The Trump administration released its long-awaited plan to reform the nation’s housing finance system and privatize Fannie Mae and Freddie Mac, calling it the “last unfinished business of the financial crisis.”
The recommendations include: “simplifying” the Qualified Mortgage rule and eliminating the so-called QM patch that allows Fannie and Freddie to sidestep some regulations; reducing “unnecessary regulatory impediments” for private-label securitization; and promoting private-sector competition.
Most of the recommendations in the 53-page plan, released to the public on the eve of Friday’s 11th anniversary of the government takeover of Fannie Mae and Freddie Mac, don’t require input from Congress.
“The GSEs’ conservatorships should come to an end,” the plan said, referring to Fannie Mae and Freddie Mac. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.”
It will be difficult for the Trump administration to enact the plan, even the parts that don’t involve Congress, before the 2020 elections, according to Beacon Policy Advisors.
“We remain skeptical that much progress will be made in making it a reality, even with respect to proposed unilateral actions, before next year’s elections,” Beacon wrote in a note to clients. “And if Trump fails to win reelection, the GSE blueprint will likely fall out of favor as quickly as Trump leaves.”
U.S. Treasury Secretary Steven Mnuchin is set to testify on the reform plan before the Senate Banking Committee on Sept. 10, alongside Federal Housing Finance Agency Director Mark Calabria and Housing and Urban Development Secretary Ben Carson.
Other plans for reforming housing finance and dealing with Fannie and Freddie have been floated in recent years, such as the Senate’s “Johnson-Crapo Bill.” So far, they’ve all failed. After the Senate plan went nowhere, it became known as the “Crapo Bill.”
Donald Layton, who was CEO of Freddie Mac until two months ago, provided context for GSE reform efforts. From his new perch at Harvard University’s Joint Center for Housing Studies, he wrote last month:
“In 2012, when I joined Freddie Mac, I was told, `legislation is imminent,’” said Layton, who stepped down on July 1.
The incremental changes enacted by the FHFA, the regulator for Fannie and Freddie, have put the GSEs on firm footing, Layton said. In a Harvard paper he published last month he revealed a comment made by a senior Treasury official in a private meeting during Layton’s closing days as Freddie’s CEO: “GSE reform has already mostly happened.” Layton didn’t provide the name of the speaker.
Despite the government’s plan, releasing Fannie and Freddie to the private sector is still a long way off, Beacon said in its note to investors.
“There will be many more twists and turns before any recapitalization and release is fully, if ever, executed,” Beacon said. “Investors should focus on Calabria’s repeated insistence that he wants to achieve certain reforms, but that he is on a five-year timeline, rather than the far more abbreviated timeline of the Trump administration, particularly due to their concerns over the housing market’s impact on the economy and the larger electoral implications.”
