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Mnuchin: A GSE reform plan will come this year

U.S. Treasury Secretary Steve Mnuchin on Thursday said the Trump administration will soon weigh in on reform of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

In testimony before the Senate banking committee, Mnuchin said GSE reform remains a priority, but didn't take a position on some of the broadest questions, such as whether the federal government should take any role in backing conventional home mortgages.

GseMnuchinMnuchin said he would share ideas with the committee in the second half of this year.

“We would like to give a clear outline as to what our recommendations would be,” Mnuchin said. “Obviously, we need to work with Congress and it is something that needs to be done on a bipartisan basis.”

GSE reform is taking a backseat right now to Treasury’s comprehensive review of financial regulations and tax reform. In both cases, Treasury has been tasked with the job of working out the details of President Donald Trump’s plan to overhaul the Dodd-Frank Act regulations and to cut taxes.

“We are committed to working with you on a solution on housing reform,” Mnuchin said. “We need to fix Fannie and Freddie.”

Mnuchin did not attempt to define what role the Trump administration would take in remaking the GSEs. He also wouldn’t take a position on whether the government should provide an explicit guarantee to the mortgage-backed securities issued by the enterprises.  

“My strong preference is to do [GSE reform] through Congressional action,” Mnuchin said. “I will say, obviously, the Treasury has a lot of exposure and taxpayers are at risk, but the strong preference is to work with you.”

As to the government’s role in the conventional mortgage market, Mnuchin said he supported preservation of the 30-year fixed mortgage, but wavered when asked directly whether the federal government should provide an explicit guarantee that backed the mortgage-backed securities issued by the enterprises.

Mnuchin said the question of an explicit backing needs more study. If the government were to provide a guarantee, “we want to make sure there was ample credit and real risk in front of that guarantee so that taxpayers are not at risk,” he said.

On the GSEs diminishing reserves

Mnuchin also did not shed much light on whether he would agree to negotiate with the GSE conservator, Federal Housing Finance Agency Director Mel Watt, to temporarily end the profits sweeps, allowing the GSEs to rebuild their depleted capital buffers.

The GSEs, which bankroll around half of all home mortgages, have been in conservatorship and largely controlled by the government since 2008. Pursuant to the 2012 amendment to the original bailout agreement in 2008, the Treasury sweeps up almost all of the GSEs quarterly profits.

The GSEs capital buffers have been purposely wound down to $600 million, and will go to zero in 2018. The remaining government funds that could be drawn to ensure the GSEs' solvency after that point total $258.1 billion, of which $116.1 billion is available to Fannie and $140.5 billion is available to Freddie.

In testimony before the Senate Banking Committee last week, Watt said that he was concerned about how the markets would react if these available funds begin to diminish. Each time the GSEs take a draw on that line, it can’t be replenished through future profits.

Watt testified before the committee that he was prepared, as the GSE conservator, to act on his own to ensure that the GSEs do not need future bailouts by taking draws on the Treasury’s line of credit. This would mean withholding dividend payments to the Treasury. In June, the GSEs are expected to pay a combined dividend of $5 billion.

Responding to a question, Mnuchin said he had spoken with Watt several times about the capital buffer issue.

“It was our expectation that they would pay us the dividend, and we hope that they continue to do so, per the agreement,” Mnuchin said.   


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