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

WASHINGTON — The Federal Housing Finance Agency's acting director, Joseph Otting, has promised that the White House is set to announce an administrative plan to make changes to Fannie Mae and Freddie Mac. But the mechanics of such a plan as well as the timeline have left mortgage industry insiders scratching their heads.

In a staff meeting last week, Otting told FHFA employees that within the next month, the White House and the Treasury Department would set a direction for the future of housing finance in the U.S that would define the agency’s role in a new system. The comments were first reported by MarketWatch.

“The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do,” Otting said at the meeting, according to a recording obtained by Politico.

Otting promised significant progress on overhauling the system within six to 18 months — which sent the shares of Fannie and Freddie soaring Thursday to their highest levels in at least a year — but he failed to provide specifics of such an administrative plan, and his comments appeared at odds with those previously made by other administration officials. Treasury Secretary Steven Mnuchin has discussed letting Congress do the heavy lifting on housing finance reform.

Otting also said Mark Calabria, an administration official nominated to become the permanent FHFA director, had "signed off" on the reform plan to be announced by the White House. But Calabria, the chief economist to Vice President Mike Pence, is still awaiting confirmation. In response to Otting's comments, senior Democratic lawmakers have been eager to see a copy of the administration plan.

Here are key questions about Otting and others' housing finance reform plans.

Why isn't the administration waiting for Calabria to be confirmed?

FHFA Director Mark Calabria
Mark Calabria, director of financial regulation studies with the Cato Institute, speaks during a Senate Banking Committee hearing with Richard Smith, chief executive officer of Realogy Corp., left, in Washington, D.C., U.S., on Wednesday, Sept. 14, 2011. The committee discussed new ideas for refinancing and restructuring mortgage loans. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Richard Smith; Mark Calabria
“There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in a Jan. 10 interview with Politico. “If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out.”

Many have compared Otting’s position as acting director of FHFA to Mick Mulvaney’s role as acting director of the Consumer Financial Protection Bureau, a position Mulvaney used to attempt significant changes to the CFPB. But unlike Otting, Mulvaney served about half of his tenure at the consumer bureau with no one having been nominated to run the agency full time. (Kathy Kraninger was confirmed as CFPB director in December.)

In the case of the FHFA, the White House announced its intention to nominate Calabria for the role before it appointed Otting as acting director, suggesting that Otting may have been viewed as just a temporary placeholder.

“Calabria’s nomination, given his experience, seems likely to go ahead,” said Thomas Wade, the director of financial services policy at the American Action Forum. “For an acting FHFA director to announce this plan rather than wait suggests an urgency I can’t pinpoint.”

But Otting and the White House could be tracking the economy and thinking ahead, said Karen Shaw Petrou, managing partner at Federal Financial Analytics.

Otting "knows as does Mark and as does the White House that confirmation will take some time, and they do not have an awful lot of time to take this kind of administrative action given the state of the economy and the potential downturn and the already evidenced strain in the housing market,” she said.

Why would Mnuchin endorse an administrative plan when he has said he would prefer legislation?

Steven Mnuchin
Steven Mnuchin, U.S. Treasury secretary, leaves after a Senate Finance Committee hearing in Washington, D.C., U.S., on Wednesday, Feb. 14, 2018. Mnuchin said the Internal Revenue Service will issue guidance within the next two weeks to prevent hedge-fund managers from dodging new tax rules on carried-interest profits. Photographer: Zach Gibson/Bloomberg
Since he became Treasury secretary, Mnuchin has promised a solution for reforming the GSEs, but has repeatedly said that he wants legislation as opposed to administrative action to wind down Fannie and Freddie.

"I would like to get them out of conservatorship," Mnuchin told Bloomberg in December. "My preference would be to do something that has bipartisan legislative support."

While GSE reform plans that do not require congressional legislation exist, the heavy lift of making substantial changes to the charters of Fannie and Freddie or devising a new entity to take their place ultimately falls to Congress.

“The FHFA director has sweeping powers to reduce the footprint of the GSEs but not to change their fundamental conservatorship structure,” said Wade. “If the administration is relying on this plan to spur congressional legislative activity, in this divided Congress, the plan could be only so much hot air.”

With one party leading the House and the other leading the Senate, the potential inability for lawmakers to make legislative deals could ultimately encourage the administration to do what it can on its own to reduce the scope of Fannie and Freddie.

“A hallmark of the Trump Administration is their willingness to take aggressive action when they have statutory authority,” Ed Mills, a policy analyst at Raymond James, said in a research note.

Though Mnuchin has emphasized that in a perfect world he would prefer a legislative solution, his desire to resolve the longstanding issue of conservatorship might outweigh his preference for Congress to deal with the GSEs.

“Secretary Mnuchin has also made it very clear that he would like to see the situation resolved quickly and knows he has administrative authority to do it,” Petrou said.

Could Otting’s comments complicate Calabria’s confirmation?

