5 questions on Trump’s plan to reform Fannie, Freddie

WASHINGTON — The Trump administration's plan to end the conservatorship of Fannie Mae and Freddie Mac marked its first effort to solve a problem still left over from the financial crisis, but ultimately raised more questions than it answered.

Under the plan, the government-sponsored enterprises would be converted into "fully private entities" responsible for raising their own capital and backed by an explicit government guarantee.

But the proposal, made as part of the Office of Management and Budget's broader effort to reorganize the government, doesn't get into key specifics.

“The devil is always in the details and this plan is almost devoid of all of the most important details,” said Ed Mills, a policy analyst at Raymond James.

Doubts persist about whether the rest of the administration even supports the plan. Housing and Urban Development Secretary Ben Carson offered at least some support for the proposal on Wednesday, saying he agreed with the objectives laid out in the plan. But he stopped short of the full-throated endorsement many have expected.

“I love the fact that many people are talking about how do we get" the GSEs out of conservatorship, Carson told the House Financial Services Committee, but "how do we put them on a playing field in the secondary market with potentially other private-sector guarantors to create real competition and still have an appropriate guarantee so that we encourage capital in the market from foreign areas.”

Following are five key questions that the White House plan still needs to address:

President Donald Trump
U.S. President Donald Trump speaks during a Medal of Honor ceremony in the East Room of the White House in Washington, D.C., U.S., on Tuesday, June 26, 2018. Trump posthumously awarded the Medal of Honor to First Lieutenant Garlin Conner for his gallantry and valor during World War II, where he "left his position of relative safety to place himself in a better position to direct artillery fire onto the assaulting enemy infantry and armor." Photographer: Al Drago/Bloomberg
WASHINGTON — The Trump administration's plan to end the conservatorship of Fannie Mae and Freddie Mac marked its first effort to solve a problem left over from the financial crisis, but ultimately raised more questions than it answered.

Under the plan, the government-sponsored enterprises would be converted into "fully private entities" responsible for raising their own capital in the private market and backed by an explicit government guarantee.

But the proposal, made as part of the Office of Management and Budget's broader effort to reorganize the government, doesn't get into key specifics and there are doubts about whether the rest of the administration even supports the plan.

“The devil is always in the details and this plan is almost devoid of all of the most important details,” said Ed Mills, a policy analyst at Raymond James.

Housing and Urban Development Secretary Ben Carson offered at least some support for the plan on Wednesday, saying he agreed with the objectives laid out in the proposal. But he stopped short of the full-throated endorsement many have expected.

“I love the fact that many people are talking about how do we get" the GSEs out of conservatorship, Carson told the House Financial Services Committee, but "how do we put them on a playing field in the secondary market with potentially other private-sector guarantors to create real competition and still have an appropriate guarantee so that we encourage capital in the market from foreign areas.”

Following are five key questions that the White House plan still needs to address:
HUD Secretary Ben Carson
Ben Carson, secretary of Housing and Urban Development (HUD), listens during a House Appropriations Subcommittee hearing in Washington, D.C., U.S., on Tuesday, March 20, 2018. The order of a $31,000 dining room table for Carson's office suite and allegations of retaliation against an official who objected to the purchase because it exceeded the $5,000 limit is already the focus of the House Appropriations Subcommittee hearing on the HUD fiscal year 2019 budget proposal. Photographer: Eric Thayer/Bloomberg

Do Treasury and HUD support this plan?

When the plan was released last week, both Treasury and HUD remained silent, raising speculation that the agencies don’t support it.

"We do not believe that the OMB proposal enjoys much support within government,” Jaret Seiberg, an analyst with Cowen Washington Research Group, wrote in a research note. “It is interesting that it came out without direct expressions of support of Treasury or HUD, both of which are major players within this White House on housing policy.”

That changed on Wednesday with Carson's comments, but observers noted he stopped short of explicitly endorsing the OMB plan. Rather, he signaled he supported the discussion around it.

“What we need to do is lessen the taxpayer exposure [and] increase private capital in the secondary market," Carson said.

A source familiar with the matter said that the plan had input from across the administration, including both Treasury and HUD.

"Everyone signed off on this," the source said.

But it remains worrying to some that Treasury has not yet formally weighed in. The agency did not respond to requests for comment for this article.

“The silence is striking, frankly, and should be of concern to us,” said Doug Ryan, the senior director of affordable homeownership at Prosperity Now.

Can small banks get on board with this proposal?

As the proposal stands, small banks will not back the plan because it doesn't offer enough details, according to observers and industry representatives.

The details of reform in the plan are “deliberately ambiguous,” said Scott Olson, the executive director of the Community Home Lenders Association.

