What to do about Fannie & Freddie? How the Trump administration could change the mortgage industry

by James F. McClister

The Mnuchin imperative

Those questions will be among the most pressing that the incoming Trump administration will have to answer – although, if assumed Treasury Secretary Steve Mnuchin’s rhetoric surrounding the issue is any indication, the administration already has its answers.

“It makes no sense that (Fannie Mae and Freddie Mac) are owned by the government and have been controlled by the government for as long as they have,” Mnuchin said during an interview on the FOX Business Network’s “Mornings with Maria.” He further promised to separate the GSEs from the government “reasonably fast,” if he is confirmed as treasury secretary.

Mnuchin blames the conservatorship for displacing private lending in mortgage markets, despite the fact that since 1990, the only time private mortgage insurers held a more significant market share than Fannie and Freddie was in the years immediately leading up to and during the 2007 mortgage crisis. Otherwise, Fannie and Freddie have always insured the overwhelming bulk of residential mortgages.

The confirmation hearing for Mnuchin could be rough. His opponents cast him as one of the few key beneficiaries of the mortgage market’s collapse. In a statement, Sen. Elizabeth Warren (D, Mass.) branded him “the Forrest Gump of the financial crisis,” saying he’d been present for all of Wall Street’s worst moments.

Most of his opponents are referring specifically to the 2009 formation of his bank OneWest, built from the purchased remains of failed subprime lender IndyMac – an institution that had itself been held in conservatorship under the U.S. government. Through OneWest and reverse mortgage lender Financial Freedom – which was included in the IndyMac purchase – Mnuchin and company foreclosed on thousands of homeowners, including the now infamous attempted foreclosure over an unpaid bill of only 27 cents. According to recently disclosed memos from the attorney general’s office in California, OneWest allegedly violated numerous foreclosure laws in the state.

But Mnuchin’s history aside, even if he is unable to make it through his confirmation hearing, removing Fannie and Freddie from conservatorship has long been a point of policy for Republicans, and is even supported by FHFA Director Mel Watt.

In remarks Watt made early in 2016 at the Bipartisan Policy Center in Washington, D.C., he said: “I have consistently stated that our responsibility and role at FHFA as conservator is to manage in the present. However, as we work to appropriately manage challenges and risks in the present, we also have a responsibility to assess when these challenges and risks may escalate to the point that they negatively impact the Enterprises and the broader housing finance market in the future. By giving this speech today, I am signaling my belief that some of the challenges and risks we are managing are escalating and will continue to do so the longer the Enterprises remain in conservatorship.”
It is unclear, though, in what capacity Watt would prefer Fannie and Freddie to operate post conservatorship.

A case for re-privatization

Tim Brigham is an LPO manager with Evolve Bank and Trust. To put the possible ramifications of once again privatizing Fannie Mae and Freddie Mac in perspective, he looks to other private institutions already operating in the mortgage market.

“Privatization of loans has had great success with some of the portfolio lenders out there,” Brigham says. “We call them portfolio loans, which means a bank uses its own funds for a deal and they are backed by the bank’s investors. In most cases, that allows the banks to write their own rules on risk while still adhering to industry standards for protection of the consumer.”

The key detail in Brigham’s statement is that a portfolio lender “uses its own funds.” It has its own capital reserves to draw from. So in the case of a down quarter, or a down year, when cash outflow exceeds inflow, the bank can draw on those reserves to stay afloat. Fannie and Freddie do not operate that way – they rely on the Treasury Department for funds.

The two GSEs currently have a built-in store of cash called a “capital buffer,” which is meant to act as a reserve in the event of a loss. But as Watt explained in his Bipartisan Policy Center address, that buffer is being systemically removed.

“(The) capital buffer is available to absorb potential losses, which reduces the need for the Enterprise to draw additional funding from the Treasury Department,” Watt said. “However, based on the terms of the (preferred stock purchase agreements), the capital buffer is reducing each year. And, we are now over halfway down a five-year path toward eliminating the buffer completely.”

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  • Thomas Sofia says:

    I’ve heard enough. Just put it back the. Way it was. When something bad. Happens the. Uncle Sam. Will help. .every other 2008 bailout was. Returned. To. Businesses as usual.. So be it for FANMA

  • Bill Maloni says:

    I have worked on/written about these matters in the Congress, at federal regulatory agencies, and for more than 20 years as Fannie’s chief lobbyist, before retiring in 2004.

    For the past nine years, I’ve written a financial services and GSE blog.

    My single greatest piece of advice to the Realtors who read about these issues is to kick in the butt your NAR execs in DC, who have tried to placate the Obama Admin and opposed resurrection of the GSEs. It’s that frustratingly simple.

    Look at its record, not what they say to you in you conferences or breakout sessions.

    The NAR is powerful but seems to want to play footsie with the big banks–and Senate baddies like Bob Corker (R-Tenn.)– and others who have their eye on the GSEs revenue not what best for mortgagors or homebuyers.

  • Rob Zimmer. says:

    They will be utilities under the HERA statute of 2008, operating safely with more capital and a federal backstop to keep rates lower. The old GSEs are gone already, and no one wants the Big Banks to take over this marketplace.

    Ideally, Congress would pass a small bill with some tweaks, though this is not necessary. What IS necessary is to keep Big Banks from taking over and harming consumers, Realtors, small lenders, and inner-city neighborhoods.

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