Sen. Mark Warner and Sen. Elizabeth Warren
Senator Elizabeth Warren, a Democrat from Massachusetts, right, and Senator Mark Warner, a Democrat from Virginia, speak during a Senate Committee on Banking, Housing, and Urban Affairs hearing with Steven Mnuchin, U.S. Treasury secretary, not pictured, at the the U.S. Capitol in Washington, D.C., U.S., on Thursday, May 18, 2017. Mnuchin's testimony is his first committee appearance since his controversial confirmation. Breaking up Wall Street banks would be a "huge mistake," Mnuchin told lawmakers Thursday. Photographer: T.J. Kirkpatrick/Bloomberg
Otting reportedly told FHFA staff that Calabria “signed off” on a joint White House and Treasury reform plan. If that’s true, it could mean that the already challenging confirmation process for Calabria will be even more difficult.

“Announcing an exit plan for Fannie and Freddie from conservatorship now could derail his confirmation,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a Jan. 18 note. “It also would make his confirmation hearing all about the terms of whatever deal the Trump administration would try to cut.”

Regardless of whether or not Calabria was involved with crafting an exit plan for the GSEs, the Trump administration’s apparent intentions of moving forward with housing finance reform will undoubtedly frame Calabria’s upcoming confirmation hearings.

If Otting is correct and there is an announcement from the White House and Treasury in weeks, it could precede Calabria’s hearing, which has yet to be scheduled. This would provide senators with even more details on the administration’s blueprint for reform, which could in turn further tailor the questions they ask Calabria.

Calabria can afford to lose only three Republican votes, and senators might be nervous about the administration usurping Congress’ power.

“Nothing unites Congress more than perceived threats to its authority,” Seiberg said in the research note.

Could an imminent GSE reform plan spur congressional action?

Rep. Maxine Waters
Representative Maxine Waters, a Democrat from California and ranking member of the House Financial Services Committee, speaks during a hearing on Capitol Hill in Washington, D.C., U.S., on Thursday, July 27, 2017. Mnuchin ruled out prioritizing U.S. debt payments if Congress fails to raise the borrowing limit and repeated his call for quick action by lawmakers. Photographer: Zach Gibson/Bloomberg
House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee, have not yet seen the White House-Treasury reform plan, as they indicated in a letter Friday to Otting.

The two lawmakers requested that Otting provide the committees with “a copy or detailed description of the mission that Treasury and the White House have outlined to which you referred.”

“Your comments call into question the independence of the FHFA under your leadership,” Brown and Waters said in their letter.

If Congress deems the administration’s efforts toward GSE reform as going too far, it could consider taking up the 2015 Jumpstart GSE Reform legislation, which would solidify Congress’ leading role in any efforts to unwind Fannie and Freddie, Seiberg suggested. The bill, which could be tacked on to a spending bill, would also prevent Treasury from selling or getting rid of its ownership in the GSEs' senior preferred shares.

What will the White House and Treasury reform plan look like?

Comptroller of the Currency Joseph Otting is sworn in by Treasury Secretary Steven Mnuchin
Joseph Otting, comptroller of the U.S. currency, right, is sworn-in by Steven Mnuchin, U.S. Treasury secretary, left, next to Bonnie Otting, center, during a ceremony at the U.S. Treasury in Washington, D.C., U.S., on Monday, Nov. 27, 2017. Otting, a former OneWest Bank Group chief executive officer, won Senate approval this month to lead a key U.S. bank regulator, further clearing the way for the Trump administration to roll back Wall Street regulations. Photographer: Andrew Harrer/Bloomberg
Otting’s comments have stoked speculation that the administration is planning to recapitalize and release Fannie and Freddie from conservatorship, but he gave no real suggestion that that's what the White House and Treasury are planning to do.

“I do not think that recap and release is what’s on the agenda, and I think there are significant indications in what Otting has said that that’s not the case,” Petrou said.

Even if the administration did want to pursue a recap and release path, it would be almost impossible for such a plan to occur in the six to 18 months that Otting has promised. Otting himself noted at the staff meeting, according to reports, that the business model of the GSEs calls for $150 to $200 billion in capital reserves, which would take a considerable amount of time to build, he conceded.

“I expect the White House plan to explain how the GSEs might build their capital up from the currently permissible $6 billion to $200 billion — although this would certainly not be a quick process, and I’m curious what pressures this might place on GSE pricing structures and from there on to the housing market more generally,” Wade of the American Action Forum said.

However, there is widespread agreement that the Trump administration will use its position to push certain reforms that do not require legislation, such as the expansion of the common securitization platform and the completion of the FHFA’s proposed risk-based capital rule for the GSEs.

There is also question as to how similar this proposal will look to the one the White House pushed last June as part of a larger effort to reorganize the federal government. Although this plan did suggest ending the conservatorships of Fannie Mae and Freddie Mac, it was widely criticized for lacking details and it’s unclear if it even had support in other areas of the government, including Treasury.