Treasury Secretary Steven Mnuchin seems to be throwing cold water on a potential plan to return Fannie Mae and Freddie Mac to investors’ hands before the end of the Trump administration.
Last month, The Wall Street Journal reported that Mark Calabria, director of the Federal Housing Finance Agency, was eyeing ways to end the conservatorship of the two housing-finance enterprises before President-elect Joe Biden enters the White House.
Fannie Mae /zigman2/quotes/208846331/delayed FNMA -2.73% and Freddie Mac /zigman2/quotes/202741363/delayed FMCC -0.85% have remained under government control since the 2008 financial crisis. Following their bailout, the FHFA was created to regulate the two enterprises and oversee their operations. The arrangement was meant to be temporary, yet lawmakers have not made strides in ending the arrangement.
Calabria, who previously served as chief economist to Vice President Mike Pence, was reportedly considering a plan under which the FHFA would enter into a consent order to allow Fannie and Freddie’s conservatorship to end. The order would likely require Fannie and Freddie to amass adequate capital under the new capital requirements the regulatory agency established last month, but allow them to operate more freely than they can currently.
However, the federal government owns preferred shares in both Fannie and Freddie — the dividends these shares paid out were intended to repay the federal government for the money used to bail out the government-sponsored enterprises. The Treasury Department oversees these shares, and any plan to release Fannie and Freddie from conservatorship would require its sign-off as a result.
Until this week, it was unclear whether or not Treasury Secretary Mnuchin was supportive of these plans. And based on his testimony in House and Senate committee hearings this week, he appears to be somewhat reluctant to allow Fannie and Freddie to exit conservatorship so quickly.
“I don’t think they should be let out of conservatorship without appropriate capital,” Mnuchin said during a Senate Banking Committee hearing on the government’s COVID-19 response on Tuesday.
The next day, Mnuchin reiterated that comment during a hearing before the House Financial Services Committee, saying, in his opinion, they needed to have “significant capital” to be released from conservatorship. During this second hearing, Mnuchin did acknowledge, though, that Fannie and Freddie could eventually be released via a consent order.
“There could be a scenario at some point basically between the zero capital that they have and the full capital requirement [where] there would be a consent order and they would be released subject to a consent order,” Mnuchin said, noting that he and Calabria have discussed the matter but have made no decisions.
Mnuchin’s choice of words — and the fact that he seemingly doubled down on his stance across the two congressional hearings — is an important signal, according to Jaret Seiberg, financial services and housing policy analyst for Cowen Washington Research Group.
“Our view is that Fannie and Freddie will not have an appropriate level of capital by Jan. 20, which is inauguration day,” Seiberg said in a research note. “As a result, we see Mnuchin as suggesting he does not plan to let Fannie and Freddie exit conservatorship over the next 50 days.”
That does not mean though that Fannie and Freddie will remain in conservatorship indefinitely. Seiberg argues that the Treasury Department and FHFA will work to ensure that Fannie and Freddie “are on a path” toward exiting conservatorship. “It is just a road that could take several years or longer,” Seiberg wrote.
Meanwhile, lawmakers on both sides of the aisle have expressed concerns about a quick exit from conservatorship.
Sen. Mike Rounds, a Republican from South Dakota, noted during Tuesday’s hearing that housing has been “one of the bright spots” of the country’s economic recovery from the pandemic, but changes to how Fannie and Freddie operate could undermine the sector. “While I agree in a perfect world that conservatorship should have been ended some time ago I am concerned that if recent conversations come to fruition, and Fannie and Freddie are prematurely released from the FHFA’s control, the strength that we’ve seen in the housing sector could be called into question,” Rounds said.
California Democrat Maxine Waters, who chairs the House Financial Services Committee, said in her opening remarks that she was “very concerned that the Treasury Department may be taking actions that will undermine our housing markets during the pandemic by reportedly working with the Federal Housing Finance Agency to rush the government-sponsored enterprises out of conservatorship before the end of the Trump Administration.”