Path to a GSE bill still fraught despite Treasury plan

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WASHINGTON — Senators' examination Tuesday of the Trump administration's housing finance reform plan made two things clear: Lawmakers feel urgency to move legislation, but addressing obstacles that have stalled congressional action for years still eludes them.

The reports issued last week by the Treasury Department and Department of Housing and Urban Development sent a clear signal that the administration could accelerate its own reform plan to privatize Fannie Mae and Freddie Mac if bipartisan legislation does not come to a vote.

That ultimatum in dealing with the government-sponsored enterprises seemed to resonate with some members of the Senate Banking Committee.

“Today’s hearing should also serve as a warning,” said Sen. Mike Rounds, R-S.D. “As we’ve all read, the Trump administration is determined to bring the GSE conservatorship to an end, and it has clearly defined ways that it can do so. Although my colleagues might object to certain parts of the administration’s plan, these objections are no justification for not attempting to at least find a path forward within this committee.”

In its presidentially directed report, Treasury said it would prefer that Congress take up comprehensive reform legislation to privatize Fannie and Freddie, but that a bill is not a prerequisite for ending conservatorship.

Imploring the committee to act

Treasury Secretary Steven Mnuchin reinforced that Monday when he said he hoped congressional movement on the issue would happen in the next three to six months, and “if we can’t do that, we’ll move on the administrative front.”

Both Republican and Democratic senators implored Senate Banking Committee Chairman Mike Crapo, R-Idaho, to hold a markup of a bill that would achieve the legislative requests both Treasury and HUD laid out in their respective reports.

“I completely agree we need to get this in front of this committee and we need to hash it out, but … I think we need to go farther than just this housing issue in this committee,” said Sen. Doug Jones, D-Ala. “We need to get things to the floor of the United States Senate.”

Lawmakers have for years debated legislative options such as creating a new government backstop to reinsure multiple private-sector guarantors, which would include Fannie and Freddie. The administration supported such a legislative approach in the report.

Administration officials on the defensive

Yet the committee did not appear focused on reaching consensus on a bill, while Democrats on the panel spent considerable time putting the hearing's witnesses — Mnuchin, HUD Secretary Ben Carson and Federal Housing Finance Agency Director Mark Calabria — on the defensive about administrative reform steps laid out in the reports.

Sen. Sherrod Brown, D-Ohio, the ranking member of the committee, said the administration's plan potentially to reduce the size of Fannie and Freddie's footprint could lead to higher mortgage rates for borrowers.

“If the GSEs and ... [Federal Housing Administration] cut out their most profitable lines of business and still have to cover their costs, they’ll have to raise rates on the borrowers who are left,” said Brown.

But Mnuchin said he and his fellow witnesses disagreed that their proposed actions would increase mortgage rates.

“We will be very clear that we are very careful,” said Mnuchin. “We support the 30-year [fixed-rate] mortgage and we’re not going to do anything to jeopardize that for hardworking Americans.”

Brown and Sen. Mark Warner, D-Va., also expressed skepticism that the administration could shrink Fannie and Freddie’s footprint while also attempting to build private capital for the companies — one of its stated goals for reform.

“To raise the capital you say they need, you’d have to raise more money than any company in IPO history right after the Trump administration has shrunk their businesses and given away their most valuable assets,” said Brown.

While neither Mnuchin nor Calabria gave exact numbers on how much capital Fannie and Freddie would need to raise before exiting conservatorship, Mnuchin said the amount is “more like $100 billion than $6 billion.” Each GSE is only permitted to retain a thin capital cushion of $3 billion.

And regardless of how much capital is raised, Fannie and Freddie would still be “too big to fail” under the administration’s unilateral plans for reform, said Warner. If Congress cannot pass structural GSE reform, the administration plan envisions what most refer to as a "recapitalization and release" of the mortgage giants. The Virginia senator said that scenario would preserve the structural flaws of the housing finance system.

“My concern is on your administrative proposal that what you're really talking about on Fannie and Freddie is recap and release, which is going to keep us with a duopoly, even with higher capital standards, which is going to put us right back to where we were prior to 2008,” he said.

FHFA chief shifts stance on SIFI designation

Meanwhile, Calabria appeared to shift his stance over whether Fannie and Freddie should be designated as "systemically important financial institutions." In a May interview, Calabria suggested that a designation would make sense, and that it would be appropriate for the Financial Stability Oversight Council to at least consider the label.

Yet a designation could complicate efforts to set Fannie and Freddie on a future path.

Under questioning from Warner, Calabria said he agrees with Mnuchin that the administration should consult with FSOC before starting to raise public capital to “make sure we understood that there was enough capital so that they did not need to be designated,” Mnuchin said.

“As a member of FSOC, while I believe that there is more than sufficient information to begin a process, I also think it’s important as a member of FSOC to never start with the presumption that any entity is necessarily systemic until you’ve actually run the process,” said Calabria.

Hope for a utility model

Although Treasury’s report pushed for a multi-guarantor model with Congress granting FHFA the power to charter competitors to Fannie and Freddie, Mnuchin said the administration would support alternative legislative plans, such as a utility model.

“We support working with this committee on what you consider to be a utility model, and again, I would just say there are plenty of utilities where the pricing of the utility is regulated and we do think FHFA should maintain regulation and oversight of the pricing of the guarantee,” he said.

Brown, who has made known his support for a utility model, seemed particularly encouraged by this comment.

“I look forward to working with you on this and really figuring out how we can flesh out details,” he said at the conclusion of the hearing. “I will ask the staff of both of [Mnuchin and Calabria] to provide technical assistance on a utility model with a regulated rate of return.”

Crapo: administration should move forward 'with incremental steps'

While Crapo did not give any indication as to whether the committee would examine a bill to implement the legislative suggestions in the report, he did push the administration to make headway on its own reforms, regardless of what his committee does.

“Ultimately, only Congress has the tools necessary to provide holistic, comprehensive reform to our system that will be durable through any market cycle,” said Crapo in his opening statement. “However, it is important for the Administration to begin moving forward with incremental steps that move the system in the right direction.”

Despite vowing to plow ahead on administrative reform, Calabria, Mnuchin and Carson all made clear that they hoped Congress would take the lead with legislation.

“Anything that we do is going to be questioned as biased, so yes, working with Congress is the best way to do it,” said Carson.

However, the reality of a divided Congress with a full legislative agenda wasn’t lost on the panel’s members. As Sen. John Kennedy, R-La., put it, passing a bill in the Senate would “kind of be like slamming a revolving door.”

“I think we ought to flesh it out, but if we’re not, let’s just admit that Congress is just going to sit on its ice cold lazy butt and do nothing,” Kennedy said, speaking to Calabria. “You need to get started trying to fix this car wreck, Mr. Director.”

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GSE reform Housing finance reform Steven Mnuchin Ben Carson Mark Calabria Treasury Department Senate Banking Committee Fannie Mae Freddie Mac