Key interest groups are hoping that the Trump administration will overhaul bailed-out government-sponsored enterprises Fannie Mae and Freddie Mac itself and that the current congressional effort to find a compromise on bipartisan legislation will fail.
This week, managers at the giant investment firm PIMCO wrote that the current system of housing finance “has been and continues to be immensely successful, not to mention wildly profitable, and the current system works.”
PIMCO is a major investor in the mortgage-backed securities that Fannie and Freddie bundle. The two don’t make mortgages, but they buy them from banks and other lenders and package them into the securities for sale to investors, complete with a guarantee. They have continued to provide that service while in the government’s custody since 2008, and PIMCO suggested that the best path for them would be to continue doing so as official government-run companies.
On the Left, economist Dean Baker published an article in the spring issue of American Affairs, a new journal, arguing that the status quo — with Fannie and Freddie as public companies — is better than the alternative that would be created in a bipartisan bill.
And on the Right, scholars with the conservative American Enterprise Institute are planning next week to announce a blueprint for reducing the government influence over housing markets through administrative changes to Fannie and Freddie.
“We’ll go through why Congress doesn’t need to do anything at this juncture and why allowing Fannie and Freddie to shrink, which can be done administratively, is needed,” said Ed Pinto, co-director of the think tank’s Center on Housing Market and Finance. The paper is set to be published Tuesday and is sure to influence congressional Republicans.
Pinto said the effort to find a bipartisan compromise on housing finance legislation is “misguided,” because it would be bound to include policies meant to promote affordable housing that he argues would raise housing prices and undercut affordability.
The leading effort along those lines is led by Sen. Bob Corker, R-Tenn., who has worked on draft legislation meant to garner support from Democrats. His measure would create a system in which private entities, including the remnants of Fannie and Freddie, would compete to offer securities, which would have government guarantees. The system would include mechanisms for contributing to affordable housing programs.
A government guarantee for mortgage-backed securities is a top desire for the banking industry, which has been pushing for bipartisan legislation. The industry has argued that a government backstop is necessary to maintain the viability of the 30-year fixed-rate mortgage.
But the Corker-led effort has faced opposition from civil rights and affordable housing groups, on the grounds that the entities created by the bill wouldn’t be subject to affordable housing goals the way Fannie and Freddie are. Their criticism of the bill has made it harder for Democrats to sign on.
Affordable housing advocates are just one of many interests for whom the status quo is just fine, and who would rather see a Trump administrative effort to revamp Fannie and Freddie than bipartisan legislation.
Currently, the regulator with custody of the two GSEs, the Federal Housing Finance Agency, is led by Mel Watt, an Obama appointee. But his term expires in January. A Trump-appointed director, working with the Trump Treasury Department, would have broad discretion to overhaul the two.
“There is certainly a rising drumbeat for administrative action, especially once Watt is gone,” said Chris Whalen, an investment banker and consultant, as well as publisher of the Institutional Risk Analyst.
Advocates of reform, such as Corker, have argued that leaving Fannie and Freddie alone raises the risk that one day they might return to the failed pre-crisis model, in which they earned profits as private companies but enjoyed an implicit government backing. In their eyes, resolving the status of the GSEs is major unfinished businesses from the financial crisis.
But that logic isn’t enticing to conservative analysts, who oppose government guarantees for mortgage-backed securities. Nor does it appeal to affordable housing advocates who prize the contributions of Fannie and Freddie to affordable housing trust funds and their pursuit of affordable housing goals in guaranteeing packages of home loans.
Proponents of bipartisan legislation this year have tried to use the threat of a conservative Trump-appointed FHFA director shrinking the role of Fannie and Freddie or even putting them into receivership, meaning that they would be dissolved.
In a hearing this month, House Financial Services Committee Chairman Jeb Hensarling of Texas, a Republican, ran through the possibilities with Treasury Secretary Steven Mnuchin, indicating that the Trump administration could end the affordable housing goals, cut off contributions to the affordable housing trust funds, and end refinancing programs.
“I hope all within earshot have listened carefully to what might happen if we choose not to engage in GSE reform,” Hensarling said at the hearing, looking over to the Democratic side of the hearing room. Hensarling signaled in December that he would support a housing finance system with a government guarantee, despite his earlier opposition.
But Democrats have remained unswayed. And with time running out for major legislation before Congress is overtaken by the midterm elections, the prospects for GSE reform are bad.
Isaac Boltansky, director of Policy Research for Compass Point Research and Trading, said he placed the odds for legislation at 10 percent, “given the lack of operational detail at this stage in the legislative calendar, reported reticence on the Left due to the proposal’s treatment of affordable housing, and the transition risk that is inherent to this effort.”
Mnuchin has declined to say how the Trump administration would manage Fannie and Freddie. But he did say last month that he has options.
