Treasury Department’s plan for the housing giants is vague on key details such as how they will be recapitalized
By Aaron Back
The Trump administration is proposing reforms to the country’s mortgage-finance system. Photo: Steve Helber/Associated Press
America’s mortgage-finance system isn’t going to change in a fundamental way for the foreseeable future. That is the inescapable—though to many parties deeply disappointing—takeaway from the U.S. Treasury Department’s housing reform plan issued Thursday afternoon.
Mortgage guarantors Fannie Mae FNMA -8.75%▲ and Freddie Mac , FMCC -8.21%▲ which have been wards of the state for 11 years, are likely to remain so for some time.
For years a debate has raged over how to deal with the companies that back most mortgages in the U.S. Some, especially holders of their volatile shares, want them recapitalized and released from government control as soon as possible. Others want a fundamental reform of the system, which would require new laws and likely include an explicit government guarantee for the mortgage-backed securities they issue.
The Trump administration is trying to straddle the two camps by recommending that Congress get to work on the more fundamental reforms while the executive branch gets started recapitalizing and releasing the companies. But exhortations to Congress are likely to fall on deaf ears. Meanwhile, the route to recapitalizing the companies outlined in the report is tentative and vague.
The report uses the term “Congress should” 40 times. It hardly seems likely that the Democratic-controlled House of Representatives will rally to implement the Trump administration’s detailed proposals between now and the next election, though—especially given the sensitivity of the issue.
As for what to do on its own, the Trump administration’s plan is in large part to keep thinking about it. The report states that it is time to bring the government’s conservatorship of the companies to an end. Then it lists several formidable preconditions, including that the companies should have raised sufficient capital to absorb losses on their own. According to an earlier report by the Federal Housing Finance Agency, it would likely require around $180 billion between the two companies for them to survive another 2008-magnitude financial crisis.
The fine print of Thursday’s Treasury report suggests even that amount might be insufficient.
The report lists several options for raising this money, including ending the “net worth sweep” whereby the companies surrender their quarterly net profit to the Treasury, or selling their shares through private or public offerings. It correctly notes, though, that “each of these options poses a host of complex financial and legal considerations that will merit careful consideration.” In the end, the Treasury’s plan is to consider all this and come up with a more detailed plan later.
Based on the language of the report, it does seem likely that the net worth sweep will end or be amended soon. Even so, it would take many years for the companies to build up sufficient capital through this alone: Over the last four quarters they had combined net income of just under $20 billion.
The Trump administration keeps insisting that it is willing to act alone, without Congress. But with the administration’s own plans still unfinished, it is far from clear it will have time to do so during the current presidential term. The future of Fannie and Freddie will likely remain unsettled until after the next election.
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