Government Shifts Gears on Fannie Mae, Freddie Mac
After years of talk about winding down the mortgage-finance giants, lawmakers are working on bipartisan deal to keep them
Fannie Mae and Freddie Mac are critical to home mortgages but have bee in government conservatorship since the financial crisis. Here, houses are being built in Zelienople, Pa.
Fannie Mae and Freddie Mac are critical to home mortgages but have bee in government conservatorship since the financial crisis. Here, houses are being built in Zelienople, Pa. PHOTO: KEITH SRAKOCIC/ASSOCIATED PRESS
By Andrew Ackerman and Nick Timiraos Dec. 17, 2017 8:00 a.m. ET
WASHINGTONMortgage-finance giants Fannie Mae and Freddie Mac are here to stay.
Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companiescritical to home mortgages but in government conservatorship since the financial crisisthat could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.
Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies.
Advancing legislation to refashion the nations $10 trillion mortgage market is a heavy political lift and may yet sputter during the coming midterm-election year, as a prior Senate effort did four years ago. One big difference this time around: a more incremental approach largely reliant on the existing housing-finance framework.
Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) are moving to introduce the plan as early as January. Unlike a failed effort four years ago to create an entirely new mortgage-finance system, their plan would restructurenot eliminateFannie and Freddie and allow the companies, stripped of their federal charters, to issue government-guaranteed mortgage securities, according to people familiar with the matter.
The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. It isnt clear what companies might be interested in entering the market. But the bipartisan proposal would restrict the amount of investment that could come from mortgage lenders, a person familiar with the matter said.
Another factor bolstering chances for a deal is the retirement of Washington officials interested in reducing government control of housing, including Mr. Corker. The Tennessee senator has been working with Mr. Warner and Senate Banking Committee Chairman Mike Crapo (R., Idaho) all year on the issue, according to people familiar with the deliberations, and Mr. Crapo has made the overhaul a top goal for his panel.
Even House Financial Services Committee Chairman Jeb Hensarling (R., Texas), who favors winding down the companies, signaled this month in a speech to Realtors that he would like to see a Fannie and Freddie deal in what is to be his final year in Congress.
Supporters of an overhaul see a narrow window early next year and could try a long-shot move to tack the changes onto a separate bill to ease postcrisis regulations that could come up for a Senate vote in the next couple of months.
Treasury Secretary Steven Mnuchin, who has frequently cited his experience in the mortgage market from his days with Goldman Sachs Group Inc., in November gave support to keeping the two companies, saying he doesnt support an approach favored by some conservatives to abolish them.
No, I wouldnt, he said in an interview at Novembers Wall Street Journal CEO Council meeting. We have got to make sure that the housing system is built to last.
The Trump administration hasnt formally endorsed any legislation nor issued a set of its own overhaul principles. Treasury officials, however, have been in close contact with Senate lawmakers as they develop their plan, according to people familiar with the discussions.
Washingtons about-face will come as little surprise to market participants who for years predicted that efforts to replace Fannie and Freddie, which together back around half of all outstanding mortgages, would prove too difficult. But the shift on Capitol Hill nevertheless illustrates one way in which policy ideologues appear to have lost ground to market realities.
The companies became so politically toxic after the financial crisis that longtime defenders of the firms, such as former Rep. Barney Frank (D., Mass.), said the companies should be abolished. President Barack Obama in 2013 called on Congress to wind down the firms and end Fannie and Freddie as we know them.
But by 2014 private markets hadnt revived amid a widespread lack of investor confidence in mortgage bonds that didnt have a government guarantee. Officials began rethinking the issue, concerned that their efforts could hurt the housing market. At the time, Obama advisers prepared plans to repurpose the companies as part of a refashioned mortgage-market infrastructure.
The latest iteration of those plans, including in the Senate bill, are the first effort with significant bipartisan backing to keep the companies rather than replace them.
Even if the plans dont become law, they show how the companies standing has improved in Washington, helped in part by their strong profits that have more than made taxpayers whole for the $187 billion Fannie and Freddie received from the Treasury for support after the crisis.
At the direction of their regulator, the Federal Housing Finance Agency, the companies have also made a series of changes in how they operate, addressing some concerns by critics without legislation.
By next year, the companies investment portfolios will have fallen to less than $250 billion each, after swelling to more than $900 billion each at their peak. The Senate plan could liquidate those portfolios altogether, the people said.
The portfolios, the source of large amounts of debt, were a concern when the financial crisis spread in 2008. The companies had stuffed the portfolios with riskier loans to profit on the spread between those high-yielding assets and their much lower cost of corporate debt thanks to a fuzzy, implied government guarantee. The mortgage-finance companies have also stepped up efforts to sell off credit risk on loans they insure and have done about $60 billion in such transactions through June.
Write to Andrew Ackerman at andrew.ackerman@wsj.com and Nick Timiraos at nick.timiraos@wsj.com
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