There has been a flurry of news about the two GSEs, Fannie Mae and Freddie Mac, in the last few weeks. The House Financial Services Committee recently advanced H.R. 4560, the GSE Jumpstart Reauthorization Act of 2017 to the full house for consideration. The proposed bill extends the GSE Jumpstart Act through January 1, 2019, and was approved 33-27.
The Jumpstart Act prohibits the sale of the GSE preferred shares owned by the Treasury Department without congressional approval. The bill also permits the GSEs to suspend their payments into the Housing Trust Fund for any period when it is unable to make its full dividend payment to Treasury. We take that to mean the bill will not be a precursor to allowing the GSEs to retain any part of their net profits which are currently swept in their entirety into the Treasury.
The discussion over that dividend and the related matter of whether the GSE will be allowed to begin building some capital reserves takes on more significance in light of a brief note from Bloomberg’s Felice Maranz this week. If the GOP tax bill passes in its current form, it may push the GSEs into a Treasury draw in the first quarter of 2018.
Maranz says the entities’ deferred tax assets assume a 35 percent tax rate. The merged House/Senate bill proposes a cut to 21 percent which would mean the need to write down those assets, a Q4 loss under generally accepted accounting principles, and a cash transfer from Treasury. That’s likely, the writer says, to at least delay Federal Housing Finance Director Mel Watt’s hope that the White House will begin allowing a capital cushion.
Another Bloomberg writer says the big push in a GSE plan in the Senate will be to “entice more companies to compete with Fannie Mae and Freddie Mac in the housing-finance market. An article, by Joe Light, says the plan being developed by Bob Corker (R-TN) and Mark Warner (D-VA) would lower the barriers to entering the housing market by removing some of the advantages now the sole domain of the GSEs. The goal would be building a system strong enough to withstand the failure of any one company and a potential repeat of the 2008 housing crisis. If no rivals come forward, the GSEs could stay under government control.
Light quotes Warner’s statement last week which said the lawmakers are pursuing a “simplified approach that protects the taxpayer, preserves the 30-year fixed mortgage, and includes robust access and affordability provisions.”
As it currently stands, the senators’ plan would give prospective GSE competitors access to the platform the two companies are developing for securitizing mortgages. