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Blog: Treasury's Mnuchin talks GSE reform

In testimony this week before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Treasury Secretary Steven Mnuchin reaffirmed the Trump administration’s preference for Congress to enact legislation that determines the future of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Mnuchin hinted, however, that absent successful bipartisan reform, the administration could take steps on its own to end the status quo. The GSEs, now nine years into conservatorship, are tightly controlled and guaranteed by the government.

downpay(1)“There are certain administrative options that we have,” Mnuchin said, responding to a question from U.S. Sen. Bob Corker, R-Tennessee. “These entities are very complicated. I would just say my strong preference would be to work with Congress on a bipartisan basis to reach a long-term solution.”

Mnuchin declined to elaborate on what options the administration would consider, noting that if he were to mention specifics, it could roil the markets.

He said, however, that that the reformed post-conservatorship system should preserve a 30-year fixed mortgage, but that will likely require a government guarantee.

 “I think it is critical that we have a 30-year fixed mortgage,” Mnuchin said, responding to a question from U.S. Sen. Jon Tester, D-Montana. “I don’t believe that the private markets, on their own, could support it. So, one of the things that we are looking at concerns different solutions around that.”

Mnuchin said he would prefer a government guarantee on the bonds issued by Fannie Mae or Freddie Mac, or future enterprises — and not a guarantee for the entities themselves. In other words, the new system would allow for the possibility that an enterprise could fail and go out of business. The mortgage-backed securities that ultimately give lenders the ability to fund 30-year fixed mortgages at reasonable prices, however, would still be guaranteed under such an approach.

Mnuchin didn’t appear Tuesday before the committee to talk specifically about GSE reform, but rather to deliver Treasury’s annual report on behalf of the Financial Stability Oversight Council, which monitors the nation’s financial system. His appearance, though, prompted questions on housing-finance reform from a few senators. The Senate banking committee is expected to produce a GSE-reform bill later this year.

According to news reports, the banking committee has produced a bill that has not yet been made public. The committee hasn’t released any portion of the text of the bill.  

As with the past GSE reform bills, a future Senate bill would have little chance of gaining traction without strong bipartisan support, according to Washington insiders. Apparently, the committee still hasn’t reached a consensus on one basic aspect of the plan: whether the government should provide any form of guarantee that protects the system in catastrophic downturns. 

“I would disagree that a government guarantee is a necessary precondition to have a liquid 30-year mortgage,” U.S. Sen. Pat Toomey, R-Pennsylvania, told Mnuchin.  


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