Trump’s Fannie-Freddie plan would end a decade of U.S. control of housing finance

The Trump administration laid out its vision for releasing Fannie Mae and Freddie Mac from more than a decade of federal control, issuing a long-awaited plan that marks the government’s boldest step yet toward shaking up housing finance and closing one of the final chapters of the 2008 financial crisis.

The proposal released Thursday by the Treasury Department suggests dozens of reforms to protect Fannie and Freddie from another housing crash, shrinking their dominant market shares and creating new competitors to the companies that backstop about $5 trillion of home loans. Yet, it is only an initial step in what still would be a long and arduous road to freeing the companies from the government’s grip.

Ending Fannie and Freddie has long been a goal for Treasury. But writing a report, a benchmark that took Treasury Secretary Steven T. Mnuchin almost three years to hit, is arguably the easy part. The task now gets much tougher. While Treasury has outlined broad goals, some of the trickiest questions about how to fix Fannie and Freddie remain unanswered.

In a sign of the long process ahead, Treasury acknowledged that specific details involved in releasing the companies, such as determining how they will raise capital to weather an economic calamity, still need to be negotiated across multiple government agencies.

“The Trump administration is committed to promoting much needed reforms to the housing-finance system that will protect taxpayers and help Americans who want to buy a home,” Mnuchin said in a statement. “An effective and efficient federal housing-finance system will also meaningfully contribute to the continued economic growth under this administration.”

White House and Treasury officials would be taking a leap of faith that dramatic changes won’t disrupt the mortgage market.

Concern that a revamp might make home loans more expensive has made some in the Trump administration wary of bold moves before the 2020 election, people familiar with the matter have said. That’s because the health of the economy, which has recently shown signs of slowing, is perhaps the most important issue for Trump in securing a second term.

Treasury’s timeline was vague for implementing its recommendations, some of which would have to be approved by a bitterly divided Congress. Such political and technical hurdles indicate that the conservatorships probably won’t end anytime soon.

“We remain skeptical that much progress will be made in making it a reality, even with respect to the proposed unilateral actions, before next year’s elections,” analysts at Beacon Policy Advisors said of Treasury’s plan before its public release. If Trump loses, the “blueprint will likely fall out of favor as quickly as Trump leaves.”

Fannie and Freddie — their real names are the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. — don’t make loans. They purchase mortgages from banks and other lenders and package them into bonds. Those securities have guarantees that protect bond holders from the risk of homeowners defaulting.

The process provides ample liquidity for the mortgage market, keeping the housing sector humming and borrowing rates low. Evidence of Fannie and Freddie’s impact: The U.S. is an outlier in allowing consumers to obtain 30-year fixed-rate mortgages.

The companies were taken over when the housing market soured, ultimately receiving $191 billion in bailout funds. They’ve since become profitable again, paying more than $300 billion in dividends to the Treasury in recent years.

The Trump administration contends that taxpayers will remain at risk as long as Fannie and Freddie are undercapitalized and in the government’s grip. The companies are currently barred from holding more than $3 billion in capital apiece to protect against losses, though in conservatorship, they have access to about $250 billion in Treasury funds.

Treasury’s preference is for lawmakers to approve comprehensive housing-finance reform. Only Congress has the power to charter competitors to Fannie and Freddie, a move that would lessen their systemic risk. Treasury also wants Congress to create an explicit federal guarantee of Fannie and Freddie mortgage bonds. Bond investors have warned that they might stop buying Fannie and Freddie securities if the companies are released from U.S. control without an explicit backstop.

Yet lawmakers are split on the role of Fannie and Freddie. Democrats, who control the U.S. House, want the companies to help less-affluent borrowers buy homes. Many Republicans are resistant to such affordable-housing policies, and the most conservative GOP lawmakers don’t think the government should have any presence in the mortgage market.

Should Congress again fail to come up with a compromise, Treasury’s plan includes a number of proposals that could on their own lead to Fannie and Freddie being set free. For instance, Treasury expects it will be necessary for the companies to maintain access to a government line of credit even if the companies exit conservatorship. Availability of such financing, in exchange for a fee, should assure bond investors that Fannie and Freddie mortgage securities have no credit risk, said a senior Treasury official.

Treasury also wants to set Fannie and Freddie on a path to raising capital, though beyond providing suggestions on potential avenues the companies could pursue — such as retaining earnings, public share sales or private offerings — the report is thin on details. Specifics on how Fannie and Freddie would rebuild their capital cushions, and how much money they need, still has to be negotiated between Treasury and the Federal Housing Finance Agency, the companies’ regulator.

Allowing Fannie and Freddie to retain profits would require halting or tweaking a controversial arrangement — instituted in 2012 during the Obama administration — that required the companies to send virtually all their income to the Treasury. As an interim step, the Trump administration may allow the companies to hold more capital without completely suspending the sweep of profits to the Treasury, the senior Treasury official said.