Under the plan, the federal regulator that would be responsible for overseeing the government-sponsored enterprises would have the authority to approve more guarantors and develop competition between them. The plan also would give guarantors “access to an explicit guarantee on the [mortgage-backed securities] that they issue that is only exposed in limited, exigent circumstances.”

But small-lender representatives are worried about the development of additional guarantors, fearing that they will be controlled or heavily influenced by megabanks, which will pressure them to give volume discounts to larger firms, leaving smaller ones at a competitive disadvantage.

“It’s a huge mistake to authorize more guarantors,” said Olson.

The Federal Housing Finance Agency currently has a policy that the GSEs cannot not offer volume discounts — or financial incentives to encourage bulk purchases. Small lenders would like that kept in any administration plan.

Ultimately, community bank support is key to winning congressional approval.
heitkamp-heidi-bl071117
Senator Heidi Heitkamp, a Democrat from North Dakota, listens during a news conference after a weekly Democratic luncheon meeting at the U.S. Capitol in Washington, D.C., U.S., on Tuesday, July 11, 2017. Majority Leader Mitch McConnell said he's delaying the Senate's August recess by two weeks after divided lawmakers have been unable to agree on how to revise health-care legislation he proposed to replace Obamacare. Photographer: Andrew Harrer/Bloomberg

Can Democrats support the affordable housing goals?

Under the plan, HUD would assume responsibility for affordable housing objectives, which would no longer include the conventional mortgage market. This proposed change upset many affordable housing advocates, who claim that this would allow lenders to be more selective.

Some observers took note that affordable housing was at least part of the plan, which is critical to win Democratic support of any proposal.

“[Republicans] are kind of backing having some level of explicit government guarantee and kind of recognizing that you have Democrats that exist in the Senate that you would need support from,” Mills said. “Those are—in some ways—earth-shattering events by Republicans to acknowledge.”

The issue helped scuttle the last legislative effort in 2014, when some Democrats felt that the bipartisan bill did not do enough to help affordable housing. Some observers said enough Democrats might get on board, however, noting the coalition that supported the regulatory relief bill that Trump signed at the end of May. Sens. Mark Warner, D-Va., and Heidi Heitkamp, D-N.D., both backed the reform bill, as did several other members of the Senate Banking Committee. It remains unclear, however, whether Democrats would be willing to deal on this issue too.

“They have to look long and hard at that, because I think that’s a grave concern," Ryan said.
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How would Fannie and Freddie recapitalize?

The proposal states that the GSEs would need to recapitalize once they are released from conservatorship, but it doesn’t offer a process by which they would accomplish that.

That's a big unknown that has to be addressed.

“We spent the last 10 years saying Fannie and Freddie should be put out of business, so the fact that we’re in a world where we can contemplate their existence, this document is incremental from where the debate is today, but it is a huge leap forward compared to where the debate was five years ago,” Mills said. “To me, it gives you a broad outline; it gives you a framework or a foundation that is starting to come together.”
Mel Watt
Representative Mel Watt, a Democrat from North Carolina and U.S. President Barack Obama's nominee as director of the Federal Housing Finance Agency (FHFA), waits to start a Senate Banking Committee nominations hearing in Washington, D.C., U.S., on Thursday, June 27, 2013. Watt faced lawmakers skeptical of his knowledge of housing finance issues today at a Senate Banking Committee hearing on his nomination to oversee mortgage giants Fannie Mae and Freddie Mac. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Mel Watt

How much can the Trump administration accomplish without congressional approval?

This proposal highlights another pending issue — who will Trump nominate to be the next director of the Federal Housing Finance Agency?

Director Mel Watt's term ends in January; that gives the administration enough time to make significant changes without congressional approval. For example, the FHFA director has the power to release the GSEs from conservatorship. It could also raise capital requirements on Fannie and Freddie and take other steps.

“That power has largely not been used since they’ve been put into conservatorship," Mills said, "but with a Trump FHFA director you’re going to see kind of a potential test to those powers, which can put a lot of pressure on Congress to react.”

Some, particularly those who back recapitalizing the GSEs without major structural changes, think housing finance reform is only possible through a FHFA action.

The “impetus has to come administratively,” Olson said. “The current system is probably fairly balanced and [Congress] will never reach agreement."

But administrative actions have their limit. The FHFA cannot, for example, provide an explicit government guarantee nor create an FDIC-like fund that guarantors would pay into to support that guarantee — two key elements of the Trump administration's plan.

That means some type of legislation is still necessary if the White House wants to enact its vision — and that won't happen soon.

“I do think at the end of the day we are in a really tight legislative schedule, and I really hope no one expects this to be forced down in the remaining months of this Congress,” Ryan said. “This has to be something deliberative, carefully thought-out and conclusive and that hasn’t really been the trademark lately.”
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