De­bate heated over plan to shed mort­gage gi­ants

Northwest Arkansas Democrat-Gazette - - Front Page - COM­PILED BY DEMO­CRAT-GAZETTE STAFF FROM WIRE RE­PORTS

WASH­ING­TON — Of­fi­cials in Pres­i­dent Don­ald Trump’s ad­min­is­tra­tion on Tues­day de­fended their plan to Congress for end­ing gov­ern­ment con­trol of mort­gage fi­nance gi­ants Fan­nie Mae and Fred­die Mac, clash­ing with Demo­cratic sen­a­tors on whether the change would raise home bor­row­ing costs and ne­glect lower-in­come home­own­ers.

The two fi­nance com­pa­nies nearly col­lapsed in the fi­nan­cial cri­sis 11 years ago and were bailed out at a cost to tax­pay­ers of nearly $190 bil­lion.

Trea­sury Sec­re­tary Steven Mnuchin and Hous­ing and Ur­ban De­vel­op­ment Sec­re­tary Ben Car­son, along with reg­u­la­tor Mark Cal­abria, di­rec­tor of the Fed­eral Hous­ing Fi­nance Agency, tes­ti­fied be­fore the Se­nate Bank­ing Com­mit­tee on the plan to re­turn the Fed­eral Na­tional Mort­gage As­so­ci­a­tion, com­monly called Fan­nie Mae, and the Fed­eral Home Loan Mort­gage Corp., Fred­die Mac, to pri­vate own­er­ship.

The com­pa­nies have be­come prof­itable again and have re­paid their bailouts. Un­der the plan, their prof­its would no longer go to the Trea­sury Depart­ment but would be used to build up their cap­i­tal bases as a cush­ion against pos­si­ble fu­ture losses.

Fan­nie Mae and Fred­die Mac cur­rently have a com­bined $6 bil­lion in cap­i­tal but should have about $100 bil­lion, Mnuchin told the Se­nate panel. “We think they need a lot of cap­i­tal,” he said. The com­pa­nies “could not op­er­ate to­day if not for the Trea­sury lines.”

Get­ting to the ap­pro­pri­ate level will re­quire rais­ing “third-party” cap­i­tal, Mnuchin said.

But Mnuchin also said he op­poses any “sim­ple” re­cap and re­lease — a move hedge funds have long lob­bied for that would con­sist of build­ing up the two com­pa­nies’ cap­i­tal buf­fers and then free­ing them from fed­eral con­trol. Mnuchin’s com­ment in­di­cates the ad­min­is­tra­tion’s time­line for end­ing the com­pa­nies’ con­ser­va­tor­ships might be longer than share­hold­ers would like.

The pro­posal also rec­om­mends elim­i­nat­ing the mort­gage back­ers’ af­ford­able-hous­ing goals and in­tro­duc­ing com­pe­ti­tion that ex­perts say could fur­ther re­duce ac­cess to credit for low-in­come com­mu­ni­ties.

Fan­nie Mae and Fred­die Mac to­gether guar­an­tee roughly half of the $10 tril­lion U.S. home loan mar­ket. They don’t make home loans. They buy them from banks and other lenders, and bun­dle them into se­cu­ri­ties, guar­an­tee them against de­fault and sell them to Wall Street in­vestors.

Cal­abria said the two com­pa­nies’ cap­i­tal must be bulked up “to match their risk pro­files” and avoid another bailout. “In their cur­rent fi­nan­cial con­di­tion, the [com­pa­nies] are not equipped to with­stand a down­turn in the hous­ing mar­ket,” he tes­ti­fied, adding, “It keeps me up at night.”

Un­der the ad­min­is­tra­tion’s plan, Fan­nie Mae and Fred­die Mac would pay a fee in ex­change for a gov­ern­ment guar­an­tee back­ing their busi­nesses. The plan is a po­ten­tial wind­fall for hedge funds that

have in­vested heav­ily in the com­pa­nies’ stocks. Those in­vestors have ar­gued for years that the com­pa­nies should be re­leased from gov­ern­ment con­trol, al­low­ing their stock prices to rise.

The plan “would pre­serve the long-stand­ing gov­ern­ment sup­port of the 30-year, fixe­drate mort­gage loan,” Mnuchin said. “That sup­port, how­ever, should be ex­plic­itly de­fined, tai­lored and paid for.”

