Trump administration, not Congress, may institute GSE reform in 2019

Despite the release of Senate Banking Committee Chairman Mike Crapo's outline of a government-sponsored enterprise and housing reform plan, most policy changes will likely come from the White House, and may even materialize this year, according to Keefe, Bruyette & Woods.

The plan, released Friday, was not presented in legislative form nor was it comprehensive, prompting KBW analysts to suggest that the proposal is "a way for Sen. Crapo to stay out ahead of others, including the administration, in the mortgage policy debate."

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Crapo's actions, in addition to recent press reports and comments from Federal Housing Finance Agency Director Joseph Otting, point to signs that the Trump administration will propose a recapitalization plan for the GSEs and release them from conservatorship, which they've been in since September 2008, said a KBW report. This will likely not come to pass until the White House's nominee for FHFA director, Mark Calabria, is confirmed by the Senate.

There seems to be no movement by Congress to reform the GSEs, but the administration can legally do so without Congress' involvement. Logistics for reform, however, will be questionable, and may significantly dilute the common shareholders; common shares are up 140% for Fannie and 132% for Freddie, according to KBW.

Each of the four reform bills introduced to Congress in the last decade (the most recent being the 2014 Johnson-Crapo Bill) propose to eliminate the existing GSE structures, meaning there would be no value in the common or preferred equity in those instances, said the report. The government's role in the mortgage market still stands in three of the four bills, which are those most focused on.

The GSEs still owe the government $191 billion, which is just one hurdle for the White House as Fannie Mae and Freddie Mac only have about $6 billion in equity. Even if a scenario were to alleviate or shrink that debt, the GSEs still need considerable incremental capital — potentially as much as $180 billion — according to a framework set forth by the FHFA in 2018.

The Senate Banking Committee may hold a hearing to confirm Calabria's nomination as soon as February, followed by a Senate vote in March. This means a GSE reform plan from the White House may materialize in early spring.

What is Otting's plan for GSE reform? It's complicated

The acting head of the Federal Housing Finance Agency has promised substantial changes for Fannie Mae and Freddie Mac, but the exact mechanics and timeline of an administration plan are still a mystery.