Treasury Secretary Steven Mnuchin on Wednesday said the Trump administration would tackle housing finance reform after it addresses tax reform, setting the stage for Washington to lay to rest the last unfinished business from the financial crisis.
Housing finance has been a prickly subject for Washington ever since the 2008 crisis, when the giant quasi-governmental agencies Fannie Mae
and Freddie Mac
, reeling from credit losses, were made wards of the state. Lawmakers – and housing analysts – have considered overhaul efforts since then, but they’ve gone nowhere.
That seems likely to change. In 2012, an amendment to the original agreement that bailed out Fannie and Freddie directed the two enterprises to dwindle their capital buffers down to zero by 2018.
As that deadline draws closer, calls to revise the process have grown. If the companies have no capital and experience a quarterly loss, they’d have to ask Treasury for funds just to keep doing business.
Some analysts believe Congress would have trouble with the political fall-out from having to make another “taxpayer bailout” to the two agencies whom many Americans believe caused the financial crisis that brought the economy to its knees.
Also read: Regulator warns of risk of keeping Fannie, Freddie under government control
Mark Zandi, chief economist for Moody’s Analytics, is skeptical even such headline risk will light a fire – and he thinks housing finance reform is such a heavy lift that even a White House with far less on its plate would have trouble pulling it off.
The administration’s interest is promising, Zandi told MarketWatch, and it’s a “good sign” that, according to various media reports, Sen. Mike Crapo is aiming to hold hearings on the subject as early as next month. There’s less momentum on housing in the House, where House Financial Services Chair Jeb Hensarling is focused on repealing Dodd-Frank.
But industry groups are also weighing in. Last week the influential Mortgage Bankers Association released a reform white paper, followed days later by a proposal from the Independent Community Bankers of America. Zandi was one of the authors of a proposal released last year.
It’s technically possible for the White House and the head of Fannie and Freddie’s regulator, the Federal Housing Finance Agency, to make some small administrative reforms, Zandi noted, such as amending the 2012 agreement to allow the enterprises to retain capital. But that would get Congress “hopping mad,” and may wind up being more trouble than it’s worth, he said, and it’s more likely that the various separate reform efforts proceed independently and eventually coalesce.
Equity shareholders, who were wiped out when the Treasury began sweeping capital in 2012, have fought the sweep in court. Shares of both Fannie and Freddie have rallied since the election, when it became more likely that the new administration would be amenable to shareholder-friendly policies.
Also read: Fannie, Freddie surge as Treasury-pick Mnuchin advocates their release from government control
Zandi doesn’t believe that the headline risk of a quarterly draw from Treasury is a big deal. “It’s not an economic issue, it’s an accounting issue,” he said. But he believes a housing finance overhaul is critical nonetheless.
“The system is working,” Zandi said. “But absolutely it could be working better, and over time it will work less and less well.”
What’s more, Zandi said, the overall housing finance system is far too reliant on the government backstop.
Fannie and Freddie guaranteed 31% of all first mortgages in 2016, according to data from the Urban Institute, and the Federal Housing Agency guaranteed another 23%. Private-sector bondholders securitized less than 1% — down not only from the heady levels they enjoyed in the run-up to the crisis, but also from 10-11% in the early 2000s.
“There’s a lot of private capital out there that would like to do it at a similar cost,” Zandi said. “We should use the government balance sheet for other purposes, for things that the private sector isn’t willing to do.”