Housing and Urban Development Secretary Ben Carson said Thursday that his agency will take “as much time as is necessary” to report back to the White House on its plan to reform the two government-sponsored enterprises (GSEs): Fannie Mae (FNMA) and Freddie Mac (FMCC).
On Wednesday night, President Donald Trump directed the U.S. Treasury and HUD to develop a framework for releasing the two mortgage guarantors from conservatorship and “promote competition in the housing finance market.”
Since the government’s takeover of Fannie Mae and Freddie Mac in September 2008, lawmakers and regulators have wrestled with how to change control of the two companies in a way that does not risk another failure in the future.
In an interview with Yahoo Finance, Carson said the 12 years of conservatorship “seems a little bit excessive” and said it is a “high priority” for the Trump administration to address housing finance reform.
“It’s one of the last pieces that’s left in the recovery from the housing debacle,” Carson said. “It needs to be done in the most appropriate way.”
The White House memo was thin on details, only making mention of the administration’s desire to privatize both GSEs and preserve the 30-year mortgage.
Isaac Boltansky of Compass Point wrote March 28 that while the memo could ultimately produce a “viable framework for action,” political disagreements over specific changes to the GSEs stand in the way.
“[W]e caution that bridging the divide from a set of policy objectives to an actionable blueprint will prove challenging,” Boltansky said.
One key ideological challenge: the multi-guarantor structure. Currently, Fannie Mae and Freddie Mac face little private sector competition in the secondary market of buying and securing mortgages. The Trump administration directs the Treasury and HUD to endorse a framework that promotes new entrants in the housing finance market.
But Senate Banking Committee hearings on Tuesday and Wednesday showed that Democrats and Republicans are still far apart on the mechanics of an expanded private market for mortgages.
While those in support of competition argue that a multiplicity of players would reduce the “too-big-to-fail” nature of Fannie Mae and Freddie Mac, opponents warn that new guarantors could face little incentive to prioritize affordable rental housing in its approach to guaranteeing mortgage-backed securities.
Additionally, allowing new players to guarantee mortgage-backed securities would require Congressional action defining the “charter” necessary for a company to enter the market.
Carson told Yahoo Finance the main priority for HUD as it grapples with this issue is to protect taxpayers, who have been on the hook for bailing out the government-sponsored enterprises if they fail. Carson outlined his other priorities with respect to a HUD-recommended framework.
“We want to maintain the 30-year mortgage because that’s so important. We want to bring millennials into the mix, we want to do things to preserve the ability of the elderly to age in place,” Carson said.
The executive and legislative branch interest in housing finance reform has been a positive signal to analysts who have been waiting for years for a resolution. One reason for the challenge: it’s been a game of chicken between the White House and Congress over taking the lead on reform. Although the White House could direct the Treasury and HUD to review its framework, only Congress can make the necessary statutory changes to dramatically reform the system.
One bridge is already being built; Mark Calabria, Vice President Mike Pence’s economist, is on his way to being confirmed as the head of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
And on Capitol Hill, Ed Mills of Raymond James wrote March 27 that there’s positive signs for bipartisanship, noting that Virginia Democratic Senator Mark Warner said that he shares “98% of the same goals” as Republicans on reform.
A bearish case against reform has to do with the lack of timing. The White House memo did not provide a deadline for the Treasury and HUD to report back to Trump, and Carson told Yahoo Finance he doesn’t want to “put a timeframe” on a framework.
Boltansky estimated that the Trump administration could have some plan by the end of the third quarter of this year, but cautioned that the path to full legislative overhaul is the real challenge.
“While there is undoubtedly a degree of conceptual cohesion on core mortgage finance reform issues, palpable concerns regarding affordability and transition risk are simply too great to resolve during a divided Congress with a presidential election approaching,” Boltansky wrote.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.