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The Treasury's plan, released in a 53-page
report, marks the first major effort to jump-start housing
finance reform in Washington after a failed 2012 attempt by the
Obama administration.
The report calls for recuperating Fannie and Freddie and
removing them from their government lifeline, but it strikes a
cautious tone by failing to commit to concrete timelines or a
specific recapitalization plan.
It commits to preserving the 30-year fixed rate mortgage, a
cornerstone of the U.S. mortgage market, and leans heavily on
Congress to implement several critical measures, including the
creation of an explicit guarantee for Fannie and Freddie's
mortgage-backed securities.
As such, it may disappoint some investors who had been
anticipating a speedy overhaul of the mortgage giants and
conservative Republicans who had hoped the administration would
take bold steps to sever all government ties with the companies.
Instead, the Treasury outlines a series of incremental
administrative measures it can take to bolster Fannie and
Freddie's finances, reduce their risk to the taxpayer, and
shrink their footprint in the secondary mortgage market.
Democrats were quick to criticize the plan, warning it could
increase housing costs by limiting access to mortgages to
lower-income Americans.
"President Trump’s housing plan will make mortgages more
expensive and harder to get," Senate Banking Committee ranking
Democrat Sherrod Brown said in a statement.
Fannie and Freddie, which guarantee over half the nation's
mortgages, have been in conservatorship since they were bailed
out during the 2008 financial crisis and Washington has since
struggled to agree a plan to get them back on their feet.
The Treasury holds warrants representing 80% of Fannie and
Freddie’s common stock, as well as senior preferred stock
agreements that allow it to sweep the firms' profits into its
coffers. That arrangement has left Fannie and Freddie with just
around $3 billion of capital each, leaving taxpayers exposed to
future bailouts.
Some investors had hoped the Treasury would provide a clear
recapitalization plan that would allow the mortgage firms to
start retaining the majority of their earnings. The report,
however, recommends only that the government "consider
permitting" them to retain more than the $3 billion in capital
currently allowed.
A senior Treasury official said a specific recapitalization plan
would still have to be carefully negotiated with the Federal
Housing Finance Agency (FHFA), which oversees the mortgage
giants. Washington insiders say that negotiation could be highly
complicated and legally tricky.
FHFA director Mark Calabria, who told Reuters in July he is
eager to end the conservatorship by his the end of his five-year
term, called the report an "important step forward" in a
statement.
The Treasury hopes that parallel to negotiating a capital plan
with FHFA, Congress will be spurred to take up broader housing
reforms in the coming months. Most importantly, it called for
Congress to create an explicit guarantee for the companies'
mortgage-backed securities, although Washington housing
lobbyists see such action as unlikely in the near term.
"My preference is to fix the housing finance system through
legislation and I look forward to working with all of my
colleagues as we move forward," U.S. Senator Mike Crapo,
chairman of the Senate banking committee, said in a statement.
If Congress fails to create a new guarantee, the Treasury said
it would use its existing investment in the companies to
continue serving as a backstop, signaling it may be prepared to
stand behind the companies indefinitely.
In March, President Donald Trump asked the Treasury to develop a
plan for housing finance reform, wading into one of the most
politically fraught, technically challenging, and economically
thorny issues in Washington ahead of the 2020 election.
As the administration digs into the detail, it will have to
navigate the concerns of powerful lobby groups representing
bankers, realtors, homebuilders, as well consumer advocates and
fair lending groups, which could ultimately scuttle its plan.
"I'm urging the President: Make it easier for working people to
buy or rent their homes, not harder," said Brown in his
statement.
(Reporting by Pete Schroeder; Editing by Michelle Price and
Andrea Ricci)
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