Did Treasury & # 39; s GSE Report Move the Needle?

WASHINGTON – The Trump administration's report on the country's home financing system lifted the goal posts to shut down Fannie Mae and Freddie Mac conservatories, but how officials get there is still highly uncertain.

Like much of the debate around reforming the state-sponsored businesses, the Ministry of Finance's report – and its reactions – revolve around two scenarios: Congress enacts comprehensive legislation and the administration goes on its own.

The report essentially requires both. It outlines a preference for lawmakers to create a new government backstop, an explicit guarantee and a marketplace for guarantors to compete with the GSEs. But with legislation still unlikely, much attention has been turned to what the administration wants to do on its own. The report states that measures by Congress on an explicit guarantee are not mandatory.

Nevertheless, the Ministry of Finance's focus on parallel roads has done nothing to satisfy skeptics who believe sustainable reform is not possible without Congress. Many observers believe anything but legislation to permanently define Fannie and Freddy's charter could risk a return to today's status quo.

“If you do not address the charters, you can do many things to improve the market and try to level the playing field, but at the end of the day, these two guys work with charters and legal provisions that can then change over time back to the uneven playing field. we had, which is why it lacks permanence, "said Ed DeMarco, president of the Housing Policy Council and former acting director of the Federal Housing Finance Agency. He added that investors in mortgage securities would seem to prefer a full-faith and credit authority guarantee.

Others disagree, claiming that the Treasury report offered real solutions to avoid congressional freedom. For example, the report recommended that during an administration-driven release of Fannie and Freddie in the private sector, the Treasury could maintain stock purchase agreements requiring GSEs to pay "commitment fee" in a disastrous backstop fund.

"A backstop is, in a way it worked 11 years ago, that if they were in trouble, the government would hopefully be able to raise them a credit line," said Scott Olson, executive director of the Community Home Lenders Association. Fannie and Freddie are still in this role 10 years from now and that's a problem, I just don't think we're going to stand by and let them stop taking loans. "

Someone claimed that the appeal to administration commitment as" recapitalization and release "for GSEs is that a Congress-sanctioned explicit warranty will still be a grant to Fannie, Freddie and other companies that could potentially compete with them.

This guarantee may even be" an unnecessary gift for these systemically important financial institutions, ”said Joshua Rosner, CEO of Graham Fisher & Co.

The next steps following the release of the Ministry of Finance's report and additional recommendations from the Department of Housing and Urban Development are unclear. FHFA Director Mark Calabria, Treasury Secretary Steven Mnuchin and HUD Secretary Ben Carson are set to testify before the Senate Banking Committee on the Sept. 10 case, with some industry observers hoping for more detailed details of the administration's plan.

"There was no action plan, no implementation plan, so it's hard to know what it really means," said Laurence Platt, a Mayer Brown partner, from Treasury and HUD reports. "Is it just musings or is it really a blueprint for what the administration should do unilaterally?"

And while the Trump administration's report laid the groundwork for a reworking of an executive branch, several other independent agencies are involved in many of the report's recommendations, DeMarco said.

"One of the most important things to look for is what kind of organized follow-up it will be to make those recommendations," he said. "The recommendations are sound, they talk again about leveling the playing field, raising private capital and so on, but you have [the Consumer Financial Protection Bureau] the FHFA, the Securities and Exchange Commission and all the federal banking regulators who all need to play a part in adopting that vision . "

Still, some believe that Calabria can hold the brunt of much of the administration's way forward, and FHFA has already been given considerable authority to handle Fannie and Freddie administratively. The report may be a signal that FHFA will move aggressively when he opens the door to revive and release them.

Calabria "and [Treasury] Secretary [Steven] Mnuchin has a tremendous administrative area of ​​action, as they make clear here," said David Dworkin, the president and CEO of the National Housing Conference. [19659002] But when he also promoted legislative solutions, the report continues to send mixed signals about the government's intentions. rendering acting FHFA director Joseph Otting significant progress with the holding housing finance system in the next six to 18 months. However, the report seemed to include a more conscious approach.

"For me, the bigger thing is the credibility of the Treasury and the FHFA who say their focus is on doing what the law says and can still drag their feet … for political reasons rather than law enforcement," Rosner said. [19659002"ThecongressionalproposalwiththeproposalwasalsosurprisingtomanyWhiletheTreasuryreiteratedthatitpreferredCongresstoenactlegislationmanyofthebillswereideological"saidPlattSuchapackagewouldbeimpossibletoadvanceinadividedcongress

"We couldn't get a bipartisan plan through Congress, "he said." Should we be able to get a more partisan review? "

Dworkin suggested that it would make more sense to expect Congress to oversee the administration's reform of GSEs to go ahead.

"Inventing an entire mortgage financing system is like letting Congress build a nuclear bomb," he said. "It is appropriate for Congress to oversee our nuclear program, but it It's not reasonable to expect them to actually build it. I think overseeing this process and adjusting the statute for the current system is in the sweet spot of Congress. ”

Still, leading congressional Democrats threw out the administration's recommendations to rework the affordable housing goals, expressing concern that some of the proposals would have the effect of making mortgage loans more expensive and disadvantageous to minority lenders.

"It is imperative that proposals for home financing reforms do not reduce homeowners' opportunities, increase housing costs or make housing less accessible," said the committee's chair of the Financial Services Committee, Maxine Waters, D-California, in a statement. "However, Trump's plan seems to be doing just that."

Repealing the affordable housing goals is a non-starter package, no matter how good the rest of the report's recommendations are, Dworkin said.

"If you try to do that, it really negates all the other value of moving forward, and it's not going to happen as long as the Democrats are in control, and potentially even if they aren't," Dworkin said. they propose is a loan from a mortgage loan that will go to HUD for affordable housing, and it's the dumbest idea I've ever heard. "

In the future, FHFA must now decide whether it will incorporate some or all of the report's administrative recommendations, said DeMarco.

"Mark has a lot of work to do, but I think the Treasury report presents a very good list of actions that he and his team can investigate and decide exactly how they want to do it," he said. [19659002] Calabria had said he was waiting to see the conclusions of the report before negotiating changes with Treasury to stock purchase agreements, of which Treasury offered several options, and the report also recommended several options for moving forward with recapitalization of the GSEs – another of Calabria's goals.

"I think of this as a road map and not a blueprint, because there are many paths they can walk, but they signal quite clearly the ones they like and the ones they provide delivery services to," Dworkin said. "I expect that they will gradually move forward with the administrative reforms, so that Congress has time to make adjustments to the statute."