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The Next Move on Fannie and Freddie Won’t Come from Capitol Hill

As Reuters reports today, Members of Congress know they will not take up an overhaul of Fannie Mae and Freddie Mac this year. The Trump Administration, however, does not have the luxury of inaction. Even though the Administration itself probably lacks the bandwidth for major revisions to housing finance policy, it cannot avoid looming questions about whether to allow the mortgage finance giants to recapitalize.

Congress is grappling with landmark policy matters that have enormous and highly unpredictable political implications for both parties, such as health care and taxes, and the committees with jurisdiction on housing finance are otherwise occupied.  As Reuters reported, the Senate Banking Committee is at square one on GSEs, having just begun weekly bipartisan staff briefings. The House Financial Services Committee, meanwhile, is focused on rolling back parts of the Dodd-Frank financial reform law and issues other than Fannie and Freddie.

Even without the political earthquake Trump triggered, GSE reform was not likely to have originated on Capitol Hill. As was evident in recent Congresses, the complexity of both the politics and the policy of how to either shutdown or rebuild new and improved government sponsored enterprises (GSEs) was too heavy a lift, especially since it was not a top priority for the Obama Administration. Bipartisan proposals, such as legislation offered by Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA) stalled under scrutiny about their implications for taxpayers and homebuyers.  

Of more immediate consequence is that Fannie Mae and Freddie Mac’s reserve capital is dwindling down to the point where a negative quarter in the housing sector would require a new infusion of cash from taxpayers. This would put both Congress and the Trump Administration in an unenviable position with the public; having to rationalize what will surely be termed a bailout. Such an announcement would underscore how the mix of inaction and ill-conceived actions during the last eight years continues and how, even with a new Congress and President, there is no resolution in sight.

Congress’ off-and-on interest in the GSEs aside, let’s remember that the Housing and Economic Recovery Act (HERA) designated the Federal Housing Finance Agency (FHFA) as conservator for Fannie and Freddie. HERA mandated that FHFA preserve the GSEs’ assets with the goal of returning them to a sound and solvent condition. Obama’s Treasury Department ignored that mandate in implementing the Net Worth Sweep in 2012 and FHFA Director Mel Watt and the Trump Administration will soon have to come to grips with that policy.

Over a year ago, Watt warned in a high-profile speech at the Bipartisan Policy Center that the day of reckoning was coming. Noting that the Sweep anticipated the dwindling of the GSEs’ capital to zero by 2018, Watt said it was his duty as “regulator and conservator” to be candid about the GSEs’ prospects under the Sweep.

In addition to warning that another infusion of taxpayer dollars in the event of a loss would be needed, Watt said such draws by Fannie and Freddie could reduce their ability to back mortgages, raising possible unease by investors in capital markets and undermining the ability of Americans to finance a home purchase.

A year later, the writing on the wall is bolder. Treasury Secretary Steven Mnuchin clearly wants to extricate Fannie and Freddie from government control but has not said how or when this will happen. Congress is not going to be much help in this regard. Watt might finally get the green light to use the power Congress gave him and suspend the payments of recent GSE profits to Treasury. That would not mean the end of the conservatorship, a return to business as usual, and the restoration of shareholder rights. It might, however, signal that the Trump Administration wants to free itself from unfair, illegal and ill-advised policies it inherited and take a fresh look at Fannie and Freddie and housing finance reform.