WASHINGTON: The US Treasury said the government should draw up a plan to begin recapitalising mortgage giants Fannie Mae and Freddie Mac, while calling on Congress to pen a comprehensive housing reform that would allow them to be safely freed from government control.
The Treasury’s plan, released in a 53-page report, marks the first major effort to jump-start housing finance reform in Washington after a failed 2012 attempt by the Obama administration.
The report calls for recuperating Fannie and Freddie and removing them from their government lifeline, but it strikes a cautious tone by failing to commit to concrete timelines or a specific recapitalisation plan.
It commits to preserving the 30-year fixed rate mortgage, a cornerstone of the US mortgage market, and leans heavily on Congress to implement several critical measures, including the creation of an explicit guarantee for Fannie and Freddie’s mortgage-backed securities.
As such, it may disappoint some investors who had been anticipating a speedy overhaul of the mortgage giants and conservative Republicans who had hoped the administration would take bold steps to sever all government ties with the companies.
Instead, the Treasury outlines a series of incremental administrative measures it can take to bolster Fannie and Freddie’s finances, reduce their risk to the taxpayer, and shrink their footprint in the secondary mortgage market.
Democrats were quick to criticise the plan, warning it could increase housing costs by limiting access to mortgages to lower-income Americans.
“President Trump’s housing plan will make mortgages more expensive and harder to get,” Senate Banking Committee ranking Democrat Sherrod Brown said in a statement.
Fannie and Freddie, which guarantee over half the nation’s mortgages, have been in conservatorship since they were bailed out during the 2008 financial crisis and Washington has since struggled to agree a plan to get them back on their feet.
The Treasury holds warrants representing 80 per cent of Fannie and Freddie’s common stock, as well as senior preferred stock agreements that allow it to sweep the firms’ profits into its coffers. That arrangement has left Fannie and Freddie with just around $3 billion of capital each, leaving taxpayers exposed to future bailouts.
Some investors had hoped the Treasury would provide a clear recapitalisation plan that would allow the mortgage firms to start retaining the majority of their earnings. The report, however, recommends only that the government “consider permitting” them to retain more than the $3 billion in capital currently allowed.
A senior Treasury official said a specific recapitalisation plan would still have to be carefully negotiated with the Federal Housing Finance Agency (FHFA), which oversees the mortgage giants. Washington insiders say that negotiation could be highly complicated and legally tricky.
FHFA director Mark Calabria, who said in July he is eager to end the conservatorship by the end of his five-year term, called the report an “important step forward” in a statement.
The Treasury hopes that parallel to negotiating a capital plan with FHFA, Congress will be spurred to take up broader housing reforms in the coming months.
Most importantly, it called for Congress to create an explicit guarantee for the companies’ mortgage-backed securities, although Washington housing lobbyists see such action as unlikely in the near term. — Reuters
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