A Treasury official on Thursday ruled out “narrowly crafted ad-hoc fixes” for the government-sponsored mortgage businesses Fannie Mae and Freddie Mac, reiterating the Obama administration’s demand for a comprehensive congressional overhaul of the mortgage market that would shutter the two bailed-out companies.
Responding to recent calls by investors in Fannie and Freddie for the federal government to recapitalize the businesses and privatize them,Michael Stegman said Thursday that the firms’ private profit, public backstop model means “exposes taxpayers to great risk and is irresponsible.”Stegman, the Treasury’s counselor to the secretary for Housing Finance Policy, was speaking at a housing finance conference hosted by Goldman Sachs in New York City.
Fannie and Freddie buy mortgages from lenders and package them into securities to sell to investors with a government guarantee in case they go bad. The two companies failed in 2008 and were taken into possession by the federal government, ultimately receiving $187 billion in taxpayer assistance.
In recent years, they have returned to positive cash flow, and returned more than that sum to the U.S. Treasury. But much of that money came from one-off factors, such as legal settlements with banks that sold the companies faulty mortgages during the housing bubble. Weaker earnings this year have raised the possibility that the firms may, in future months, need to draw money from the Treasury rather than paying it dividends.
Stegman noted Thursday that “both recapitalization of the GSEs and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense,” and reasserted that “the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.”
Late last year, the government caretaker of the GSEs, Federal Housing Finance Agency Director Mel Watt, expressed openness to removing Fannie and Freddie from the government’s possession if the Treasury wanted to do so. But the Obama administration has repeatedly said that it would be irresponsible to allow the companies to return to the form in which the operated before the financial crisis.
The odds are low that Congress will pass legislation to reform Fannie and Freddie. In 2014, a bipartisan group of senators on the Banking Committee moved legislation to shutter the firms and set up a system in which private capital was at risk for mortgage-backed securities, with a government backstop in place after losses exceeding 10 percent.
Despite approval from the White House, that bill failed to gain traction in the broader Senate amid concerns from concerns from the industry, liberals, and conservatives.
Until a time when Congress is able to act, Stegman said, the government should take steps to make it easier for private capital to replace Fannie and Freddie, and to repair the damaged trust between lenders and investors.
The administration’s plans, according to Stegman, including transferring risk from mortgage securities from the GSEs to private investors, limiting risks from securities bought or guaranteed prior to the crisis, and providing a framework for securitizing loans that could be taken over by private-sector companies after reform legislation.
