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White House plans to overhaul housing finance system, top regulator says

The White House will announce a plan by next month to end government control of Fannie Mae and Freddie Mac in a bid to resolve a long debate over the fate of the two companies that dominate the mortgage market, a top regulator said.

Joseph Otting, acting director of the Federal Housing Finance Agency, told employees last week that the administration would not wait on Congress, where attempts to overhaul the housing finance system have repeatedly faltered in the years since Fannie and Freddie were rescued during the financial crisis, according to a recording of his remarks obtained by POLITICO.

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“In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be,” Otting said.

Otting’s remarks, captured in a 30-minute recording, present the fullest picture yet of the Trump administration’s plans for the massive companies, which bolster the housing market by buying mortgages from lenders and selling them as securities to investors, freeing up more money to lend. He pledged significant headway on an overhaul within “six to 18 months.”

He referred to Treasury Secretary Steven Mnuchin’s past statements that he wants to wind down the government’s control under his tenure — “and I will tell you that it is a commitment,” Otting said.

Yet that move would re-ignite a long-simmering dispute over Fannie and Freddie’s future. Republicans have long argued that the companies have an unfair competitive edge over private companies because of their government guarantee. Some even blame the companies for the financial crisis, pointing to their over-extension in subprime loans.

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Democrats, meanwhile, are fiercely protective of the companies’ affordable housing goals, which they see as a priority in any discussion of housing finance reform.

Trump administration officials have typically at least paid lip service to the idea that Congress should go first; Mnuchin told Bloomberg in December that he would prefer to “do something that has bipartisan legislative support.”

“The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do,” said Otting, who was named acting director of the regulator earlier this month when Mel Watt’s term expired.

Otting, who also serves as comptroller of the currency, vowed to “move the path forward” on overhauling Fannie and Freddie while Mark Calabria, President Donald Trump’s nominee to assume the position full time, awaits a Senate hearing and confirmation.

“This is a path that’s been established by the White House and the Treasury, and Mark has signed off on it, I’ve signed off on it, Treasury has signed off on it, the White House has signed off on it,” he said.

Fannie and Freddie have been in conservatorship since September 2008, when Treasury took control of the companies to prevent catastrophic losses during the housing crisis. The FHFA is both conservator and regulator, responsible for overseeing the companies’ combined $5.4 trillion portfolio of mortgage loans and securities.

Ending conservatorship is easier said than done, Otting conceded, noting that releasing Fannie and Freddie from government control would require a “thoughtful look” at the capital and liquidity levels they would need to operate independently.

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“But I do think over the next six to 18 months, we will solve that issue,” he added. “And I can assure you that I’m not here to just sit around and enjoy the fruits of being the director. I’m here to kind of move that path forward. And then when Mark is confirmed in his role, he can kind of come in and just continue down the path.”

The capital needed is “probably somewhere, based upon their business models today, [in the range of] $150 billion to $200 billion,” he said.

Currently Fannie and Freddie are each allowed to build a $3 billion capital buffer, with the rest of their profits swept to Treasury each quarter.

“$6 [billion] to $150 billion is a big road, especially when you consider the earnings are, what, probably $11 billion a year?” Otting said. “So it’s like, how do we accelerate that, or what do we do to try to achieve that? And I think that’s going to take some really heavy lifting and thought processes around that.”

Source: politico.com

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