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Trade groups fret over fate of GSE reform

Large mortgage-banking groups and other trade associations urged the Trump Administration this week to stay the course on allowing Congress to reform Fannie Mae and Freddie Mac, saying that they are growing increasingly concerned about “efforts to derail” comprehensive reform.

The groups, which includes the Mortgage Bankers Association (MBA) and American Bankers Association (ABA), said the Trump administration should resist the temptation to privatize the government-sponsored enterprises absent significant reforms first by Congress.

GSEreformletter"As you both have made clear on numerous occasions, housing-finance reform must go through Congress to create stable, sustainable housing markets that best serve our nation's communities,” the trade groups said in a letter to Treasury Secretary Steve Mnuchin and Federal Housing Finance Agency (FHFA) Director Mel Watt.

The industry’s letter did not elaborate on why the groups have become concerned. MBA and ABA spokespersons didn’t immediately respond to a request for comment.

Recently, however, the Republican National Committee adopted a resolution that the GSEs should be capitalized and privatized. This resolution adopted language from a June blueprint for reform that was bankrolled by GSE private shareholders.

RNC’s resolution, for example, gets behind the shareholder’s privatization plan for Treasury to exercise its GSE warrants, and then sell its shares in the enterprises. The shareholders believe that this would generate $75 billion to $100 billion for taxpayers. Their plan envisions that $180 billion in capital could be raised by the GSEs through retained earnings, and existing and future shareholders.

Also recently, a group of six Democrats on the Senate Banking Committee sent a letter to Mnuchin and Watt, urging the administration to allow the GSEs to retain some of their earnings and build a small capital cushion so that they would avoid taking draws on the Treasury.

The Democrats do not want the GSEs to be released until Congress reforms the GSEs, but do want the administration to suspend the quarterly dividend payments until the enterprises build enough of a cushion to allow them to absorb losses without the need to draw on a massive credit line extended by the government.

Dividend due in September

By Sept. 30, Fannie and Freddie are scheduled to pay dividends of $3.1 billion and $2 billion, respectively. This money goes directly into the coffers of the Treasury. Trump officials and the FHFA have revealed nothing that would suggest that the status quo is about to change. 

Mnuchin recently said at the Politico conference in Washington, D.C., that GSE reform would take place next year, and he expected the dividends to be paid. Watt, the GSE conservator, is an Obama appointee, however. He has twice expressed deep concerns about the GSEs' diminishing capital buffers, and hinted he might withhold dividends. The GSE buffers are scheduled to go to zero at the beginning of 2018.

In previous interviews, MBA officials have called the buffer “a distraction” and unnecessary given the funds already available to the GSEs. The GSEs have a total of $258 billion available in funding from the Treasury to cover future losses. 

The trade-group letter cited a 2016 Congressional Budget Office report that indicated creating such a buffer would increase taxpayer exposure to future losses. 

Mortgage banking trade groups are divided on this issue, however. Some groups that represent smaller lenders have urged Watt to use his authority to build a cushion and develop a recapitalization plan.  

“It is interesting to see that not a single trade association representing small lenders was willing to sign this letter,” said Glen Corso, executive director of the Community Mortgage Lenders of America. “That speaks volumes as to which organizations have the best interests of American homebuyers at heart.”

Other groups signing the letter this week included the American Land Title Association; the Asian American Real Estate Association; the Committee on Healthcare Financing; the Consumer Bankers Association; the Consumer Mortgage Coalition; Habitat for Humanity; the Housing Policy Council of the Financial Services Roundtable; the National Affordable Housing Management Association; the National Association of Hispanic Real Estate Professionals; the National Association of Home Builders; the National Association of Housing Cooperatives; and the National Housing Conference Real Estate Services Providers Council Inc.


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