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Fix Mortgage Finance, Or We’ll Do It For You, Regulator Tells Congress

https://www.wsj.com/articles/regulator-to-press-congress-to-act-on-mortgage-finance-revamp-11560337204



Mark Calabria says it is past time to end government conservatorship
of mortgage-finance companies Fannie Mae and Freddie Mac

Mark Calabria, director of the Federal Housing Finance Agency , at its offices in Washington, D.C., on April 18. 'If I do nothing and don't push, then I'm fairly certain Congress will do nothing,' he said in an interview. PHOTO: T.J. Kirkpatrick for The Wall Street Journal



WASHINGTON—Mark Calabria has a message for Congress: Help the Trump administration overhaul mortgage-finance companies Fannie Mae and Freddie Mac , or he will do what he can on his own.

The two companies, critical to half the nation's mortgages, have been under government control since the 2008 financial crisis. For over a decade, policy makers have tried and failed to return them to the private sector and scale back the government's role in housing.

"If I do nothing and don't push, then I'm fairly certain Congress will do nothing," said Mr. Calabria, the Trump-appointed head of the Federal Housing Finance Agency , which oversees Fannie and Freddie. "They have a lot of priorities, so how do I knock this up a few levels in the priority chain for Congress?"

Mr. Calabria is expected to send ideas to Congress as early as this week, people familiar with the matter said.

He acknowledged that mortgages could become more expensive if the Trump administration returns Fannie and Freddie to private hands without a broader legislative solution—a reason Congress ought to act, he said.

Related

* Administration Nears Plan to Return Fannie, Freddie to Private Ownership

* Fannie and Freddie Back More Mortgages of Those Deeply in Debt

"If all of these things are the likely outcome, then that should focus Congress to come in and decide what it wants the future to be," Mr. Calabria said, when asked whether the firms could see ratings downgrades that could ultimately raise mortgage costs.

Fannie and Freddie for decades have played a key role in maintaining the plumbing of the U.S. mortgage market. They purchase loans from lenders and repackage them as securities that are insured if the loans default, guaranteeing roughly half of the $10 trillion housing market. The companies also are central to the popular 30-year mortgage, which locks in low payments for buyers.

The companies got into trouble ahead of the financial crisis because they took on more risk without building more of a financial cushion to cover possible losses. Fannie and Freddie amassed huge investment portfolios to profit from the difference between their lower cost of funding mortgages—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages. They were bailed out after loans went sour during the housing market's free fall; the George W. Bush administration put them in government conservatorship, where they remain today.

Repeated efforts to overhaul Fannie, Freddie and the housing-finance system have foundered since the crisis because of disagreement over how to do it—and because the mortgage market has stabilized with lower interest rates. Boosting the companies' financial footing also would be expensive—possibly more than $125 billion—because the companies need more capital to absorb losses, if housing hits a rough patch.

The Obama administration in 2011 released plans that didn't gain traction in Congress. A subsequent legislative effort in 2014 and another during the Trump administration also fell flat.

Lawmakers in both parties this year have said the issue is a priority, but so far they have yet to agree to any legislation to overhaul the companies.

Mr. Calabria expressed frustration that policy makers didn't end the Fannie and Freddie conservatorship years ago and compared his push to re-privatize the companies to President Trump's willingness to confront China on its trade policies. "These aren't issues that are new. The problems are old. I think the issue is you have somebody who is finally saying that 'my responsibility is not to hang out for five years.'"

Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee, said prior legislative efforts sputtered because of what he called complicated "Rube Goldberg" machinations. "I want to see a solution here," he said in an interview.

Getting to an agreement will prove easier said than done. Some conservative Republicans have generally called for a private market with limited or no new federal guarantees. Other Republicans and many Democrats say a federal role is needed to preserve liquid markets for the 30-year fixed-rate mortgage that is popular with home purchasers.

A libertarian economist and former aide to Vice President Mike Pence , Mr. Calabria wants to put the firms, now profitable, on the road toward private ownership and increase competition in housing finance by fully overhauling the system. Doing so, however, will be up to Congress, he stressed.

To create a more stable housing finance-system long-term, Mr. Calabria's proposals would call for lawmakers to establish an explicit federal guarantee for securities sold by the companies.

He also plans to urge lawmakers to make technical changes to the FHFA's authority to put it on a level playing field with other regulators, he said. Those would include allowing the FHFA to charter new competitors for the firms, the way bank regulators are authorized to charter new banks.

Congress has incentives to act before Mr. Calabria moves to end the conservatorship on his own. Privatizing the companies administratively—without help from lawmakers—could upset Republicans uncomfortable with returning the firms to how they operated before the crisis. Democrats also worry that privatizing the firms could be done in a way that reduces the firms' footprints in housing and increases borrowing costs, particularly for lower- and middle-income borrowers.

Only Congress can create an explicit guarantee from the government for securities issued by Fannie, Freddie and other new competitors, reducing the chance of instability in housing markets. The exact market ramifications of recapitalizing and releasing the companies without Congress depend on how, precisely, the administration moves ahead with a "recap and release" plan for the companies, housing experts said.

Mr. Calabria said his proposals would be consistent with a separate overhaul blueprint that the Treasury Department is crafting . That plan also is likely to include legislative proposals along with administrative steps the companies' regulator can take, if Congress doesn't enact a more fundamental overhaul.

Both plans take into account the likelihood that Congress won't take action, Mr. Calabria said. "A lot of what you're going to see out of Treasury and a lot of what you're going to see here is, how do we continue to make administrative actions that aren't dependent on Congress," he said.

Write to Andrew Ackerman at [e-mail]