With the Trump administration in power, mortgage bankers see a new opening to release Fannie Mae and Freddie Mac from government control and reshape the housing finance system, marking a shift in the political landscape from the late Obama years.
The Mortgage Bankers Association, a key housing industry trade group, plans to lobby Congress and the Trump administration to effectively turn Fannie and Freddie into private utilities and to allow new entrants to compete with them on the same terms. The most important of those terms would be an explicit government backstop for the insurance they provide for mortgage-backed securities.
|'The realtors aren't screaming, the mortgage bankers aren't screaming, no one has a problem.'|
From the industry's perspective, that arrangement could create more competition in the secondary market for home loans, potentially allowing bankers to make more loans, builders to build more houses and real estate agents to sell more homes.
Achieving that won't be easy. Fannie and Freddie remained in the government's hands throughout all of Barack Obama's tenure for a reason.
The two government-sponsored enterprises buy mortgages from lenders, package them into securities and sell them to investors with a guarantee that they will make them whole if the loans go bad. In doing so, they increase liquidity in the secondary market for mortgages, allowing lenders to make more loans with the expectation that they will be able to sell them to investors. That liquidity makes it possible to offer 30-year fixed-rate mortgages, a hallmark of the American housing system, the industry says.
Fannie and Freddie were bailed out by the government in 2008 during the financial crisis and have remained there since, even after returning to profitability.
The two government-sponsored enterprises back nearly half of all new home loans, and, with other government entities, account for nearly all new issuance of mortgage-backed securities.
The system has worked well enough to support the housing recovery, as weak and fragile as it has been. But the mortgage bankers see an advantage to introducing competitors to Fannie and Freddie.
"We just think that competition is good for the system," said Rodrigo Lopez, the group's chairman and also the executive chairman of NorthMarq Capital, a commercial mortgage banking company.
In the system the group envisions, some of the advantages Fannie and Freddie enjoy would be mitigated. Once they were returned to the private sector, they would be declared "systemically important financial institutions," an official designation that means they would be regulated by the Federal Reserve as if they were megabanks.
Also, thanks to an initiative begun under the Obama administration, many of the technical systems for securitizing mortgages, such as the documentation for disclosures to investors and the programming for making payments to investors, would be made available to any new entrants, through a government-owned corporation.
It's a blueprint for ending Fannie and Freddie's long purgatory. The group hopes to have a finalized, detailed proposal out in April and to begin talking with the relevant agencies as soon as Trump nominees are confirmed.
Yet, just as with failed attempts to reform housing finance in the Obama years, the obstacles to success are numerous.
One is that the group hasn't spelled out how current investors in Fannie and Freddie would be treated. Hedge fund investors in the two companies, which are traded outside of the stock exchanges, are in litigation with the federal government over claims on their profits. Tim Pagliara, the head of a group of investors, said they were still learning about the mortgage bankers' proposal.
Another is that the plan would need congressional action. "There's no way around it. It's just unavoidable," Lopez said, noting that Congress would be required to authorize the guarantees of new securities and the new government corporation.
There, the politics are convoluted.
Conservative Republicans would have concerns because Fannie and Freddie would continue to operate, likely under their existing names. Conservatives, such as House Financial Services Committee Chairman Jeb Hensarling, favor shuttering Fannie and Freddie and limiting government guarantees for mortgage securities.
Also, the plan doesn't explain how Fannie and Freddie and their competitors would support affordable housing. Spelling out whether they would contribute to affordable housing funds, or have goals for loans made to lower or middle-class families, would be crucial to getting liberal lawmakers on board, but at the expense of conservative votes.
Nor does the plan specify what kind of credit borrowers would need to be eligible for government backing.
"These are solvable questions, but they are the ones that kind of tripped up" bipartisan legislation in the Senate in 2013, said Michael Bright, a director at the Milken Institute's Center for Financial Markets. Bright, a former staffer for Sen. Bob Corker, R-Tenn., also played a lead role in authoring that legislation, which failed to gain a vote in the full Senate.
Yet there are reasons to believe that the circumstances are more favorable to legislation now than they were in Obama's second term.
The biggest is that the Trump administration appears to be much more amenable to transitioning Fannie and Freddie back to the private sector than the Obama administration.
During his confirmation hearing, Trump treasury secretary-designate Steven Mnuchin said Fannie and Freddie are "very important entities to provide the necessary liquidity for housing finance."
"I believe we need housing reform, so we shouldn't just leave Fannie and Freddie as is for the next four or eight years under government control without a fix," he said.
Keeping Fannie and Freddie as part of the mortgage mix may be more politically viable now than it was during Obama's tenure, Bright said. "In 2012, there was a little more of a willingness or desire to torch everything and build from the ground up," he said, but now there is more of a desire to "repurpose what we have."
Even repurposing Fannie and Freddie, however, might not be politically feasible when so many interests are able to get along well with them as wards of the state.
"The realtors aren't screaming, the mortgage bankers aren't screaming, no one has a problem," said Christopher Whalen, the head of research at Kroll Bond Rating Agency.
Reform of Fannie and Freddie is far down the priority list for the GOP Congress, Kroll noted, and the status quo is acceptable for many key players. "Reform is great to talk about in theory, but for people like us who work in bond markets every day ... there's just no logic here."