Fannie-Freddie Overhaul Plan Is Dead for This Year, Senators Say

(Bloomberg) -- Two U.S. senators who have played key roles in trying to advance housing-finance reform are acknowledging the legislative efforts to end government control of Fannie Mae and Freddie Mac are dead, at least for now.

Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia commented on the status of the two companies Wednesday at a Senate Banking Committee hearing with Federal Housing Finance Agency Director Mel Watt.

Corker and Warner tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to new competition. That effort foundered after failing to win support from progressives, who wanted to preserve the companies’ affordable-housing mandates, and Congress has little time left to consider major legislation before November’s mid-term elections.

“My sense is that these institutions may well stay in conservatorship for some time,” Corker said, adding that he believed President Donald Trump’s administration might take some sort of action on Fannie and Freddie.

The failure to pass legislation means that the two quasi-governmental companies at the center of the U.S. mortgage market will have spent more than a decade under federal control without an end in sight. The U.S. took control of Fannie and Freddie in 2008, injecting them with $187.5 billion in the wake of the financial crisis and then with another $4 billion to help them deal with an adverse effect of Trump’s tax cut. The companies have become profitable and paid taxpayers about $279 billion, which doesn’t count as repaying the bailout.

Dividend Payments

Senator Pat Toomey, a Pennsylvania Republican, said at the hearing that the large dividend payments since the crisis could arguably mean that taxpayers have been paid back. Under the original terms of their bailout agreements, Fannie and Freddie paid a 10 percent dividend, but in 2012, the government began to require them to send nearly all of their profits to taxpayers. Toomey has expressed similar sentiments since at least 2014.

Such a move could benefit shareholders in Fannie’s and Freddie’s stock. Several shareholders have sued the government, alleging that the move from a 10 percent dividend to a sweep of profits was illegal. Those lawsuits haven’t seen any success thus far.

New Director

Corker and Warner both said they believe the FHFA is likely to take administrative steps to change Fannie and Freddie, especially after Trump is able to replace Watt with a new director in 2019. Corker’s Senate term ends this year, and he isn’t seeking reelection.

Warner said a new director might raise fees and lower maximum mortgage limits in an effort to shrink the footprint of Fannie and Freddie.

In response, Watt said he hoped a new FHFA director would take into account how such moves could disrupt the economy.

Some progressives have hoped that Watt could choose to stay on after his term ends, assuming that lawmakers haven’t confirmed a new appointee by then. In an interview after the hearing, Watt said he hadn’t thought about whether or not he would be willing to stay on and that he’d need to consult with his family.

“I’m concerned about anything that adversely impacts housing and affordability but there was a housing market before I got here, and there will be a housing market after I’m gone,” said Watt of Warner’s concerns.

Early Stages

The Trump administration is having private meetings on what to do with Fannie and Freddie but is still in the early stages of developing a plan, according to people familiar with the talks. Treasury Secretary Steven Mnuchin in a TV interview in April said he would focus on the issue after the November elections.

In his opening statement at the hearing, Watt said he would develop a new rule to set capital requirements for Fannie and Freddie. He said the rule would be suspended during the conservatorship, as the current capital rule is, but that he thought its development would provide transparency and set prudent business practices.

Watt said he hasn’t moved from his overarching belief that Congress, rather than the FHFA, needs to determine the future of Fannie and Freddie.

©2018 Bloomberg L.P.