Stocks

Are Fannie Mae Foes Driving GSE Reform?

The House Financial Services Committee is considering a slew of bills today, including one offered by the panel’s chairman, Jeb Hensarling, R-TX, which would ensure Fannie Mae and Freddie Mac function with no reserve capital, using a housing trust fund that helps struggling workers as the enforcement mechanism.
 
The bill, a reauthorization of the flawed Jump Start GSE Reform bill, authored by Sen. Bob Corker, R-TN, two years ago, is even more poorly conceived, more misnamed, and more badly timed than the original. It should not be added to an omnibus spending bill Congress is slated to take up before the end of the year. Federal Housing Finance Agency Director Mel Watt, as Fannie and Freddie’s conservator, should not have his hands tied when it comes to preserving the GSEs’ solvency or protecting taxpayers from having to pay for bailouts.
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Why Hensarling introduced the bill last week is puzzling.  From the start of his tenure, Treasury Secretary Steven Mnuchin has insisted that ending the nine-year-old conservatorship and charting a new course for housing finance policy is a priority, saying recently this should be accomplished in 2018.  Hensarling seemed to be on board with this effort, ready to help a Republican Administration clean up the mess inherited from the Obama era. Last week, Hensarling went so far as to acknowledge that  his PATH Act, which would have effectively ended the government role in housing finance, did not have enough support and that he accepted the fact that retaining a government guarantee for mortgage-backed securities was likely to be included in a comprehensive reform measure.
 
“While I personally have not changed my principles or my mind, and I still believe the best path forward is the Path Act, I do not see the Path Act’s passage likely,” Hensarling told Politico. “I stand ready to negotiate with an open mind.” This was regarded as something of breakthrough after nearly a decade of failed attempts by Congress to address GSE reform.
 
An intriguing question at this point is whether Hensarling is actually ready and willing to play a constructive role in this effort in his final year as chairman. Recently, he endorsed ideas laid out in a series of papers issued by the Milken Institute and authored by Ed DeMarco, former acting director of the FHFA, and Michael Bright, acting president at Ginnie Mae. The two were invited to make the case for a “Ginnie-centric” model at a hearing on November 29, fielding questions about the impact on mortgage rates and other practical considerations.
 
Interestingly, just a few years ago, Bright was a top staffer for Corker and played a key role in the Corker-Warner bill in 2013, which would have replaced Fannie and Freddie with a mortgage guarantee system with a larger role for banks. Like the PATH Act, the bill completely ignored the rights of Fannie and Freddie’s shareholders. The bill cleared the Banking Committee but questions about its possible impact on taxpayers and home buyers impeded consideration by the full Senate.
 
DeMarco, of course, was an instrumental figure in designing and implementing the Net Worth Sweep in 2012, when he was acting FHFA Director.  Court documents the government has been forced to make public showed him to be an enthusiastic backer of looting the GSEs’ profits. After leaving government service he called on Fannie and Freddie to be “put out of the taxpayers’ misery.”  
 
All of this raises questions about whether Hensarling is truly committed to working with the Administration to end the conservatorship in a way that protects taxpayers and preserves affordable housing finance options made possible for generations by Fannie and Freddie, which is what Mnuchin says he wants.  Hensarling is casting his lot with individuals who have made names for themselves being overtly hostile to Fannie and Freddie and their shareholders. It appears Hensarling is more aligned in his thinking with Bright, the unconfirmed acting head of Ginnie Mae, and perhaps Corker, than he is with Mnuchin.

For the immediate future, the Sweep is having its intended effect. Within a few weeks, Fannie and Freddie will lack reserve capital. If Hensarling’s Jump Start revival becomes law, Watt will be barred from using the enterprises profits to make up for possible quarterly losses. This will put the burden on taxpayers to bail out the GSEs. Longer term, it looks as though Congressional Republicans and the Trump Administration might be farther apart on comprehensive housing finance reform than would have been expected at this point.