Fannie Mae and Freddie Mac would be turned into shareholder-owned utilities and face competition from new companies under a trade group’s mortgage-finance overhaul plan that could eventually require about $200 billion in private capital.
The Mortgage Bankers Association proposal released Thursday calls for the U.S. government to remain involved in the housing market, putting its guarantee behind mortgage-backed securities that the firms issue but no longer backstopping the companies themselves.
The proposal comes as Congress and President Donald Trump’s administration ramp up work on what to do about Fannie and Freddie, which have been in government-managed limbo for more than eight years. What the government decides to do will have huge ramifications for the $10 trillion mortgage market, about half of which is backed by the two companies.
“There are two options here for anybody in the process,” said MBA President David Stevens. “You can kick and scream on how you want the game to be played differently or you can play the game. We’re staying in the game on this one.”
Stevens said he believes statements made by the Trump administration and lawmakers make a serious legislative effort probable within the next year.
The process could help determine whether any value is realized by holders of Fannie’s and Freddie’s old common and preferred shares, including funds managed by Paulson Co., Pershing Square Capital Management and Fairholme Funds as well as individual investors.
On a call with reporters, Stevens said senior members of the Trump administration had signaled to MBA that they support a legislative process to overhaul Fannie and Freddie. Some investors and others have advocated for the Treasury Department and the companies’ regulator, the Federal Housing Finance Agency, to release them from government control without legislation.
The Treasury Department didn’t respond to a request for comment.
At a conference in Washington on Thursday, Treasury Secretary Steven Mnuchin said that housing-finance reform was a priority for the administration, along with tax reform and regulatory relief.
“We need housing reform. We have to fix — we have two entities, Fannie Mae and Freddie Mac, that are sitting under government control — we’ve got to figure out how to reform housing finance so we don’t have taxpayers at risk and yet we have liquidity,” Mnuchin said.
The MBA first gave a general outline of its proposal in January. The 60-page paper released Thursday is more detailed, describing capital requirements and proposed options for transitioning to the new system.
Fannie and Freddie don’t make loans themselves. They buy them from lenders, wrap them into securities and make guarantees to investors in case of default. That process frees up lenders to make more mortgages and is widely credited for making 30-year fixed-rate loans possible.
The government took over Fannie and Freddie in 2008 during the financial crisis, eventually injecting them with $187.5 billion in bailout funds. In return, the government received a new class of senior preferred shares and warrants to acquire nearly 80 percent of the companies’ common stock. Since 2013, the companies have been profitable and sent nearly $266 billion to taxpayers, though the money isn’t counted as repayment for the bailout.
The success or failure of the MBA proposal and others could hinge on threading the needle to satisfy competing priorities of lawmakers, advocates and borrowers.
Some conservative lawmakers, for example, argue that a government role in housing keeps taxpayers exposed to potential future bailouts. Some Democrats contend that a government subsidy is appropriate to keep mortgage rates low for lower-income borrowers.
On a call with reporters, MBA officials said the amount of capital standing in front of taxpayers in the new system could eventually be about $200 billion, including both shareholder equity and transfers of mortgage-credit risk to other investors. Fannie and Freddie combined currently back around $5 trillion in mortgages.
The trade association also suggested that Congress create a mortgage insurance fund, standing behind Fannie, Freddie and competitors, which could make payments in the event of failures.
Banks and other lenders would be forbidden to own more than 10 percent of the companies, in part to keep large lenders from controlling both the primary and secondary mortgage markets. Guarantors should give large and small lenders equal access to the system, MBA said.
“We were glad to see MBA’s endorsement of the utility model for the GSEs and the principle that there must be fair and equal access and pricing for lenders of all sizes,” Glen Corso, executive director of the Community Mortgage Lenders of America, said in an email. Corso added that the group needed to review the proposal to ensure it achieves that outcome.
Some affordable housing advocates are also likely to be concerned about how the new system could affect mortgage rates, especially for less-affluent borrowers. The MBA said its proposal would likely lead to slightly higher mortgage rates. The new housing-finance system should encourage lending to lower-income borrowers through mechanisms including target amounts of lending to certain demographic or income-based groups, the group said.
The MBA plan, like others released in the past year, is a marked departure from complete replacements of the housing-finance system proposed several years ago. Rather than wind down Fannie and Freddie, the association would preserve their employees and other assets to be used by successors in an effort to lessen disruption to the market.
The plan doesn’t address what could happen to current shareholders of Fannie and Freddie. In its outline of potential ways to transition to the new system, the MBA said the companies could be put into receivership or could create subsidiaries, unburdened by guarantees on legacy-mortgage backed securities, which could then be spun off into the private market.
MBA Chairman Rodrigo Lopez said the transition could take as long as 10 years to avoid market disruption and give time for new companies to be formed.