Don’t Hold Your Breath on Fannie Mae and Freddie Mac

Definitive action on these companies remains a long way off

By Aaron Back

    Steven Mnuchin in 2013. Photo: Andreas Branch/Patrick McMullan


Holders of shares in Fannie Mae and Freddie Mac were thrilled at comments by Donald Trump’s choice for Treasury secretary. They should calm down. Definitive action on these companies remains a long way off, and the interests of shareholders aren’t high on the agenda of policy makers.

Steven Mnuchin said in a Fox Business Network interview Wednesday that he wants to restructure the companies and “get them out of government control.” The giants of housing finance were taken over in a $187 billion financial-crisis bailout.

Mr. Mnuchin’s comments sent their shares soaring 46% on Wednesday. The stocks have given up some of these gains since but have still more than doubled since the election.

These shares are basically speculative bets that the pair will be recapitalized and released from government conservatorship. They tend to move sharply on any news.

What happens to the two companies could also have big implications for the nearly $14 trillion mortgage market since they, along with Ginnie Mae, account for nearly all new mortgage-bond issuance. This makes it a particularly complex problem to solve.

In fact, Mr. Mnuchin’s comments were somewhat vague. He specified that the companies would have to be “restructured” so they are “absolutely safe.” This could mean a simple recapitalization or it could mean some broader reworking of the companies and their role that would require legislation by Congress.

As Treasury secretary there is a lot that Mr. Mnuchin could do without Congress. A simple bilateral agreement between Treasury and the Federal Housing Finance Agency would be sufficient to stop the current “profit sweep” whereby all of Fannie and Freddie’s earnings go to the government. That would help them build up capital to prepare for life outside government control.

But such an action could be at cross-purposes with prominent congressional Republicans.

House Financial Services Committee Chairman Jeb Hensarling (R., Texas), and Sen. Mike Crapo (R., Idaho), who is likely to be the next head of the Senate Committee on Banking, Housing and Urban Affairs, have each put forward their own plans that would wind down the two companies. The proposals differ on many points, but both men want Fannie and Freddie gone, not strengthened and set free.

These are also lawmakers that the Trump administration will need to work with closely on other priorities. Angering them with unilateral actions on Fannie and Freddie may not be wise.

Mr. Mnuchin says dealing with Fannie and Freddie is one of the administration’s top 10 priorities. It is hard to believe they will get through priorities one to nine very quickly.

Whatever the ultimate resolution, it will have to balance the interests of taxpayers, home buyers, mortgage lenders and more. The interests of a small group of speculators holding the companies’ residual shares are probably not a high priority for any policy maker.

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