Steve Mnuchin, President-Elect Donald Trump’s pick to lead the U.S. Department of the Treasury, said during an interview this week that he is in favor of restructuring Fannie Mae and Freddie Mac and returning the two companies back to the private sector.
“We’ve got to get Fannie and Freddie out of government ownership – it makes no sense that these are owned by the government and have been controlled by the government for as long as they have,” the former Goldman Sachs executive and former chairman of OneWest Bank said during an interview with Maria Bartiromo of Fox News on Wednesday.
Mnuchin, who also proposes mostly dismantling Dodd-Frank, told Bartiromo that Fannie and Freddie would be restructured so that “they’ll be safer” and won’t need to get taken over by the government again.
When asked how quickly this might happen, considering the complexities at hand, Mnuchin said that “it’s right up there in the top 10 list of things we’re going to get done – and we’ll get it done reasonably fast.”
When asked why the Obama administration didn’t tackle the issue of government-sponsored enterprise (GSE) reform despite cries from the industry to do so, Mnuchin said it simply wasn’t a priority for that administration. “If it had been a priority, [the Obama administration] would have [gotten it done],” he said.
In an interview with MortgageOrb, David G. Kittle, president of The Mortgage Collaborative and former chairman of the Mortgage Bankers Association, said the main reason the Obama administration didn’t want to return Fannie and Freddie to the private sector was because all of the companies’ profits were being swept to the Treasury.
“There’s been no interest in GSE reform from the Obama administration, given the cashflow into the Treasury [Fannie and Freddie] have produced for them,” Kittle said.
“I support privatization, with a substantial reduction in the guarantee fees, given the high quality of the loans that are being produced,” Kittle added. “However, what is needed is a stated housing policy. One that supports a grossly under-funded and under-staffed Ginnie Mae, expands and streamlines the Federal Housing Administration [FHA] multifamily programs to address affordable rentals, and reduces the mortgage insurance premiums on FHA single-family loans.
“[With] a Hispanic population that represents the largest block of future homeowners, how will we effectively finance them?” Kittle asked rhetorically. “It’s bigger than the GSEs being privatized – the Trump administration needs to accept counsel from industry practitioners to help form a long-term housing policy that speaks to all the stated issues.”
Mnuchin’s proposal puts him at odds with several Republicans, including Rep. Jeb Hensarling, who has introduced a Republican-backed plan that would see the GSEs wound down.
Alice Sorenson, executive vice president at LRES, also said she supports the idea of returning Fannie and Freddie back to the private sector.
“The privatization of Fannie and Freddie should level the playing field,” Sorenson told MortgageOrb. “In the past, they have always had the opportunity to favorable interest rates and almost unlimited resources. The private sector hasn’t had similar opportunities, and on top of that, they’ve had more competition for the resources.”
As Sorenson points out, taking the companies out of conservatorship should result in a relaxing of government regulations.
“The private sector historically has been able to operate with less regulation, albeit not always with the best outcomes,” she said. “But with the new police department – the Consumer Financial Protection Bureau – less regulation and more oversight could work to the favor of the consumer.”
So, how might this impact appraisal management companies (AMCs) and other vendors serving the mortgage industry?
“AMCs will be in the same position as other vendor services,” she said. “Opportunity will be there – but learning how to operate within the new environment will be essential to success. Volumes will be affected, probably negatively in the beginning as everyone learns the new structures. Plus, with increased interest rates threatened/promised, volume may shrink again. But with the millennials getting interested in homeownership, there may be a quick adjustment upward.”
Rick Roque, president of Menlo, said, “It will be great to have a ‘mortgage guy’ as Treasury Secretary.”
“Mnuchin brings a lot of mortgage expertise to the Treasury Department, which I believe will help our industry,” Roque tells Orb. “He bought the failed IndyMac during the financial crisis, renamed it OneWest, turned it around and then sold it to CIT Group in 2015 at a huge profit. So, he has a lot of experience in subprime mortgages, retail origination and correspondent lending. That background will prove to be very beneficial to the mortgage industry, especially non-depository mortgage bankers.”
Roque said he expects the new administration to make “some fairly bold moves to expand the housing market, which, of course, will help boost mortgage originations despite the rise in interest rates.”
“With housing inventory low and home prices at pre-crash highs, we clearly need new construction, especially at the lower and middle tiers of the market,” he said. “I think we can get to $3 trillion in annual mortgage originations, but it will take some new expanded loan products, a wider credit box and incentives to get investors to buy the loans. I’m optimistic.”
A.W. Pickel, president of the midwest division, at AmCap Mortgage, told Orb: “Obviously, both Fannie and Freddie need to be brought out of conservatorship, which was only meant to be a short term solution. Bringing in private capital to the secondary market is, as well, a high priority. It seems to me that the best of all worlds would be private guarantors which would assume the majority of the mortgage risk while retaining a government insured backstop that would keep the liquidity in the capital markets. As well, the government backstop would be paid by a form of basis points to the government.”
And Rick Sharga, chief marketing officer at Ten-X, added, “After eight years of conservatorship, there’s a lot to unwind before Fannie Mae and Freddie Mac can possibly be privatized. What’s critical is that whatever is done to change the current model is done carefully and thoughtfully, since the GSEs have essentially been the foundation upon which the housing market recovery has been built and still account for the lion’s share of loans being issued today. Simply unplugging them and hoping private capital will fill the void could be disastrous.”
