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5 major changes the Trump administration wants to make to housing finance

By Jacob Passy

Published: Sep 9, 2019 12:09 pm ET

Creating competitors to Fannie Mae and Freddie Mac, and loosening mortgage regulations are among the proposed reform

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Fannie Mae and Freddie Mac could see more competition if the Trump administration has its way.

The Trump administration wants to overhaul the country’s housing-finance system.
The Treasury Department and Department of Housing and Urban Development have proposed broad changes that could affect all players in the system, from mortgage borrowers to lenders to securities investors.

Here are some of the most notable recommendations:

Treasury and FHFA should work to recapitalize Fannie and Freddie

Ostensibly, the goal of any housing-finance reform would be to address one of the largest remaining legacies of the Great Recession: The conservatorship of Fannie Mae FNMA+28.04%  and Freddie Mac FMCC+27.24%
One of the key recommendations the Treasury department made in its plan was to work with the FHFA, the regulatory body that oversees Fannie and Freddie, to consider allowing each enterprise to retain earnings beyond the $3 billion in capital reserves they are now permitted.
The profit sweeps were initiated in 2012 to repay the federal government for the roughly $190 billion Fannie and Freddie received in bailout funds. All told, the two firms have now paid more than $300 billion back to the government, according to The Wall Street Journal.
Currently, any money earned in excess of that $3 billion is swept to the Treasury department. The specific timing and mechanics by which these sweeps would end has yet to be decided and will be determined with the Federal Housing Finance Agency (FHFA), senior Treasury officials said Thursday.

Also see: Why are green housing bonds not getting more love from ESG investors?
The lack of details regarding the profit sweep changes sends mixed messages, according to investment bank Cowen. “To us, this seems like it could be the next step for Treasury as it tries to figure out what to do with its preferred holdings,” Cowen wrote in a research note. “If Treasury intended to quickly deem the preferred shares as repaid, then there would be no need to discuss suspending the sweep as the sweep would no longer exist.”
However, Treasury Secretary Steven Mnuchin told Fox Business Monday that the end of the net worth sweeps could come as soon as September, pending negotiations with FHFA. “We expect in the near term we’ll have an agreement where we will allow both Fannie Mae and Freddie Mac to retain their earnings, which will be a significant increase in capital and a step in the right direction to us ultimately raising third-party capital,” Mnuchin said.
The net-worth sweeps have been a thorn in the sides of Fannie and Freddie’s investors for years now. Those investors scored a win last week when a federal appeals court overturned a previous ruling, thus clearing the path for the to trial court over the federal government’s sweeps. The court also ruled that the FHFA’s structure was unconstitutional. The case may ultimately end up in the Supreme Court.
Ending the net worth sweeps would not mean that Fannie and Freddie would necessarily stop paying any money to the federal government. In fact, Treasury proposed that the two enterprises continue paying a “commitment fee” after being recapitalized to maintain their access to the government’s preferred capital lines.

https://www.marketwatch.com/amp/story/guid/B68F3CAE-D0E5-11E9-B4A5-93F583A249DA