FHFA's Calabria is open to wiping out Fannie, Freddie shareholders

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WASHINGTON — At the second of two hearings to examine the Trump administration's housing finance reform blueprint, key officials charged with implementing the plan made clear they are abundantly focused on Fannie Mae and Freddie Mac's capital levels.

Members of the House Financial Services Committee were mostly concerned with issues that the administration proposal did not discuss. But Treasury Secretary Steven Mnuchin, Federal Housing Finance Agency Director Mark Calabria, and Housing and Urban Development Secretary Ben Carson offered additional insight on the process to end Fannie and Freddie's conservatorships.

Calabria told the committee that he is open to wiping out shareholders of the government-sponsored enterprises, but he cautioned that “no decision has yet been made on moving forward.” He also hinted at a future rulemaking intended to shrink Fannie and Freddie's footprints.

The administrative blueprint the Trump administration released in September called on Congress to implement several reforms to guide the mortgage giants out of conservatorship, but said that absent legislative action, they would move ahead on their own to recapitalize Fannie and Freddie and ultimately release them from government control.

Lawmakers battled over the outcome of the administration’s proposal, with Financial Services Committee Chair Maxine Waters, D-Calif., calling the plan “disastrous" and Republicans taking issue with the Democratic majority's focus on affordable housing issues.

Although there is still no clear path for a legislative solution to end the conservatorships of the GSEs in the near future, the members of the committee implored each other to act, and the hearing’s three witnesses reiterated their preference for Congress to take the lead.

“In order to have a lasting change to our housing finance system, to put it on a sustainable path for our taxpayers, for our communities, it is important we legislate in a bipartisan way and this is an ideal moment to do it,” said the committee’s ranking member, Rep. Patrick McHenry, R-N.C.

Here are the four things we learned from Tuesday’s hearing:

Calabria is open to eliminating shareholders

Rep. Bill Foster, D-Ill., expressed concern that Calabria’s actions — such as allowing Fannie and Freddie to retain earnings — were boosting Fannie and Freddie’s share prices and benefiting hedge funds, some of which have had principals serving on Trump’s advisory committees.

While Mnuchin denied any conflicts of interest and said he doesn’t “really look at the share price one way or another,” Calabria went a step further. He said he would be open to eliminating shareholders altogether, noting that he works for the American taxpayers.

“Let me first say, I am very much on the record over the various years as saying in 2008 what we should have done is wipe out the shareholders,” he said. “If the circumstances present itself, if we have to wipe out the shareholders, we will.”

Foster agreed with Calabria’s sentiment “completely” and pledged to work with him to achieve that.

Mnuchin: No decision has been made on receivership

Calabria said in September that he doesn’t believe the conditions exist today for placing Fannie and Freddie in receivership. But on Tuesday, Mnuchin stressed that the current priority is for Fannie and Freddie to maximize earnings and therefore all options remain on the table.

“We have made no decision as to whether they would exit by conservatorship or receivership, and I would just comment that I represent the largest creditor, which is the U.S. government, and we would need to be part of any decision,” he said. “Again, we’re focused on how we make them safe and sound, recapitalize them, and then we can figure out the process of raising extra capital.”

Calabria agreed, adding that he believes he has “a responsibility in the interim to help build capital at these enterprises.”

However, neither Mnuchin nor Calabria elaborated when pressed on the level of capital that Fannie and Freddie should hold before exiting conservatorship.

“I do believe that the GSEs can raise a very significant amount of capital from the private sector, so we do anticipate [with] the combination of retention and third-party capital raise, there will be sufficient capital to get to the new standards,” Mnuchin said.

Calabria anticipates rulemaking to prevent charter creep

Fannie and Freddie have long been accused of overstepping their charters and foraying into segments of the market that put them at a competitive advantage. Calabria said the FHFA “will be setting up a rulemaking to have a very clear process to make sure the GSEs stay within their charters.”

“Anytime a player in the marketplace has considerable market power, they try to leverage them to other lines and I think that’s something that we always have to be cautious of,” he said to Rep. French Hill, R-Ark. “Fannie and Freddie have the ability to essentially put anybody out of business that they could directly compete with, so it’s certainly a very large concern of mine.”

Lawmakers disagree on what the Trump plan would do to affordable housing

Without an explicit guarantee for Fannie and Freddie, the administration plan would likely “create turmoil in the housing market, prevent many Americans from obtaining 30-year fixed rate mortgages and block families across the country from attaining the American dream of homeownership,” Waters said in her opening statement.

But Republicans and administration officials argued that the proposal would actually do the opposite.

“I was surprised and disappointed by the title of this hearing, which asks whether the administration plans ‘an end to affordable housing,’ ” Mnuchin said in his written testimony. “To be clear, Treasury does not propose, and indeed opposes, reducing or eliminating the government-sponsored enterprises’ longstanding support for affordable housing.”

Still, Democrats remained concerned about the administration’s suggestion that the GSEs should scrap the affordable housing goals.

“This administration says the plan will not raise costs of homeownership … but affordable housing experts disagree with that,” said Rep. Joyce Beatty, D-Ohio. “So you’ll have to forgive me for taking the side of affordable housing advocates and experts.”

Rep. Andy Barr, R-Ky., argued the opposite.

“The proposals set forth by the administration lay the groundwork to protect taxpayers, retain the 30-year mortgage, improve efficiencies in the mortgage market and lower prices for qualified borrowers,” he said. “By pushing back against common-sense reforms to housing finance, the Democrats are endangering the very low- and middle-income citizens they claim they want to protect.”

Rep. Steve Stivers, R-Ohio, attempted to unite the two sides, pointing out that both Republicans and Democrats value and aim to protect housing availability and affordability.

“It is time to make something happen and not only are taxpayers on the hook right now, but we’re not doing everything we can do to make affordable housing work for people and take away the differences between populations,” he said.

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Housing finance reform Housing affordability GSEs GSE reform Capital requirements Mark Calabria Steven Mnuchin Maxine Waters FHFA