Fannie Overhaul to Focus on Legislative, Regulatory Changes, Sources Say

(Bloomberg) -- The Trump administration’s push to free Fannie Mae and Freddie Mac from federal control will likely start with the White House calling on federal agencies to put forth ideas for a legislative and regulatory overhaul of the housing-finance giants, said people familiar with the matter.

The White House may outline a broad set of recommendations, such as increasing competition for the companies and protecting taxpayers from losses, and then request that the Treasury Department and the Department of Housing and Urban Development propose plans for implementing them, said the people who asked not to be named because plans are subject to change.

The move, which could come within the next few weeks, would be the culmination of months of meetings among administration officials on what to do about Fannie and Freddie.

Fannie Overhaul to Focus on Legislative, Regulatory Changes, Sources Say

Some of the changes that the White House has discussed could be done by federal agencies, such as allowing Fannie and Freddie to hold more capital. Others would require congressional action, including providing an explicit government guarantee of mortgage securities backed by the companies. In meetings, officials have been resistant to any plan that would completely circumvent lawmakers, the people said.

Less Ambitious

Such an approach indicates the administration’s ambitions aren’t as sweeping or as far along as some investors hoped. And a White House spokeswoman confirmed Tuesday that they want to work with Congress, providing more evidence that changes might not be imminent. Controversial issues routinely move slowly on Capitol Hill, particularly during times of divided government.

Fannie and Freddie both fell more than 22 percent Tuesday, the biggest daily declines since February 2017. The shares had been rallying this month after acting Federal Housing Finance Agency Director Joseph Otting reportedly said a proposal for freeing the companies would be released in the next two to four weeks, and that the FHFA and Treasury were willing to bypass lawmakers.

“Housing finance reform is a priority for the administration,” White House spokeswoman Lindsay Walters said in a Tuesday statement. “The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”

Walters said no decisions have been made on any reform plan. The administration intends to work with Congress to formulate a proposal that fully addresses the risks to taxpayers and that improves the ability of creditworthy Americans to buy a home, she added.

Slow Process

Figuring out what to do with Fannie and Freddie, which the government took over during the 2008 financial crisis, has confounded policy makers for more than a decade.

Hedge funds have been hopeful that President Donald Trump would help end the decade-long stalemate for Freddie and Freddie in a way that allows shareholders to get their hands on the companies’ profits, which now go to the Treasury. But two years into his term, little progress has been made.

Fannie and Freddie underpin the housing market by buying mortgages from lenders, packaging them into securities and offering bond investors guarantees in case borrowers default. The companies backstop nearly $5 trillion in mortgage bonds, which keeps borrowing costs low and helps make loans readily available.

In a potential directive to Treasury and HUD, the Trump administration is almost certain to demand that their plans ensure that taxpayers will be compensated for federal backing of the mortgage market, the people said. The administration also wants Congress to create an explicit guarantee of mortgage securities, ending decades of ambiguity over whether the government will step in during a crisis.

Boosting Capital

The White House has also discussed recommending that lawmakers empower other companies to compete with Fannie and Freddie, the people said. That could be accomplished by passing legislation that allows FHFA to grant charters to additional firms, permitting them to also guarantee mortgage securities.

Lawmakers say housing finance is also a priority for them. Senate Banking Committee Chairman Mike Crapo, an Idaho Republican, said Tuesday that trying to tackle it is one of his goals for the current Congress. House Financial Services Committee Chairwoman Maxine Waters, a California Democrat, has said she would consider working with the Senate on developing a plan.

There are some aspects of what the White House is considering that would be good news for hedge funds. For example, officials have discussed allowing Fannie and Freddie to hold more capital, the people said. But the White House hasn’t endorsed an approach that would let Treasury and the FHFA permit the companies to build up bigger capital buffers and then free them from federal control, the people said.

The White House has also outlined its desire to see Fannie and Freddie’s portfolios shrink, the people said. The administration would like to mitigate some of the companies’ risks, which could lead to changes in loan limits and credit underwriting requirements.

Otting’s Comments

Otting’s remarks, made privately this month to FHFA staff, have fueled shareholder optimism that a windfall is coming soon. But even he indicated that any changes might be months or even years away. Otting, who also serves as the comptroller of the currency, said the Trump administration intended to make progress on a Fannie and Freddie overhaul within six to 18 months, Politico reported Jan. 24, citing a recording of his comments it obtained.

John Paulson, a hedge fund billionaire who invests in Fannie and Freddie, has a history with Otting and Treasury Secretary Steven Mnuchin. In 2008, Mnuchin joined forces with Paulson to buy troubled mortgage lender OneWest. Mnuchin recruited Otting to run OneWest two years later.

Otting’s recent comments have raised eyebrows on Capitol Hill. Representative Waters and Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, have demanded that he provide a copy of any Fannie and Freddie proposal that’s in the works and more details about his own plans for the FHFA.

©2019 Bloomberg L.P.