Fannie-Freddie Investors Hopeful as Senate Eyes Treasury Plan

(Bloomberg) -- President Donald Trump’s point men on housing finance will take to Capitol Hill on Tuesday looking to sell lawmakers on their plan for freeing Fannie Mae and Freddie Mac.

But with legislation unlikely to get through a divided Congress, the hearing’s top takeaway may be what it reveals about steps the officials will take on their own to end government control of the mortgage giants after more than a decade.

The Senate Banking Committee will hear from Treasury Secretary Steven Mnuchin, Federal Housing Finance Agency Director Mark Calabria and Housing and Urban Development Secretary Ben Carson less than a week after Treasury released its road map for getting out of the business of running Fannie Mae and Freddie Mac.

Treasury’s outline, which was in many respects a plan to create a plan, initially disappointed investors due its lack of detail. But shares rose the most in almost three years on Monday after Mnuchin said he was nearing a deal that would let the companies retain more of their earnings to build capital buffers, which has been viewed as a key step toward their eventual release. Also pushing the stocks higher was a favorable legal ruling for shareholders that came late last week.

Hedge funds and other investors will be watching closely for signals from Mnuchin, who could dim their hopes just as easily as he could boost them. Here are some of the key things to look for:

Calabria’s Cooperation

Treasury’s role in carrying out the plan is largely contingent on negotiation with the FHFA, the independent agency that regulates Fannie and Freddie. Key details, such as ending the sweep of the companies’ profits and setting up long-term access to Treasury funds, need to be approved by both agencies.

It’s unclear how aligned Mnuchin’s views are with those of the FHFA’s Calabria, a libertarian economist who formerly worked for Vice President Mike Pence. Their responses to lawmakers’ questions could show whether they are unified and how far they have progressed on steps that can be taken without legislation.

In his prepared remarks, Calabria said the plan is “broadly consistent with my top priorities, which are to cement FHFA as a world-class regulator and to restore Fannie Mae and Freddie Mac to safe and sound condition by building capital to match their risk profile.”

Timing Questions

Treasury’s report largely avoided giving specific timing for major policy decisions, but it indicated that Congress would be given the chance to come up with its own plan before sweeping administrative steps are taken.

Senators will likely press for specifics from Calabria and Mnuchin, who said in a Monday television interview that he hopes to work with lawmakers over the next three to six months but is “perfectly comfortable” with the idea of moving without them.

Legal Reaction

Fannie and Freddie investors won a big victory on Friday in their quest to end the so-called net worth sweep that has seen nearly all of the companies’ profits turned over to Treasury since 2012. An appellate court overturned a ruling that backed the policy, a step that could give shareholders leverage in possible settlement talks over their stakes in the companies, according to Compass Point’s Chris Gamaitoni.

Any indication that Treasury or the FHFA has entered or might enter negotiations with investors would be welcome news to the hedge funds that have waited years for their post-crisis bets on the companies to pay off.

Democratic Fury

While Treasury’s proposals were almost uniformly criticized by Democrats, it’s unclear how much political capital party members are willing to use in opposing Mnuchin’s plan. Presidential contender Elizabeth Warren called the plan “shameful” in a statement last week, but the Massachusetts senator is unlikely to appear at the hearing, as she has a campaign rally in Austin, Texas, scheduled for later in the day.

If Democrats do choose to make a lot of noise on the issue, either on Capitol Hill or on the campaign trail, the Trump administration could become more wary of moving quickly.

Conservative Divisions

Republicans have been split on housing-finance reform, with hard-line conservatives seeking to end government involvement in the mortgage market and moderates trying to bring in new guarantors to compete with Fannie and Freddie.

Tuesday’s hearing could give an indication of whether there is potential for unity on the GOP side and whether there’s a chance of finding common ground with Democrats who have opposed past efforts by Republicans to scuttle the companies’ historic affordable housing goals.

Senator Mike Crapo, the Idaho Republican who leads the banking panel, has said he would prefer that Congress play a role in overhauling the housing-finance system, but expressed approval of the administration taking some action on its own. Outside of Crapo, it’s unclear if there’s enough urgency to pass reform legislation, potentially leaving the administration to act on its own.

To contact the reporter on this story: Austin Weinstein in Washington at aweinstein18@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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