Fannie Mae and Freddie Mac are all but certain to survive another Congress and complete 10 years in the government’s hands without major reform legislation.
That anniversary comes in September, a decade since the two government-sponsored enterprises teetered during the global financial crisis and required a government bailout.
[Freddie Mac joins Fannie Mae in needing federal funds because of accounting losses]
Key lawmakers who have been pushing to overhaul the mortgage giants are acknowledging that, with Congress winding down before the midterm elections, a Fannie-Freddie overhaul this year is not possible.
“I don’t feel great about anything happening this year,” acknowledged Sen. Bob Corker, the Tennessee Republican who, as a member of the Senate Banking Committee, worked behind the scenes over recent months to try to develop draft legislation that would earn support from Democrats. Without support from across the aisle, the bill hasn’t been formally introduced.
Treasury Secretary Steven Mnuchin also has acknowledged that the goal of GSE reform has fallen off this year’s agenda.
Different interests have different reasons for wanting Fannie and Freddie out of government conservatorship. Today, the two back about half of all new home loans, and with government entities guarantee about 97 percent of mortgage backed-securities. They don’t issue home loans, but rather buy them from banks and other lenders and package them into securities for sale with a guarantee.
Because they are wards of the government, that guarantee is also the taxpayers’. And it covers about $6.4 trillion’s worth of bonds.
Many conservatives want Fannie and Freddie eliminated to lessen the government’s role in housing markets and to prevent a situation from recurring in which they earn profits for private shareholders but get an implicit government guarantee.
[Conservatives release blueprint for Trump to ‘eliminate’ Fannie Mae, Freddie Mac]
Banks, real estate agents, and home builders, meanwhile, would like to see them out of the government’s hands, but with a government backstop, so they and competitors will be freer to experiment with more lending — perhaps freeing up hundreds of billions of dollars of more lending each year.
Mnuchin, a former banker who has boasted of his extensive career experience working with Fannie and Freddie, came into office pledging to take the two out of the government’s care. Last year, as the tax bill became the Trump administration’s top priority, he said that legislation would be a 2018 issue.
But now, it is clear that Congress won’t approve legislation in 2018. The only question is if any legislation will be introduced.
Senate Banking Committee Chairman Mike Crapo, R-Idaho, said he hopes to bring a bill forward this year.
Introducing a bill, even if it has no chance of passing, could set a precedent for the next Congress or a future Congress to finally take action, framing the debate and allowing outside interests and groups to lobby on it.
“The earlier you make progress on bringing a deal together, the faster you can get going the next Congress,” Crapo said, without closing the door on Congress passing legislation this year.
In the absence of congressional action, the onus is on the Trump administration to spell out a plan for resolving the status of Fannie and Freddie.
Lobbyists and members of Congress say the administration could do much on that front.
“I think the administration will use executive powers to do much of what we would have done through legislation,” Corker said. “There’s a lot that they cannot do, but there’s a whole lot that they can.”
Yet, there is only uncertainty about whether the Trump Treasury intends to do anything about the GSEs or what it might do if they did.
“It is decidedly deplorable that the GSEs have spent nearly a decade in what was originally described as a ‘timeout,’ but the lack of legislative progress coupled with administrative uncertainty suggest that comprehensive mortgage reform is not on the horizon,” noted Isaac Boltansky, director of policy research for Compass Point Research and Trading, in a recent commentary.
Mnuchin testified this year that he has options for reforming Fannie and Freddie administratively, but he declined to spell them out and said he would prefer for Congress to act.
If the Trump administration plans action, though, there are no signs of it. The Treasury did not respond to requests for comment on Mnuchin’s intentions. A lobbyist working on housing finance issues said that there are no signs the administration is moving toward unilateral action on the GSEs.
Instead, some observers think the threat of administrative action might have been more of an attempt to scare Democrats into coming to the negotiating table than a serious plan. Republicans tried to suggest that the administration, particularly with a Trump appointee installed next year in the Federal Housing Finance Agency that oversees Fannie and Freddie, could swing housing policy in a sharply conservative direction if Congress doesn’t act.
That logic didn’t sway Democrats. Housing and civil rights groups took the stance that the changes floated by Corker would do too much to lessen government subsidies for housing. Those groups, such as the Center for Responsible Lending and the NAACP, determined that they were better off working with the Trump administration than facing legislation shaped by Congress.
In their eyes, the GSEs are providing subsidies for middle- and low-income housing indirectly through the guarantees they make on packages of mortgages and directly via trust funds to which they are directing hundreds of millions of dollars by charging a small levy on those guarantees.
The Trump administration isn’t lacking for ideas on what could be done administratively.
In February, the American Enterprise Institute, a conservative think tank whose housing scholars have influence with congressional Republicans, laid out a plan for Trump to put Fannie and Freddie on a path to elimination by gradually lowering the size of loans they are allowed to purchase.
Outside conservatives fear that, in the absence of legislation and under the control of an Obama-appointed FHFA director, the GSEs have been slowly but surely expanding their mission and loosening credit requirements, rather than shrinking their influence.
“If we start kind of returning to these dangerous lending standards, that puts us back where we were 10 years ago,” said Meghan Milloy, director of financial services policy at the American Action Forum, a right-of-center think tank.
Mnuchin, though — a Democrat in his pre-Trump days — has repeatedly said that he favors maintaining a government backstop for mortgage-backed securities, the exact policy that conservatives want to curtail.
Giant investment firm PIMCO also recommended this year that the administration continue to run Fannie and Freddie as government corporations.
The reality is that, setting aside another major upheaval in housing markets, administrative action may be the only way they get changed.
Crapo and his then-Democratic counterpart, Sen. Tim Johnson of South Dakota, advanced GSE reform legislation to the Senate floor in 2014 that would have dissolved Fannie and Freddie and replaced them with a government agency that provided an explicit government guarantee for mortgage-backed securities.
That bill went nowhere in the broader Senate. After years of trying and getting nowhere, senators eventually will welcome something else.
