The Real Deal New York

Trump admin considers sidestepping Congress to overhaul Fannie and Freddie

One option is to recapitalize the entities before privatizing them
February 14, 2019 10:30AM

Steven Mnuchin and Nancy Pelosi (Credit: Getty Images)

The Trump administration may bypass Congress in its effort to privatize Fannie Mae and Freddie Mac, which have been in government “conservatorship” for a decade.

Treasury secretary Steven Mnuchin, who previously sought support from Democrats in Congress to privatize the mortgage giants, is now working on a set of proposals to do so unilaterally, sources told the Financial Times.

“They want bipartisan support, but they know that is going to be difficult, especially with so many Democrats running for president,” one source said. “But there are plenty of things they can do without Congress giving its support.”

Efforts to overhaul the country’s two largest mortgage guarantors have been in limbo for years, as lawmakers argue over how to remove them from government control while ensuring that they underwrite loans for low-income households, all while protecting American taxpayers.

One way of bypassing Congress, which would require the backing of the Federal Housing Finance Agency, would be to simply recapitalize the two institutions and allow them to enter the private market as-is. The administration’s choice to lead the FHFA, Mark Calabria, will testify in front of Congress on Thursday.

Since 2012, a policy known as the “net worth sweep” has required that Fannie and Freddie return all their profits to the Treasury. Investors argue that ending this policy would give the entities sufficient capital buffers to weather a major financial storm.

Another option would be not to privatize the entities at all, but to recapitalize them under government control and shrink their scope, a move that would likely anger shareholders banking on big returns from privatization.

Many observers believe this administration is no more likely to succeed in privatizing the mortgage giants than lawmakers have been over the past decade.

“Any administrative effort to remove Fannie Mae and Freddie Mac from conservatorship without legislation falls short on a fundamental goal of housing finance reform,” said Ed DeMarco, president of the Housing Policy Council and former head of the FHFA. [FT] — Kevin Sun