Even as President Trump outlines a broad plan to reform mortgage giants Fannie Mae and Freddie Mac, competing factions inside the White House are gearing up for a battle that will determine the scope of the reform and may ultimately derail any plan from taking shape, FOX Business has learned.
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The mortgage giants, known as Government Sponsored Enterprises (GSEs), have been wards of the government since the 2008 financial crisis, when they received tens of millions in government bailout money to remain in operation and continue their mandate in supplying significant liquidity to the $10 trillion mortgage market. Various Trump Administration officials have said ending government control of Fannie and Freddie would be a key policy goal, while maintaining the GSE’s purpose to make homeownership affordable.
On Wednesday, the President signed a memorandum ordering both the Treasury Department and the Department of Housing and Urban Development to develop a plan to end the direct government control—known as conservatorship-- while implementing safeguards to prevent another collapse of the agencies. As FOX Business was first to report, the administration is also pushing for a fast-track Senate confirmation of Mark Calabria, the new director of the Federal Housing Finance Agency (FHFA), who, once confirmed by the GOP led Senate, will be a key player in any reform effort.
But the battle lines inside the White House are already being drawn between Calabria and the Treasury Department, including Secretary Steven Mnuchin, a former Wall Street mortgage-bond trader, over how the reform will play out, according to people with direct knowledge of the matter. Mnuchin is said to favor a recapitalization and release of Fannie and Freddie, returning the GSE’s structure to something along the lines of what existed before the 2008 bailouts and government takeover: Publicly traded companies that were backed by the U.S. taxpayer with an implicit guarantee.
This approach is favored by hedge funds on Wall Street that have purchased shares of the GSEs on the cheap, betting that the Mnuchin reform plan would win the day and boost the shares.
Calabria, a Libertarian economist, is a long-time critic of the GSEs, and favors releasing Fannie and Freddie from government control, these people add. But he wants more taxpayer protections for Fannie and Freddie as part of any reform effort, these people add. Calabria’s fear is that a return to the old business model will set the GSEs up for another 2008 implosion and taxpayer bailout, these people say.
The standoff could delay or derail the reform effort indefinitely, according to people who work with both Calabria and Mnuchin. The delay and derailment could also depress shares of Fannie and Freddie, which have spiked sharply this year on hopes of a return to the old GSE business model.
“There’s definitely a battle between the Wall Street and the Libertarian approach to reforming the GSEs,” said one mortgage executive involved in the reform discussions. “The void between the two could make any reform difficult to achieve.”
Press officials for Treasury and the FHFA had no comment.
Fannie and Freddie themselves account for about $5 trillion in home loans, making affordable 30-year fixed rate mortgages to many first-time home buyers. The agencies buy the loans from the banks, package them into securities, which are sold to private investors. But both agencies have been plagued by accounting scandals in recent years, and have been blamed for instigating the mortgage bubble and the collapse of housing prices in 2007 and 2008 by purchasing loans with low credit ratings.
The bursting of the housing bubble led to the broader banking collapse and the Great Recession that followed. Fannie and Freddie were among the first casualties of the financial crisis, when they were taken over by the federal government in the summer of 2008 and placed into what’s known as government conservatorship.
Since then, they have operated as de-facto arms of the federal government and continued their mandate to help provide affordable home ownership. But the GSE’s are now profitable and have repaid hundreds of billions of bailout money that kept them afloat—prompting the Trump administration to seek ending total government control of the companies, and possibly privatize the outfits.
Complicating the White House reform efforts is that Congress will likely play a role in the new structure of Fannie and Freddie. On Tuesday and Wednesday Senate Banking Committee chairman Mike Crapo, a Republican from Idaho, held hearings on GSE reform, raising various issues about taxpayer liability in the event of another crisis and creating more competition from the private sector in the mortgage market.
Calabria is no fan of conservatorship, but he also has spoken out against the GSE’s business model, where taxpayers are on the hook for losses and the government is essentially subsidizing a business that private lenders believe is too risky: The issuance of the 30-year mortgage.
Meanwhile, Calabria has said he will seek Congressional input in any reform effort he undertakes, but yet another complication is the divided Congress with Democrats controlling the House of Representatives. Calabria would like to reduce the GSEs footprint in the mortgage business, according to his past comments on the matter, but key Democrats want to expand Fannie and Freddie’s mandate to back loans of more people to spread homeownership.
Then there’s the optics of Wall Street making huge windfall under a future reform plan—particularly as the 2020 presidential election looms. Mnuchin had business ties with at least one of the major investors in the GSE’s stock that has benefited amid the speculation of a privatized Fannie and Freddie, and the run-up in shares.
Hedge fund giant John Paulson was an investor in OneWest Bank, the successor of the failed IndyMac bank that Mnuchin and a group of investors purchased in 2008 from the FDIC. And prior to being Treasury secretary, Mnuchin invested in Paulson’s hedge fund.
Paulson – who has stakes in the GSE’s preferred class of stock -- has also submitted a proposal through his investment bankers that calls for the recapitalization and privatization of Fannie and Freddie. The Paulson plan also seeks to end the “net-worth sweep,” a move by the Obama administration where all of the GSE’s profits are swept into government coffers rather then sent back to the companies.
A Paulson spokesman had no comment.