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Cowen’s Seiberg says concern about Mnuchin’s GSE comment is overblown

"There has been much teeth-gnashing this week," Seiberg says

U.S. Treasury Secretary Steven Mnuchin started last week having dinner with the Queen of England as part of the entourage accompanying President Donald Trump to Buckingham Palace. A few days later, he made financial news by throwing cold water on plans to reform Fannie Mae and Freddie Mac.

“What we’re not going to do is business as usual with no changes, just recapitalize them and float them,” Mnuchin said in an interview heard around the world, referring to a possible IPOs of Fannie and Freddie shares. “There needs to be housing reform as part of this.”

In other words, the Trump administration won’t just let Fannie and Freddie build up capital reserves and then release the companies, a plan known as “recap and release.” Mnuchin seemed to be backing reforms that can only be implemented by Congress, casting doubt about how far Mark Calabria, the new director of the Federal Housing Finance Agency, could go with his plans to release the GSEs, given the gridlocked political landscape.

In a note to investors obtained by HousingWire, Cowen Washington Research Group said widespread concerns about Mnuchin’s comments are unwarranted.

“There has been much teeth-gnashing this week after Treasury Secretary Steve Mnuchin said GSE reform cannot simply return Fannie and Freddie to their pre-conservatorship state,” Jaret Seiberg, Cowen’s managing director, said in the note issued on Friday. “To us, the concern over these remarks is overblown. We continue to focus on the steps that FHFA is taking so that Fannie and Freddie can eventually exit conservatorship.”

The note continued:

“We think Mnuchin’s comments are a prime example of the danger of reading too much into off-the-cuff remarks in the Trump era. To be direct, what else was he supposed to say? No administration or Treasury secretary is going to advocate a return to a system that led to a government takeover. In addition, the traditional GOP critique of Fannie and Freddie pre-crisis is that taxpayers took the risk and investors reaped the profits. There is no way Mnuchin could advocate a return to that model even if he believes that criticism is off base.”

Calabria stressed the urgency of GSE reform this week in his first annual Report to Congress since taking charge of the agency.

“The Enterprises’ current duopoly undercuts competition in the market,” Calabria wrote. “Increased competition would reduce market reliance on either Enterprise and enhance market stability, as well as benefit homebuyers.”

Calabria also urged Congress to strengthen the FHFA’s regulatory powers so that it can more effectively police other firms active in the housing market, like nonbank mortgage servicers.

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