Should the federal government privatize government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac?
Yes, according to President-elect Donald Trump and his top pick for secretary of the U.S. Treasury Department, Steven Mnuchin.
A few statements that the Wall Street banker made to the media in the wake of Trump announcing his nomination have the housing industry abuzz, and many in the real estate and mortgage sectors are supportive of what he has to say.
Bill Brown
“We agree that it’s time to wind down the government’s conservatorship over Fannie Mae and Freddie Mac, and a restructuring of the secondary mortgage market is appropriate given the challenges we have ahead of us,” said William E. Brown, president of the National Association of Realtors (NAR).
But although Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA), said that MBA favors increasing private capital in the mortgage market, he cautioned that privatizing Fannie Mae and Freddie Mac should be done carefully to preserve the $5-trillion mortgage market’s stability.
“The industry should try not to overreact to just a few sentences given to one media organization,” Fratantoni said. “This is a complicated issue, and there is no quick fix here. Those of us who spend their lives focusing on these issues want to focus on the market and make sure it remains stable.”
Here’s more on Mnuchin, his plans for the GSEs and what privatizing Fannie Mae and Freddie Mac may look like.
Who is Mnuchin?
After serving as the Trump campaign’s national finance chairman, Mnuchin was announced as Trump’s nominee for Treasury secretary on Nov. 30.
Trump lauded the New York native and Yale University graduate as a “world-class financier, banker and businessman.”
Mnuchin is probably best known as a former Goldman Sachs partner and manager of several hedge funds, including Dune Capital Management and ESL Investments.
Steven Mnuchin
Credit: Office of the President-elect
During the financial crisis of 2007-2008, Mnuchin bought failed lender IndyMac and rebuilt the company as OneWest Bank. There, while serving as CEO, he was widely criticized for aggressively pursuing foreclosures against struggling homeowners.
On the day of Mnuchin’s nomination announcement, he gave an interview to Fox Business Network and stated that the main priority of his Treasury department would be tax reform, mainly through streamlining the tax system as well as cutting taxes for corporations and the middle class.
He also said he would like to “strip back parts of” the Dodd-Frank Act, as the regulation is “too complicated” and hinders banks from lending.
Mnuchin on the GSEs
Mnuchin also put another priority on the table: Restructuring the Federal National Mortgage Association, aka Fannie Mae, and the Federal Home Loan Mortgage Corporation, aka Freddie Mac.
“We’ve got to get Fannie and Freddie out of government ownership,” he told Fox Business Network. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”
Established by Congress in the last century to expand the secondary mortgage market, Fannie Mae and Freddie Mac empowered lenders to reinvest their assets into more lending by securitizing mortgages in the form of mortgage-backed securities (MBSs).
The GSES nearly crumbled in the wake of the mortgage crisis, when originators began to distribute more loans through private-label MBSs.
The increased competition between the GSEs and private securitizers led to a decline in underwriting standards, one of the main drivers of the financial crisis.
After a few failed legislative attempts to resolve some of the inherent conflicts in the GSEs’ business model — a highly criticized pairing of government oversight and private ownership — the Federal Housing Finance Agency (FHFA) in 2008 placed Fannie Mae and Freddie Mac into a conservatorship.
Taxpayers shelled out $187.5 billion to bail out the struggling GSEs, which they have repaid — but concerns over their business model remain.
“We can’t flip a switch and go back pre-Recession, before Congress had to make decisions to ensure our market remained on stable footing,” Fratantoni said. “But we can try to capitalize on a lot of the good work that Fannie and Freddie Mac have done in the conservatorship period, because they moved to align their activities and standardize their operations in helpful ways.
“I think we are on track to move to a single security for mortgage-backed securities, which I think will add liquidity to the market.”
Saving what works
In Mnuchin’s view, the GSE’s structure “displaces private lending in the mortgage markets,” he told Fox Business News.
“We need these entities that will be safe,” he said. “We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control.”
Some aspects of the GSEs should be retained, Fratantoni suggested.
“The GSEs give American consumers access to 30-year, fixed-rate loans, something that is not available in the rest of the world, and we want to retain the parts of the system that make this possible,” Fratantoni said. “But there are some parts of the system that don’t work very well. You have two entities with Congressional charges that provide them with a significant advantage.
“We think the system will work better with a more competitive secondary market.”
The road ahead
As Congress and the new administration look to comprehensive reforms, NAR will encourage them to keep costs down for borrowers with a system that maintains the 30-year-fixed-rate mortgage and ensures liquidity in the market sufficient to meet the demand of creditworthy buyers, Brown said.
“That means maintaining a government guarantee in the housing finance market and protecting taxpayer dollars with strong underwriting standards, while fully recognizing the hurdles consumers face in the marketplace today,” he said.
Michael Fratantoni
Although Mnuchin has not stated a definitive timeline for this process or discussed any details of what it could look like, he did say that privatizing the GSEs would be a top initiative for the Trump Administration in its first 90 days.
Fratantoni cautioned that if previous legislative reform proposals are any predictor, the process could be a long transition in which the government reduces its holdings in the GSEs and investors put in more capital.
“We need to do this carefully,” Fratantoni said. “We don’t want to move abruptly in any way that would destabilize the market.
“We don’t just want mortgage rates to be low today; we want them to be stable in the long term, and we need a system in place that can handle bumps in the road. We need to fix what is wrong with the prior system, allocate for additional competitors in the space and make sure the system is on a stable and firm foundation.”
