Thursday, the US Treasury said the government should draw up a plan to begin recapitalizing mortgage giants Fannie Mae (OTCMKT:FNMA) and Freddie Mac (OTCMKT:FMCC), while calling on Congress to develop a comprehensive housing reform that would allow them to be safely freed from government control.
The Treasury’s plan, released in a 53-pg report, marks the 1st major effort to jump-start housing finance reform in Washington after a failed Y 2012 attempt by the Hussein Obama administration.
The report calls for recuperating Fannie and Freddie and removing them from their government lifeline.
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 Trump Administration would take bold steps to sever all government ties with the companies.
But, 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.
Fannie and Freddie, which guarantee over 50% the nation’s mortgages, have been in conservatorship since they were bailed out during the Y 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% of Fannie and Freddie’s common stock, as well as senior preferred stock agreements that allow it to sweep the firms’ profits into its accounts. That arrangement has left Fannie and Freddie with just around $3-B of capital each, leaving taxpayers exposed to future bailouts.
Some investors had hoped the Treasury would provide a clear recapitalization plan that would allow the mortgage firms to start retaining the majority of their earnings. The report recommends only that the government “consider permitting” them to retain more than the $3-B in capital currently allowed.
A specific recapitalization plan will have to be carefully negotiated with the Federal Housing Finance Agency (FHFA), which oversees the 2 mortgage giants.
FHFA director Mark Calabria told Reuters in July he is eager to end the conservatorship by his the end of his 5-year term, called the report an “important step forward.”
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.
“My preference is to fix the housing finance system through legislation and I look forward to working with all of my colleagues as we move forward,” Senator Mike Crapo (R-ID) Chairman of the Senate banking committee said.
If Congress fails to create a new guarantee, the Treasury said it would use its existing investment in the companies to continue serving as a backstop, signaling it may be prepared to stand behind the companies indefinitely.
In March, President Trump asked the Treasury to develop a plan for housing finance reform.
President Trump’s mission is to make it easier for working people to buy or rent their homes, not harder.
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