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“Looking at” GSE Reform for Ten Years – and Counting

Steven Mnuchin was not even confirmed as Treasury Secretary when he assured in the fall of 2016 that GSE reform would be a top priority for the Trump Administration. That’s still his position. And it will be his position next year.

The great GSE reform move of 2017 and 2018 will come in 2019, he assured Maria Bartiromo on Fox Business News Monday. Mnuchin knows it is not sustainable to keep Fannie Mae and Freddie Mac caged in a government-run conservatorship. It has been almost ten years so enough is enough. He also knows his “starting principles” for reform, chiefly to protect taxpayers and preserve the 30-year mortgage. And he probably knows more about housing finance than anyone in the Trump Administration since he once ran the mortgage securities operation at Goldman Sachs. On top of that he knows Congress is incapable of coming up with a legislative solution: It has tried and failed numerous times over the last five years and is ending this Congress farther behind than ever. Despite this wealth of knowledge, he told Bartiromo that GSE reform is “something we’re going to look at” in 2019. 

What will more “looking at it” yield?  

Everyone knows the government sponsored enterprises were put into conservatorship to arrest a cascading financial crisis in 2008. It was a temporary arrangement. The Housing and Economic Recovery Act (HERA) required the GSEs’ conservator, the newly-created Federal Housing Finance Agency, to restore the shareholder-owned entities to “solvency” and to “preserve and conserve” their assets. If that proved to be impossible, then FHFA could begin receivership proceedings.

Everyone also knows Fannie and Freddie were actually in better shape than feared.  In less than five years, they were churning out profits large enough to pay back $187.5 billion taxpayers provided to keep them afloat plus another $100 billion and counting. The GSEs have reached the “10 percent” moment, with their debt to taxpayers plus the interest now settled. If that isn’t sound and solvent, what is? It doesn’t take a Wall Street player to see this.

In addition, everyone knows the Obama Administration recognized that Fannie and Freddie had few friends in Washington but lots of money. In a feat of stunning audacity, the Obama Treasury Department engineered the Net Worth Sweep of the companies’ profits in 2012. Shareholders and investors have fought this illegal action in court for years and slowly forced the government to hand over the documents that would prove the Sweep was illegal in its design and implementation. For some reason, a president who has measured a lot of his success by the number of his predecessor’s policies he has reversed is fine with leaving one of Obama’s more appalling overreaches in place.

Likewise, everyone knows that taxpayers have gotten a raw deal from government action as well as inaction when it comes to housing finance policy.  They were forced to pay for years of bipartisan collusion in corrupting the simple mission of Fannie and Freddie and for officials in Washington completely losing control of the regulatory oversight of the GSEs. Under several presidents and Congresses going back to the late 1980s, the GSEs were transformed from government chartered entities to keep mortgage markets stable and liquid to housing policy innovators laden with bad debt. Now, taxpayers have been set up for more bailouts as the Sweep has depleted the GSEs’ capital to zero, all with Congress and the Administration simply “taking a look at it.”

And, of course, everyone knows that ideologically-driven solutions are non-starters. Mnuchin reiterated Monday that a government guarantee on 30-year mortgages helps sustain liquidity in the marketplace. That means we cannot dismantle Fannie and Freddie and hand them over to big banks, like Wells Fargo, which is facing a $1 billion fine for deceptive lending practices. Nor can we go back to business as usual. That would be a slap in the face to taxpayers.

Proposals such as one designed by Moelis and Company provide at least a starting point for netting the gains from Fannie and Freddie’s recovery and putting in place mechanisms to keep them from getting into trouble again. The blueprint has been making the rounds among policy experts and analysts. It might be the solution waiting in plain sight.

So what is the solution? Mnuchin won’t say. However, he tipped his hand a little on Fox. Getting rid of FHFA Director Mel Watt when his term is up next year will give the Administration an opening to act. This is the same Mel Watt who has managed an historic offloading of the GSEs’ portfolios to the private sector and shepherded meaningful policy reforms to prevent a replay of the years leading up to 2008. And this is the same Mel Watt who has been pleading for years with the Obama and Trump Administrations, as well as Congress, to protect taxpayers by ending the Sweep and getting serious about reform. We’re in trouble if the secret plan for GSE reform rests on axing the only public official who is actually tuned into reality.

Mnuchin, as Treasury Secretary, is the face of the Administration on economic policy. As it stands, the pace of one of the longest economic recoveries in U.S. history is almost exactly where it was under President Obama: Growth at around 2.3 percent; monthly job growth averaging is averaging about 186,000 per month, which is actually 10,000 fewer than it was in Obama’s last year in office; wages are growing but at the same anemic rate as they were under the Obama years.  At the same time, the stock market is flat for the year so far and interest rates, including mortgages, are on the rise. The other major change since the Obama years is that the huge tax cut and sustained spending has set the stage for deficits of $1 trillion – every year and for years to come. Mnuchin acknowledged this to Bartiromo and assured the appropriate response will be offered if those projections prove to be accurate, saying, “We’ll continue to take a look at it.”

That’s a good idea. For now though, taxpayers, average people looking for an affordable path to home ownership, capital markets, and Fannie and Freddie’s shareholders have had enough “looking at” GSE reform. They want someone to do something.