Trump’s Fannie-Freddie Plan Gets GOP Favor, Democrats’ Scorn

(Bloomberg) -- The top Republican and Democrat on the Senate Banking Committee split over the Trump administration’s plan for freeing Fannie Mae and Freddie Mac from U.S. control, a sign of the uphill battle Congress faces in overhauling housing finance.

Republican Senator Mike Crapo, the banking panel’s chairman, said his preference is for lawmakers to take the lead on freeing the companies, but added that the administration should get going on reform. Senator Sherrod Brown, the committee’s top Democrat, labeled the plan a non-starter that will make housing more expensive.

The remarks, made at a Tuesday hearing, are the latest sign that a bipartisan compromise isn’t likely anytime soon. That might embolden the administration to pursue its own changes, including steps to bolster Fannie and Freddie’s capital and reduce the companies’ mortgage-market dominance.

Crapo encouraged such moves, arguing that they might make it easier for lawmakers to ultimately fix Fannie and Freddie, which backstop about half of the nation’s $10 trillion of home loans. The companies have been wards of the state since the 2008 financial crisis, when the housing-market crash triggered the government takeover. Lawmakers have repeatedly failed to agree on how to end the conservatorships.

Trump’s Friends

“Only Congress has the tools necessary to provide holistic, comprehensive reform to our system that will be durable through any market cycle,” Idaho’s Crapo said. “However, it is important for the administration to begin moving forward with incremental steps that move the system in the right direction.”

Ohio’s Brown countered that the Treasury Department’s plan, released Sept. 5, would be a gift to President Donald Trump’s friends on Wall Street, and would be disastrous for U.S. home buyers.

“The Trump plan will make mortgages more expensive and harder to get,” he said. It will also make it “easier for Wall Street to profit off of hard working families.”

Explicit Guarantee

Treasury Secretary Steven Mnuchin, who defended his agency’s proposal at the hearing, said he remains eager for Congress to take the lead. There are some policy changes Treasury is calling for, like an explicit guarantee of Fannie and Freddie’s securities, that require congressional action. Lawmakers would also have to approve chartering other companies to compete with Fannie and Freddie, which is also called for in the Treasury report.

Federal Housing Finance Agency Director Mark Calabria and Housing and Urban Development Secretary Ben Carson also testified at the hearing. They agreed with Mnuchin that they prefer Congress revamp the nation’s housing-finance system.

At the same time, Mnuchin said Treasury is in talks with the FHFA, Fannie and Freddie’s regulator, on changes that don’t require legislation. Those include “removing” the so-called net worth sweep, an Obama-era policy that requires the companies to send nearly all their profits to the Treasury. Ending the sweep Would allow them to retain earnings and build up their capital buffers.

‘Simple’ Recap

Mnuchin said he doesn’t support a “simple” recap and release of Fannie and Freddie, which is something that hedge funds and other investors have long advocated. There would likely have to be extensive negotiations over the process for freeing the companies before any capital raising initiatives -- like an initial public offering -- could take place. That could mean that a windfall for investors is still likely a ways away.

Shares of Fannie fell 7% to $3.60 at 12:28 p.m. in New York. Freddie fell 8% to $3.38.

Fannie and Freddie, which are currently limited to capital buffers of $3 billion apiece, will need much more than that to survive outside of government control, Mnuchin said Tuesday. While he declined to offer specifics about how much they’d need, Mnuchin told lawmakers it should be “more like $100 billion than $6 billion.”

Taxpayer Rescue

Fannie and Freddie don’t make loans. Instead, they purchase mortgages from banks and other lenders and package them into bonds. Those securities have guarantees that protect bond holders from the risk of homeowners defaulting. The process provides ample liquidity for the mortgage market, keeping the housing sector humming and borrowing rates low.

The companies were taken over more than a decade ago, ultimately receiving $191 billion in bailout funds. They’ve since become profitable again, paying more than $300 billion in dividends to the Treasury in recent years.

Shares of Fannie and Freddie rose the most in almost three years on Monday following comments by Mnuchin that he was nearing a deal that would let the companies retain more of their earnings to build capital buffers.

Also pushing the stocks higher in recent days is a favorable legal ruling for shareholders that came late last week. On Friday, an appellate court overturned a ruling that backed the net sweep policy, a step that could give shareholders leverage in possible settlement talks over their stakes in the companies, according to analysts.

--With assistance from Saleha Mohsin.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

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

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