U.S. Markets open in 5 hrs 35 mins

Fannie and Freddie shares go haywire following Mnuchin comments

Julia La Roche
Steven Mnuchin talks to reporters in Trump Tower. (Photo: Mike Segar/Reuters)

Steven Mnuchin, president-elect Donald Trump’s Treasury Secretary-designate, was asked during his senate confirmation hearing about some comments he made about Fannie Mae and Freddie Mac back in November.

During the hearing, Sen. Mark Warner (D-VA) expressed some concern about comments Mnuchin made about Fannie and Freddie that some have interpreted as a recap and release.

“Let me first be clear, I did make some comments about this,” Mnuchin said. “My comments were never that there should be recap and release. I have been around the mortgage industry for 30 years and I have seen this for a long period of time. This is an area I believe I have expertise in. For very long periods of time, I think Fannie and Freddie have been well run without creating a risk to the government.”

He continued: “I believe these are very important entities to provide the necessary liquidity for housing finance. What I have committed to is that I will work with both the Democrats and Republicans. What I have said and believe, we need housing reform. We shouldn’t just leave Fannie and Freddie as they are for four or eight years under government control without a fix. I believe we can find a bipartisan fix for these. On the one hand, we don’t want a giant bailout. On the other hand, we don’t run the risk of completely limiting housing finance.”

Back in November, Mnuchin told Fox Business Network’s Maria Bartiromo that it “makes no sense that [Fannie Mae and Freddie Mac] are owned by the government and have been controlled by the government for as long as they have.”

Mnuchin, a former partner at Goldman Sachs who ran the bank’s mortgage-backed bond trading desk, also told Fox Business this is on “the list of the top ten things we’re going to get done, and we’ll get it done reasonably fast.”

Mnuchin told the Senate Finance Committee that he is committed to finding a bipartisan solution for Fannie and Freddie. He also noted his expertise in housing finance.

“Unlike the Medicare funds, which I need to learn more about, I think I am an expert in Fannie Mae and Freddie Mac. I’ve been around them for 30 years. It would be one of my priorities to work with you. What I am focused on is we need housing reform and a solution. The status quo is not acceptable of just leaving them there. There are two extremes on this and it is something I look forward to sitting down and talking with you. I believe we need housing reform and need to make sure whatever the outcome is 1, we don’t put the taxpayers at risk and 2, we don’t eliminate capital for the housing market. I’m very concerned that middle of income people who need mortgage loans have access to the capital,” he said at the hearing.

Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) fell around 3% on Thursday. The government-sponsored enterprises (GSEs) have seen their stock climb 185% since election day.

It’s been a wild ride for Fannie and Freddie.

Fannie and Freddie are one of the legacy issues from the financial crisis. The Treasury placed Fannie and Freddie into conservatorship in early September 2008 amid concerns about their capital. At the time, though, the GSEs met their statutory capital requirements, but then-Treasury Secretary Hank Paulson called those capital requirements “thin and poorly defined as compared to other institutions.”

Over the next few years, Fannie and Freddie incurred large credit-related losses. But by 2012, home prices had bottomed out, and Fannie and Freddie began to make money again. In August 2012, the Treasury amended the terms of its senior preferred stock agreement, requiring the GSEs to pay the net-worth sweep.

It’s been eight years and Fannie and Freddie still operate in a state of conservatorship. They’ve repaid the billions in bailouts they’ve received and they’ve returned to profitability, making billions in profits all of which goes directly to the Treasury as a way to reduce the deficit.

Fannie Mae’s former CFO Tim Howard spoke with Yahoo Finance and laid out a path for Mnuchin to get Fannie and Freddie out of government control “reasonably fast.”

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.

Read more: