Fannie-Freddie Rise as White House Proposes Privatization

The Trump administration wants Congress to remove the federal charters for Fannie Mae and Freddie Mac as part of a plan to release the mortgage giants from U.S. control, according to a sweeping proposal for reorganizing the government released Thursday.

The two companies, which have been under U.S. conservatorship since 2008, could have their market dominance challenged by new competitors under the plan. Fannie, Freddie and any rivals would be overseen by a government entity with power to approve guarantors, change regulations and ensure market participants are adequately capitalized, the report said.

The changes, which would require congressional approval, would give Fannie, Freddie and their competitors access to an explicit guarantee on mortgage-backed securities that would only be accessible in “limited, exigent circumstances,” according to the report.

“Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors, maintenance of responsible loan underwriting standards, and other protections deemed appropriate by their primary regulator,” the report said.

Some classes of Fannie preferred shares rose 4%, while some of Freddie’s climbed by 3%. Fannie and Freddie don’t make loans themselves. They buy them from lenders, wrap them into securities and make guarantees to make investors whole if the loans default.

Federal regulators took over the two companies during the 2008 financial crisis, eventually injecting them with $187.5 billion in bailout money. They have since returned to profitability and paid the government more in dividends than they got in aid. Still, some members of Congress and other policy makers have said the companies should be replaced with a system that doesn’t leave taxpayers on the hook for losses.

The White House proposal is similar to one crafted by two senators who have played key roles in trying to advance an overhaul of U.S. housing finance.

Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia tried to develop a bill that would have largely preserved the operations of Fannie and Freddie while opening the market to competition. Their effort foundered earlier this year after they failed to win support from Senate progressives, who wanted to preserve affordable-housing mandates. “It is long past time to end the failed model of private gains and public losses,” Corker said in a statement Thursday. “I am hopeful the reorganization plan will help continue to grow support for the need to address the last unfinished business of the financial crisis.”

The White House plan envisions an overhaul designed so that affordable-housing fees sent to the Department of Housing and Urban Development would enable the Federal Housing Administration to provide subsidies for lower-income borrowers “while maintaining responsible and sustainable support for homeownership and wealth-building.”

The proposal was applauded by Mortgage Bankers Association Chief Executive Officer David Stevens, who also noted that it builds on work that started on Capitol Hill.

“It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small-lender access,” Stevens said in a statement. “As with any proposal of this size, the devil is in the details and MBA looks forward to working with the administration and Congress to finally tackle this long overdue issue.” National Community Reinvestment Coalition CEO Jesse Van Tol assailed the plan as an “assault on America’s working class” that shows the sway industry lobbyists have over the Trump administration.

“I understand the desire to tackle GSE reform,” Van Tol said in a statement. “The enterprises are more profitable, more stable and better-regulated than at any point in history. But GSE reform without an affordable-housing mandate is not reform, it’s a retreat.”

Private shareholders have pushed for the administration to work with the Federal Housing Finance Agency, the independent agency that currently oversees Fannie and Freddie, to recapitalize and release the companies without Congress. Such a move could become easier early next year, once Trump can replace current FHFA Director Mel Watt with his own nominee.