6 critical questions as housing finance reform heats up

January 8, 2018 5:16 PM

The Senate Banking Committee is expected soon to release a bipartisan bill that would significantly reshape the housing finance market, but key issues remain unresolved.

House Financial Services Committee Chairman Jeb Hensarling is pursuing his own reform proposal and the White House has yet to weigh in, despite Treasury Secretary Steven Mnuchin’s keen interest in the subject.

Following is a guide to the important questions that must be resolved.

Will Fannie Mae and Freddie Mac survive?

When the government-sponsored enterprises were seized by the government in 2008 in the midst of the housing crisis, few policymakers expected them to ever emerge again.
The hallmark of recent plans by lawmakers from both sides of the aisle has been an agreement that Fannie and Freddie are wound down.

But that consensus appears to have fallen apart of late. Although previous version of the Senate bill would have eliminated Fannie and Freddie, the latest version is expected to keep them, albeit with added competitors to help avoid concentrating the market risk among two companies.

But that conflicts with Hensarling’s view. “To be clear, Fannie and Freddie must be wound down and their charters repealed,” he said in a speech last month.

How that issue gets resolved will be of crucial importance. Many conservatives won’t support a bill that keep the GSEs alive, but many in the industry are uncomfortable with a world where they don’t exist, fearing big banks could come to dominate the secondary market in the enterprises’ stead.

What happens to Fannie and Freddie investors?

In addition to figuring out the future of the GSEs, policymakers must decide what occurs to those who invested in Fannie and Freddie both prior to and after the seizure by the government.

Several hedge funds have effectively made big bets on the GSEs by buying up stock after they were placed into conservatorship for pennies on the dollar with hopes that a new system will reward investors handsomely if the companies are returned to the private sector.

Lawmakers are divided on whether the investors should be rewarded, but how that issue is resolved could help determine some votes in a closely-divided Congress.

The Obama Administration wound up entangled in a legal battle over whether the preferred shareholders have a legitimate claim to Fannie and Freddie. That litigation continues and could muddy attempts at reform.

“Do you have a situation where ... if Fannie and Freddie were allowed to be maintained at the future system … the legacy shareholders got 20% of the new company?” said Ed Mills, a policy analyst at Raymond James. “It is still in a court so the shareholders haven’t really won yet, but it’s not fully resolved.”

Treasury has warrants for a 79.9% stake in Fannie and Freddie and could sell its stake if accompanied by some other reforms.

“In terms of federal government piggy banks, there is not a lot left,” Mills said.

Are community banks pleased?

Community banks are anxious that a new system not leave them at the mercy of their big bank competitors. That’s part of the reason they have favored keeping Fannie and Freddie around.

They raised issues with the last serious attempt at reform — a bill by now Senate Banking Committee Chairman Mike Crapo and former Chairman Tim Johnson, D-S.D., in 2014 — that would have created a Federal Deposit Insurance Corp.-like system for the mortgage market. Fannie and Freddie would have been replaced by several private entities that paid fees to the government for catastrophic insurance.

Community bankers fear such a system will spur big banks and nonbanks to buy up or otherwise control those private entities, forcing them to pay higher fees.

Any new system will have to address community bank concerns or run the risk of failing to attract enough support.

“ICBA is very worried that the community banks and small mortgage issuers will be left out of any GSE and housing policy bill that comes out of the Senate," said Camden Fine, president of the Independent Community Bankers of America. "The bills that we see so far will disadvantage nearly all community banks and will greatly favor the Wells Fargo class of banks. ICBA is worried and is pushing back.”

House Financial Services Committee Chairman Jeb Hensarling

Representative Jeb Hensarling, a Republican from Texas and chairman of the House Financial Services Committee, speaks during a hearing on Capitol Hill in Washington, D.C., U.S., on Thursday, July 27, 2017. Mnuchin ruled out prioritizing U.S. debt payments if Congress fails to raise the borrowing limit and repeated his call for quick action by lawmakers. Photographer: Zach Gibson/Bloomberg

Zach Gibson/Bloomberg

Can any plan get 60 votes in the Senate?

One of the reasons that a bipartisan Senate proposal to reform Fannie and Freddie never made it to the Senate floor in 2014 was because too many Democrats believed it didn’t do enough to preserve affordable housing.

Fannie and Freddie currently have certain affordable housing goals built into their charters, but they would likely be curtailed in an updated approach led by Republicans who control the Senate.

After losing an Alabama Senate seat in a December special election, Republicans have a single-vote majority and would need to find nine other Democrats to support a new bill.

“Access to the 30-year fixed-rate mortgage at affordable rates is really the things that Democrats care most about,” Mills said.

Whether Crapo, R-Idaho, along with Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., who are spearheading reform talks, can walk the fine line between appeasing liberal Democrats without losing Republican support is unknown.

At least one obstacle appears gone, however. Hensarling initially opposed any housing finance reform system that left the government with a guarantee for the mortgage market. But he acknowledged last month that a fully privatized system likely lacks support to pass, “especially in light of the super-majority threshold in the Senate.”

That concession is significant.

“The fundamental question," Mills said, "was should there be a government backstop on MBS, and until you solved that question you couldn’t move forward and we have finally gotten an agreement that that’s a ‘yes.’ That was the big change by Hensarling with his speech in December.”

What is the Trump administration’s view?

Treasury Secretary Steven Mnuchin has said that housing finance reform will be a top priority for the Trump administration, but has yet to signal its preferred approach. While many view housing finance reform as an issue best left to Congress, the administration could cut a deal with Federal Housing Finance Agency Director Mel Watt.

As the overseer of Fannie and Freddie, Watt was able to broker an arrangement with Mnuchin allowing the two mortgage companies to hold $3 billion in capital buffers to protect against losses. The two companies were set to have no buffers in 2018 and Fannie will still likely have to draw on a line of credit at Treasury in the next quarter after accounting for a write-down of tax deferred assets.

Trump administration officials signaled last year that they intended to release some sort of policy document related to housing finance reform, but such paper hasn’t been made public and it’s not even clear if there will be one.

Will Congress have the bandwidth and time?

Congress will likely work with a truncated legislative calendar as the 2018 midterm elections gain steam and put new legislative action on hold.

The Senate Banking Committee appears to be on schedule to release a legislative proposal before Congress grinds to a halt, but any action beyond that is far from certain.

The Trump administration and Republicans emerged from a weekend gathering at Camp David leaning toward making an infrastructure spending bill a top priority. It is one of the pillars of Trump’s 2016 campaign platform.

“Infrastructure will absolutely be the game, it will take a lot of oxygen,” said Rob Zimmer, acting executive director at the Community Mortgage Lenders of America. “Congress still has to pass a debt-ceiling bill and spending bills in an abbreviated year. It is not going to leave space for much else, especially if there hasn’t been a sufficient incubation period” for legislative proposals to reform Fannie and Freddie.

Some political prognosticators are also projecting that Democrats could win the House in 2018, and with Trump’s low approval ratings, they might not be willing to compromise on a housing finance reform bill if they think they can retake control of Congress next year.