Groundhog Day at Fannie-Freddie Where the Fix Is Always Tomorrow

(Bloomberg) -- Will anyone ever fix Fannie Mae and Freddie Mac?

When the two mortgage giants were taken under federal control a decade ago -- the same year Donald Trump kicked off the first season of Celebrity Apprentice -- regulators saw the move as a short timeout.

Last month, Trump’s administration effectively acknowledged that it’s no closer to figuring out what to do with Fannie and Freddie. Treasury Secretary Steven Mnuchin said there’ll likely be no end to federal control during this Congress. In the meantime, the duo has only become more crucial to America’s booming-again housing market, standing behind about $5 trillion of loans.

Trump’s team hasn’t decided how to restructure the companies -- or even who should do it, the White House or Congress. It’s still in the earliest stages of figuring out what a new housing-finance system should look like, according to interviews with officials inside and outside the administration. Some of them likened the process to Groundhog Day.

Bonanza Coming

Fannie and Freddie still get taxpayer bailouts -- about $4 billion between them in March, though that was the result of a one-time quirk in Trump’s tax law. Fund-managers who bought the stocks near record lows, betting on a fix that would suddenly restore value, are still telling investors that the Trump bonanza is on the way –- but they’ve had to keep pushing back the date.

The two companies buy mortgages, wrap them into securities, and guarantee those instruments in case homeowners default. Since 2008 they’ve been under control of the Federal Housing Finance Agency, while almost all their profits go to the Treasury.

Read more: Fannie and Freddie explained -- a QuickTake

Most people say the arrangement is untenable. But a new one involves weighing the availability of mortgages, the cost to the public purse, and the profits that shareholders, including big ones like Paulson & Co. and Fairholme Funds Inc., are entitled to make. On those priorities, there’s little agreement among Republicans, Democrats, lenders and investors.

Shareholder-Friendly

Last summer, it briefly looked as if the GOP was warming up to a shareholder-friendly fix.

The Republican National Committee in August passed a resolution declaring that Fannie and Freddie investors deserved to see a return, and that the companies should be allowed to build capital by retaining profits. It was a stark turnaround for a party that had often argued for their abolition. The shares surged.

Most Republicans involved in setting Fannie-Freddie policy proceeded as if the resolution never happened. It turned out to have been written by a shareholder, a semi-retired money manager who’s married to the Republican who introduced it.

“I sent out an email kind of chastising these guys’’ for not heeding the resolution, said Dane Fulmer, whose wife Jonelle is Arkansas’ RNC committeewoman. Fulmer said he owns thousands of Fannie-Freddie preferred shares, both individually and in funds he manages for friends and family. Jonelle Fulmer said she still hopes that Republican lawmakers will act on the resolution. “We just keep waiting,” she said. An RNC spokeswoman didn’t respond to requests for comment.

No Path

In the fall, the heavyweights were supposed to weigh in.

White House officials including Mnuchin, Office of Management and Budget Director Mick Mulvaney and then-director of the National Economic Council, Gary Cohn, met to discuss issues including what the administration wanted to say about Fannie and Freddie -- if anything.

On the table was an executive order that would formally kick off a push to end government control, according to people familiar with the meeting. A draft version set out some goals: To “‘enhance the ability of consumers to obtain housing,’’ while eliminating implicit federal guarantees for Fannie Mae and Freddie Mac, and ending their “duopoly.’’

But no definitive path was laid out. The order called for a study of options by various agencies -– and it became clear at the meeting that the heads of those agencies weren’t on the same page.

Mulvaney asked why the administration couldn’t just recapitalize Fannie and Freddie, then release them from government control, according to a person familiar with the meeting. (Two other people said he’s stuck to that line since then.) Others in the room protested that the companies needed reforms before that could happen. Mnuchin said he needed to focus on the tax bill. The order was never signed.

Familiar Feeling

Fast-forward to spring 2018, and another round of meetings.

Some of the players have changed. Cohn is gone, replaced by Larry Kudlow, who’s expressed mixed views. He’s written columns arguing that the government should stop subsidizing Fannie and Freddie; he’s also voiced sympathy on Twitter for shareholders who aren’t getting any of the profits.

But the latest talks have circled around the same questions, according to people familiar with them. One meeting set the clock back decades, as participants discussed whether mortgage bonds even need a federal guarantee (most agreed that they do), and whether competitors for Fannie and Freddie should be created.

There’s still no consensus on whether the administration should attempt reform on its own, wait for Congress or try a mix of both. In Congress, various drafts and proposals have circulated and failed to gain enough backing.

If it’s starting to feel like Groundhog Day for the people tasked with fixing Fannie and Freddie, the same is true for the people who hold their stock.

‘High Probability’

Some preferred shares jumped 25 percent after Trump’s election in November 2016 – then almost doubled later that month when Mnuchin said the new administration would get the companies out of government control quickly.

“We believe there is a high probability of a resolution before the end of 2017,’’ John Paulson wrote in a December 2016 note to investors.

It didn’t happen, and the shares gave up most of those gains. Still, in March 2018 Paulson hit the same optimistic note, saying he saw “a high probability of a favorable resolution this year.’’

That’s not happening either, Mnuchin told Fox Business on April 30.

Even before the Treasury secretary closed the door, some stakeholders were already digging in for a much longer fight.

The Center for Responsible Lending, a left-leaning nonprofit, advocates for wide credit access and is calling for highly regulated versions of Fannie and Freddie to be preserved. The group says it’s so unclear what the Trump administration wants that next year is likely to end up looking much like 2018.

There’s reason to think Congress might eventually try again, but lawmakers didn’t really get serious about Fannie and Freddie until about five years ago, CRL President Mike Calhoun said. “These major pieces of legislation usually take a decade.’’

©2018 Bloomberg L.P.

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