Trump Official Says Fannie, Freddie Should Let in Private Market

(Bloomberg) -- A top Treasury Department official said the Trump administration wants to boost the role of private capital in the mortgage market, a longstanding Washington goal that has largely befuddled policy makers since the 2008 financial crisis.

Transferring risk away from Fannie Mae and Freddie Mac is “core” to U.S. housing policy, Craig Phillips, a counselor to Treasury Secretary Steven Mnuchin, said Monday at a conference in New York. Without outlining any specific plans, Phillips said a central goal is increasing the amount of private loans in the market that lack government backing.

Since 2013, Fannie and Freddie have tried to offload risk by packaging mortgages into new securities that they sell to hedge funds and other money managers. While the securities protect Fannie and Freddie from losses should the loans sour, they also force the companies to forgo upfront revenue. Critics of Fannie’s and Freddie’s efforts have said the companies often get bad prices, in effect relinquishing revenue for little risk protection in return.

Phillips’s comments were one of the first times an administration official other than Mnuchin has discussed the mortgage-finance giants, which back about 40 percent of the market. Fannie and Freddie have received $187.5 billion in taxpayer aid since 2008 and have been under government control through conservatorship.

Dividend Payments

The remarks came less than a week after Mel Watt, who heads Fannie’s and Freddie’s regulator, told members of the Senate Banking Committee that he may suspend the quarterly dividend payments the companies make to the Treasury. Such a move by the Federal Housing Finance Agency would be aimed at preventing another taxpayer rescue. Still, it would probably be met with ire from some Senate Republicans who fear it could sap momentum for a housing-finance overhaul. Phillips did not address Watt’s remarks.

Under the terms of Fannie’s and Freddie’s bailout, they must pay all their profits to the Treasury. At Monday’s conference, an FHFA official said any change made to the dividends would be a “delay,” not an elimination of the payments. The goal would be allowing Fannie and Freddie to hold enough capital to protect against small operating losses, said Bob Ryan, who oversees the companies’ conservatorship.

“The objective here is not to recapitalize these entities in any fashion,” Ryan said.

Policy makers have attempted to bring more private money into the mortgage market for years. But private-label mortgages bond still make up a tiny fraction of loans overall, while the government, including Fannie and Freddie, dominates the market.

Phillips said the Treasury Department was looking at mortgage rules implemented after the crisis to see if they made private lending too difficult. He said the review includes the costs of servicing mortgage loans and the so-called qualified mortgage rule that protects lenders from being sued after making a loan.

Mnuchin is scheduled to appear Thursday before the Senate banking panel, and will likely face questions on Fannie and Freddie.