Administration Seeks to Fast Track GSE Reform


In what would be a major first step toward housing finance reform, the Treasury may end its net-sweep of Fannie Mae and Freddie Mac’s profits before the end of this month, Treasury Secretary Steven Mnuchin said during an interview on CNBC’s Squawk Box on Thursday.

“We’re actively negotiating an amendment to try to get it done by the end of the month,” Mnuchin said during the interview.

Ending the net sweep is a key provision of the Treasury’s recently released housing finance reform plan, which outlines steps that can be taken administratively to move the GSEs out of conservatorship, as well as legislative actions that can be taken in order to accomplish more comprehensive housing finance reform.

In its plan, the Treasury explains that in order to transition the GSEs out of conservatorship, it would first allow them to recapitalize. That would require termination of the so-called third amendment sweep, a provision of the companies’ agreements with the U.S. government under their conservatorship plans that require their profits to be fully swept to the Treasury.

Fannie and Freddie are currently only allowed to retain a combined $6 billion in capital, despite owning or guaranteeing mortgages worth $5.5 trillion.

Since being taken into conservatorship 11 years ago, the companies have more than repaid their bailouts: Fannie Mae received $119.8 billion in taxpayer bailouts and has paid back (as of the end of the second quarter) $181.4 billion, while Freddie Mac received $71.6 billion in bailouts and has paid back $119.7 billion.

In order to facilitate a safe and smooth transition out of conservatorship, the Treasury will keep the companies’ Preferred Stock Purchase Agreements (PSPAs) in place, so as to keep their mortgages backstopped and protect the companies during the recapitalization period. 

“Each GSE should be recapitalized with significant first-loss private capital so that Treasury’s ongoing commitment under each PSPA could be drawn upon only in exigent circumstances,” the Treasury states in its plan. “To facilitate recapitalization of the GSEs, Treasury and the Federal Housing Finance Agency (FHFA) should consider adjusting the variable dividend (also known as the “net worth sweep”) required by the terms of Treasury’s senior preferred shares, as well as the other approaches set forth in this plan.”

As the companies build up their capital reserves, the Treasury, working with the FHFA, will work to end the GSEs’ conservatorships. However, no timeline for achieving this goal is provided in the Treasury’s plan.

“Although applicable law does not prescribe a specific end point for the conservatorships, no conservatorship is meant to be permanent,” the Treasury states in its plan. “An eventual end is also necessary to reduce the far-reaching government influence over the housing finance system inherent in FHFA’s management of the GSEs through the conservatorships.”

In testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, Mnuchin and FHFA Chairman Mark Calabria stressed that although they would prefer to have Congress take the lead on GSE reform, the Administration is at the same time looking to get the ball rolling.

“I must emphasize, and our recommendations make it clear, that the Administration’s preference is to work with Congress to enact comprehensive housing finance reform legislation,” Mnuchin said in his testimony. “Legislation could achieve lasting structural reform that tailors explicit Government support of the secondary market, and repeals the GSEs’ congressional charters and other statutory privileges that give them a competitive advantage over private sector competition.

“At the same time, we believe that reform can and should proceed administratively,” he added. “Pending legislation, Treasury will continue to support FHFA’s administrative actions to enhance the regulation of the GSEs, promote private sector competition, and satisfy the preconditions set forth in the plan for ending the GSEs’ conservatorships.”

Calabria said that time is ripe for making the transition, as the housing market’s fundamentals are currently sound.

“Some argue reform should wait for a crisis,” Calabria said in his testimony. “This shortsighted thinking fueled the last housing market collapse. As we learned then, it is impossible to solve complex problems in the middle of a crisis.

“To paraphrase President Kennedy, the time to repair the roof is when the sun is shining,” Calabria continued. “Now is the time for bold reforms because our economy and housing market are strong. This will not always be the case.”

President Trump on Tuesday approved the Treasury’s housing finance reform plan, which focuses mainly on steps to re-privatize the GSEs, as well as the plan developed by the Department of Housing and Urban Development (HUD), which focuses on reforms for the Federal Housing Administration and Ginnie Mae.

The Treasury and HUD released their respective plans for reforming the nation’s housing finance system on Sept. 5.

In March, President Trump issued a presidential memorandum directing the agencies to develop the plans, saying that the “housing finance system of the United States is in urgent need of reform.”

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