Mnuchin ac­knowl­edged that for prices of 30-year mort­gages to re­main close to cur­rent mar­ket lev­els, some level of gov­ern­ment sup­port would be needed. He said Congress should au­tho­rize an ex­plicit, paid-for guar­an­tee “backed by the full faith and credit of the fed­eral gov­ern­ment” for qual­i­fied mort­gages. The guar­an­tee also should be avail­able to com­peti­tors of Fan­nie Mae and Fred­die Mac as mort­gage fi­nancers, he said.

The ad­min­is­tra­tion ini­tially looked to Congress for leg­is­la­tion to over­haul the hous­ing fi­nance sys­tem and re­turn the com­pa­nies to pri­vate share­hold­ers. But Congress hasn’t acted, and now of­fi­cials say they will take ad­min­is­tra­tive ac­tion for the core change, end­ing the Fan­nie Mae and Fred­die Mac con­ser­va­tor­ships. They haven’t given a time­line for the ad­min­is­tra­tive ac­tion.

A flash point came over the is­sue of af­ford­able hous­ing. Fan­nie Mae and Fred­die Mac cur­rently have man­dated tar­gets for help­ing low-in­come and mi­nor­ity-group bor­row­ers to buy homes.

“The Trump plan will make mort­gages more ex­pen­sive and harder to get,” said Sen. Sher­rod Brown of Ohio, the com­mit­tee’s se­nior Demo­crat.

The Trump pro­posal would re­place the af­ford­able hous­ing goals with a more “ef­fi­cient, trans­par­ent and ac­count­able mech­a­nism,” such as a new fee that would be trans­ferred to HUD to pro­mote af­ford­able hous­ing ac­tiv­i­ties. Many con­sumer and civil-rights groups ar­gue that the plan would not di­rectly in­crease home­own­er­ship among low-in­come fam­i­lies.

“Es­sen­tially they are try­ing to shrink the gov­ern­ment foot­print in the mar­ket and in­tro­duce pri­vate guar­an­tors that won’t have the same obli­ga­tions as Fan­nie Mae and Fred­die Mac,” said Jesse Van Tol, chief ex­ec­u­tive of the Na­tional Com­mu­nity Rein­vest­ment Coali­tion.

In ad­di­tion, hous­ing ad­vo­cates say, the ad­min­is­tra­tion’s plan would lead to a bi­fur­cated mar­ket that would block first-time home­buy­ers and low-in­come bor­row­ers, many of whom are mi­nor­ity-group mem­bers, from lower-cost con­ven­tional loans. Bor­row­ers who can­not af­ford 20% down pay­ments and have less-than-pris­tine credit scores would be chan­neled into more ex­pen­sive loans, ad­vo­cates say.

Those pro­pos­als are “about lev­el­ing the play­ing field for Wall Street,” Brown said.

Car­son on Tues­day blamed the lack of af­ford­able hous­ing on lo­cal re­stric­tions re­lated to zon­ing and rent con­trol as well as neigh­bor­hood op­po­si­tion. He dis­puted ac­cu­sa­tions from Demo­cratic law­mak­ers that the Trump ad­min­is­tra­tion does not care about hous­ing dis­crim­i­na­tion or hous­ing low-in­come and work­ing-class fam­i­lies, cit­ing a HUD in­ves­ti­ga­tion into San Fran­cisco’s af­ford­able hous­ing poli­cies.

Un­der Car­son, HUD pro­posed last month to make it harder for peo­ple to prove un­in­ten­tional dis­crim­i­na­tion, known as “dis­parate im­pact,” against mort­gage lenders and land­lords. Sen. Chris Van Hollen, D-Md., told Car­son that the pro­posal “goes way be­yond” the Supreme Court’s 2015 rul­ing af­firm­ing that dis­parate im­pact can be con­sid­ered dis­crim­i­na­tory even with­out ex­plicit in­tent — but also putting lim­its on its ap­pli­ca­tion in prac­tice.


Trea­sury Sec­re­tary Steven Mnuchin (left) and Hous­ing and Ur­ban De­vel­op­ment Sec­re­tary Ben Car­son tes­tify Tues­day in a Se­nate Bank­ing Com­mit­tee hear­ing.

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