securities and provide investors guarantees against default. That process frees up capital for lenders to make more mortgages and is often credited with making inexpensive, 30-year fixed-rate mortgages available in the U.S.
The government took control of Fannie and Freddie in 2008, eventually injecting them with $187.5 billion in capital to sustain them after the financial crisis. The companies returned to profitability and have paid the government more in dividends than they got in aid. The last major effort to reform the housing-finance system stalled in Congress in 2014.
The MBA plan would open the door for private competitors and designate Fannie and Freddie as systemically important financial institutions, a status that would subject them to stringent capital requirements and tough oversight by the Federal Reserve. Fannie and Freddie would have regulated returns on capital, would promote affordable housing and maintain equal access for small lenders.
The increased capital requirements would probably result in slightly higher mortgage rates for borrowers, said MBA chief economist Michael Fratantoni in a call with reporters on Tuesday. He said it was unclear how much they would rise.
The proposal is one of a number of plans authored in the past year. One written by the former director of Fannie’s and Freddie’s regulator and an ex-Republican Senate staffer, would turn the companies into lender-owned insurers. Another proposal, authored in part by former advisers to Hillary Clinton’s presidential campaign, would have merged the companies into a government-owned corporation. The idea of turning Fannie and Freddie, also known as government-sponsored enterprises, into utilities has been floated in the past by some shareholders and small lender groups.
“The call for the GSEs to be regulated utilities is extremely positive,” said Glen Corso, who heads the Community Mortgage Lenders of America, a small-lender trade group. “We’ve always felt that trying to rip up what we have now and start all over again could lead to a tremendous amount of disruption.”
The MBA plan, by creating an explicit government backstop of mortgage securities, would maintain some federal subsidy of the market, which could draw critics. Some Republicans have advocated for severely limiting the government’s role and winding down Fannie and Freddie.
“It’s clear that a discussion within Congress will be a marathon, not a sprint,” said Bill Killmer, MBA’s senior vice president for legislative and political affairs.
Steven Mnuchin, Trump’s nominee to be Treasury secretary, said at his confirmation hearing this month that he believed Fannie and Freddie remain important to the housing market and that he doesn’t support solutions that would put taxpayers at risk or eliminate capital for housing. He said housing-finance reform should be a priority.
The proposals over the past year have different structures but carry some similar features, said Jim Parrott, who helped author the proposal to merge Fannie and Freddie into a government corporation.
“There is increasing agreement that the government should handle securitization and the catastrophic credit risk and a competitive private market the rest,” said Parrott, who worked in the Obama White House and is a consultant for financial institutions.
The MBA plan leaves some unanswered questions. It doesn’t address what to do about current shareholders of Fannie Mae and Freddie Mac, which include hedge funds that are battling in the courts for a share of the companies’ profits.
The plan also didn’t specify how much private capital the guarantors would be required to keep or how how much would be charged to guarantors for the explicit government guarantee. In a press release, the MBA said it anticipated releasing a more detailed proposal in April.
Some policy analysts remain skeptical that Congress will address housing-finance reform soon. “It is difficult to imagine how lawmakers will agree on contentious mortgage finance reform issues ranging from affordability to transition with the political discourse on Capitol Hill already signaling delay and discord,” Compass Point Research & Trading analyst Isaac Boltansky wrote in an e-mail.
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