Fannie-Freddie Won't Be Freed Without Congress, Regulator Says

  • FHFA deputy says Watt fervently believes legislation is needed
  • Official also affirms view GSEs may suspend Treasury payments

QuickTake: The Future of Fannie Mae and Freddie Mac

The Federal Housing Finance Agency won’t release Fannie Mae and Freddie Mac from U.S. control without congressional approval even if the Trump administration asks that the mortgage-finance giants be freed, a key agency official said in an interview.

Bob Ryan, a top deputy to FHFA Director Mel Watt, said the former congressman fervently believes the fate of Fannie and Freddie must be determined by lawmakers rather than through administrative actions that are within the agency’s powers. Watt reiterated that view at a Senate hearing last week.

“You have to start with the director’s unequivocal statement that housing-finance reform is the purview of Congress,” Ryan said. “An administrative solution to housing-finance reform to take the enterprises out of conservatorship would be inconsistent with that.” Ryan said that means FHFA won’t entertain the idea of acting without Congress, even if the administration wants to.

That resistance could disappoint groups -- including affordable-housing advocates as well as hedge funds holding common and preferred shares -- that have hoped the agency would work with the Trump administration to recapitalize and release Fannie and Freddie. The FHFA’s reluctance to act without legislation means Congress will play a major role in developing whatever plan emerges.

A bipartisan group of senators is already laying the groundwork for an overhaul of the mortgage-finance system, but that could take the better part of a year to develop.

Viable Option

To be sure, it’s not yet clear whether the Trump administration believes bypassing Congress is a viable option. Treasury Secretary Steven Mnuchin has said he views Fannie-Freddie reform as a priority and wants a solution that protects taxpayers while preserving mortgage availability. Asked at his Senate confirmation hearing if he could rule out administrative action without lawmakers, Mnuchin said he wouldn’t rule anything out.

More clarity could come as soon as Thursday, when Mnuchin testifies at a Senate Banking Committee hearing. A Treasury spokeswoman declined to comment.

U.S. regulators seized Fannie and Freddie amid soaring losses in 2008, eventually injecting them with $187.5 billion in taxpayer money to sustain them after the financial crisis. The companies have since returned to profitability and paid the government more than they got in bailout funds. The law granting the takeover gave the FHFA broad powers to control the companies and determine their fates.

Under the current terms of their bailouts, Fannie and Freddie now turn over nearly all of their profits to the U.S. Treasury, which has committed as much as another $258 billion to cover future losses. The agreements also eliminate the companies’ ability to retain capital starting next year, meaning even a small quarterly loss would trigger the need to draw on those funds.

Last week, Watt told members of the Senate Banking Committee the situation is untenable and that he may tell Fannie and Freddie to stop payments to the Treasury to let them build capital. Ryan said he couldn’t specify how much capital would be needed, but that it would be a relatively small amount to deal with the risk of short-term losses.

A 2015 law that expires next year forbids the Treasury Department from selling its stakes in the companies. Watt’s term ends in 2019, so if he remains against releasing the companies through administrative steps, that option might be off the table until he leaves.

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