MortgageReal Estate

Trump administration’s plan for Fannie Mae, Freddie Mac “survived” Senate hearing

Treasury "sweep" may end by Sept 30, Cowen report says

Department of the Treasury Secretary Steven Mnuchin told a Senate committee in testimony on Tuesday he wants to reach an agreement quickly with the regulator of Fannie Mae and Freddie Mac to allow the companies to keep their profits to rebuild capital – a first step in releasing the nation’s largest sources of mortgage funding from government ownership.

He wouldn’t have far to go. Mark Calabria, director of the Federal Housing Finance Agency, the independent agency created in 2008 to oversee the mortgage giants, was sitting at the other end of the table, with Ben Carson, the secretary of the Department Housing and Urban Development, in between.

“We would allow a significant amount of capital to be accumulated, but in return for that make sure that the taxpayers are compensated for the ongoing Treasury support,” Mnuchin told the Senate Banking Committee, citing the Trump administration’s plan to have the government-sponsored enterprises pay a commitment fee that would protect taxpayers.

The lack of acrimony and partisan bickering at the committee hearing prompted Cowen Washington Research Group to put out a note to clients afterward saying the so-called "profit sweep," where all of the GSEs' profits are transferred to the Treasury each quarter, may end as early as this month.

“We expect a deal prior to Sept. 30 in which Fannie and Freddie will stop paying a quarterly dividend to Treasury,” Jaret Seiberg, Cowen’s managing director, wrote in the note. “Instead, they will pay a commitment fee for the outstanding preferred capital line. This means they can retain the rest of their profits in order to rebuild capital.”

After that, we should expect a period with little progress, Seiberg said. The Trump administration will give Congress a chance to act, if only to provide “political cover for administrative action” in the future, he said.

“While Treasury and FHFA appear to want Congress to act, we believe they are fully prepared to act alone if needed,” Seiberg wrote. “This is why we would urge against assuming that recap and release is in trouble simply because Team Trump is trying to involve Congress.”

Seiberg said he was “surprised at the lack of political fireworks” at the hearing, and described the Trump administration’s 53-page housing finance reform plan as having “survived” the hearing. 

But, that doesn’t mean there was bipartisan approval. Several lawmakers voiced objections, including Sen. Sherrod Brown, D-Ohio.

“The Trump plan will make mortgages more expensive and harder to get,” Brown said. “In addition to increasing costs, the plan would make it harder for small lenders to compete.”

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