Treasury Secretary-designate Steven Mnuchin isn’t even in the job yet, but he may have already sparked a battle with fellow Republicans over the future of the government-sponsored enterprises.
In an early morning interview with Fox Business News soon after President-elect Donald Trump’s transition team confirmed Mnuchin was getting the Treasury post, the nominee said he wanted to return Fannie Mae and Freddie Mac to the private sector, albeit with additional safeguards.
That is a radically different vision than the one pushed by many Congressional Republicans, including House Financial Services Committee Chairman Jeb Hensarling, who has fought to wind down and eliminate the GSEs.
“Hensarling has been much more rabid about repealing without replacing that I think there is a likelihood of a conflict within the Republican base on what to do,” said Laurence Platt, a partner at Mayer Brown.
At issue is how the government should treat the GSEs, which were seized by the government in 2008. After President Obama took office, his administration backed efforts to wind down and eliminate Fannie and Freddie, replacing them with a system that would provide a government guarantee in the case of catastrophic mortgage losses. While several key Republicans supported that idea, Hensarling pushed to go further, introducing a bill that would have eliminated Fannie and Freddie and largely extricated the government from the mortgage market.
But on Wednesday, Mnuchin appeared to take eliminating the GSEs off the table.
“We gotta get Fannie and Freddie out of government ownership,” he said. “We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again.”
He also acknowledged that reform efforts have been stalled because policymakers have widely divergent views on the government’s role in the mortgage market.
“The two mortgage giants have been in conservatorship since 2008 and efforts to reform them have been unsuccessful, in part because of ideological differences on the role government should play in housing finance,” he said.
To be sure, some analysts were cautious about Mnuchin’s comments, arguing that they leave plenty of room to make significant changes at Fannie and Freddie before letting them loose.
“I don’t read this as let’s go back to pre-2008,” said Mark Calabria, a former top GOP Senate Banking aide who is now at the Cato Institute. “I wouldn’t necessarily take what he says about privatization to mean what a lot of people think he means.”
While Mnuchin’s words leave little doubt that he believes Fannie and Freddie should still exist, he could push for significantly higher capital requirements and other safeguards, Calabria said.
“The devil is in the details,” he said. “It depends on what he means about keeping the GSEs safe. He is fine with a path where some version of Fannie and Freddie come out again. He does not seem to be fine with that version looking pre-conservatorship.”
Edward Mills, a managing director at FBR Capital Markets, said a test of how Mnuchin and GOP Congressional leaders will work together will come shortly when they take up tax reform and changes to the Dodd-Frank Act.
“Look at how tax reform plays itself out and look at how some of the changes to Dodd-Frank plays itself out and that will tell you whether or not they are going to clash on GSE reform,” said Mills. “If you are Jeb Hensarling, you probably love the idea that the administration is even prioritizing reform.”
For their part, industry representatives were pleased to see any movement on housing finance reform, which has been stalled for more than two years.
“I’m encouraged to hear that ending the GSEs’ conservatorship will be a priority for the new administration and that they see the need to reform the system before releasing the GSEs from government control,” said David Stevens, president and chief executive officer of the Mortgage Bankers Association.
Some also prefer the idea of returning Fannie and Freddie to government control to other proposals, including the one promoted by then Senate Banking Committee Banking Chairman Tim Johnson and Sen. Mike Crapo, R-Idaho, in 2012. That would have created a Federal Deposit Insurance Corp.-like system that some banks feared would leave small lenders out in the cold.
“We do believe there is a meaningful role to be played by the GSEs, because they allow community banks to participate in the secondary mortgage market on par with the mega banks such as Wells Fargo and others,” said Camden Fine, president of the Independent Community Bankers of America. “Without them, community banks don’t have the market leverage to price compete in the secondary market with mega banks who already control up to 40% of the secondary mortgage market.”
Glen Corso, executive director of the Community Lenders of America, said that recapitalizing Fannie and Freddie is the most efficient way to housing finance reform.
“The quickest route to getting Fannie and Freddie out of government ownership is to reform those aspects that led to conservatorship — weak capital standards, incentives that place quarterly profit growth above financial stability and service to the marketplace and equal pricing and access requirements for lenders of all sizes- chief among them,” he said.
Yet there can be little doubt that Mnuchin’s comments are a boon to investors and hedge fund managers who have bet big on the GSEs’ return. Shares soared Wednesday as many anticipated that the bet would now pay off.
Several investor groups began buying up cheap GSE shares after they were seized by the government, hoping the enterprises would one day be recapitalized and set loose, netting them a substantial payday in the process. The groups have gone so far as suing the government, arguing that the “sweep” arrangement, in which all GSE profits are kept by the Treasury Department and the mortgage portfolios are gradually wound down, is illegal.
If Mnuchin is confirmed as Treasury secretary, he could seek to renegotiate the Treasury deal with the Federal Housing Finance Agency, allowing the GSEs to rebuild capital in anticipation of freeing them of government control.
“Any path that leads to the GSEs exiting government control needs to permit the GSEs to rebuild capital,” wrote Ed Groshans, an analyst at Height Securities, in a note to clients.
How Mnuchin will navigate the differing views on GSEs if he is confirmed is unclear. But the movie producer and hedge fund executive made it clear that he wants to move quickly upon taking office.
“It’s right up there on the top 10 list of things that we’re going to get done. And we’ll get it done reasonably fast,” Mnuchin said during his interview with Fox Business News.