A GSE plan before the election has risks — but so does doing nothing
WASHINGTON — A consensus is building among some mortgage industry observers that the election makes it unlikely the administration will try to release Fannie Mae and Freddie Mac from conservatorship anytime soon. Yet others argue, "If not now, when?"
The economics of the administration's risk assessment is simple: Ending the government's grip on the mortgage giants could upend the housing market, drive up interest rates, threaten credit availability and potentially alienate voters at an inopportune time.
Washington has already heightened fragility in the mortgage market after the announcement that regulators want to end special treatment for Fannie and Freddie under the Consumer Financial Protection Bureau's underwriting rules.
“Any time you start to tinker with the mortgage finance system and the housing market, there’s a risk that things may not go as planned, that there could be a negative impact to those markets,” said Brian Gardner, the director of Washington Research at Keefe, Bruyette & Woods. “You never want to upset the housing market.”
But others say that assessment is not so simple. For one thing, the economy is still healthy, yet waiting any longer risks implementing reforms to the government-sponsored enterprises in a downturn, which could have starker economic consequences.
“If you’ve been through a storm and a house gets a leak in it, you don’t try and fix it in the middle of the storm,” said Tom Pearce, the CEO and chairman of MAXEX, a private market trading platform. “You wait until the sun’s out and everything is drying out and everything’s working, and then you go and fix it and shore it up so that if you have another storm, it could weather the storm.”
Bloomberg reported July 12 that the Trump administration was leaning toward pumping the brakes on its efforts to free Fannie and Freddie from government control, growing ever cautious that changes to the housing finance system would impact things like mortgage rates, which could make it more expensive to get a mortgage.
But some believe those reports are overstated, and that Trump administration officials are plowing ahead on reform efforts as planned. Treasury and the Department of Housing and Urban Development are expected to publish presidentially directed reports on housing finance reform in August or September.
“They’re not getting cold feet, and they’re not changing their minds,” said Ron Haynie, the senior vice president of mortgage finance policy for the Independent Community Bankers of America. “It’s just probably all the multiple things that the Treasury is dealing with right now … whether it’s sanctions or trade, tariffs and then the budget issue — the debt ceiling. Those things are going to take precedence over anything having to do with housing finance reform right now, because the housing system is working.”
Although there are real concerns that tinkering with the GSEs could result in rising home prices and could impact the ability of a consumer to obtain a mortgage, with the current state of the economy, “that doesn’t seem like a likely scenario at this point,” Haynie added.
And despite a number of more pressing issues higher on the White House’s agenda, that doesn’t change the state of housing finance, Pearce said.
“I think there are other five-alarm fires that are going on right now,” he said. “This isn’t necessarily one of them, but that doesn’t mean that it’s not an issue that should be thoughtfully dealt with.”
As Federal Housing Finance Agency Director Mark Calabria has said in public speeches, he would prefer to repair the housing finance system while the economy is healthy as opposed to in a downturn.
But some have even started to question whether or not the economy has already reached the top of the cycle, with the threat of tariffs and the Federal Reserve warning about mounting corporate debt. Anything that could send the financial system in a downward spiral in the next year will be carefully avoided, Gardner said.
“I think that the administration kind of knows that the timing of this for them is not perfect because we’re getting closer to the election,” he said. “The economy is operating well, but there are some questions especially due to trade policy that do call into question how long the expansion can continue, and I don’t think the administration is anxious to take the risk of doing anything that could upset the economy.”
It also helps that Calabria is the head of an independent agency that is solely tasked with regulating the GSEs, unlike Treasury, which has a whole slate of issues to attend to, said Ike Brannon, the president of Capital Policy Analytics.
“I think Mark Calabria wants to do what he can to come up with a long-term fix, and he wouldn't let political exigencies interfere with this goal,” he said.
Calabria also has the authority to carry out some elements of GSE reform unilaterally if Treasury and White House are occupied with other economic matters. That includes the ability to finalize a risk-based capital framework for Fannie and Freddie, determine the future of various pilot programs that expand the GSEs' footprints and make any necessary adjustments to the companies' common securitization platform.
“Director Calabria is just very thorough. I think he’s going to take his time,” Gardner said. “There are other issues at FHFA that he has to deal with. Some related to this, some not.”
Still, political elements might slow down the reform timeline. Calabria had said in May that he hoped Fannie and Freddie would “be on the path to a new regime where the GSEs can start to build capital” by January of next year, and that he aimed to begin negotiating changes to the preferred stock purchase agreements with Treasury this fall.
“There is political risk on GSE reform that is unique to this White House,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note. “And that risk could result in delays that the market is not expecting.”
That unique political risk would be “if the public narrative is that the government is getting a bad deal,” Seiberg said.
Gardner said there is a lot of precedent for slowing down the process.
“There’s a reason why the GSEs have ... been in conservatorship for 10-plus years and that is because there is no good time, and the status quo is easy,” he said. “There’s no political risk in leaving things alone.”
The fact that the status quo has endured for so long could explain reports of the administration's caution, Haynie said.
“Housing finance reform won’t get you elected,” he said. “Screwing up the housing market, though, will get you unelected.”
But even if the worst-case scenario were to occur and Treasury had to provide an influx of cash to the GSEs to stave off further market consequences, it might not enrage voters as much as some people would expect, Brannon said.
“Of course, if Fannie or Freddie need to take a draw from Treasury next year, that's going to be used as ammo against the Trump administration too, but I'm not sure how effective that will be if nothing else occurs,” he said.
Still, there is likely concern within the administration about unintended consequences, but that could be alleviated by proceeding methodically, instead of enacting comprehensive legislation, Haynie said.
“It’s a difficult beast to get your arms around and you’ve got to be careful that if you fold one part of it, do you end up clogging the drain?” he said. “That is the big fear, because it is such a big part of the economy and it’s a big market.”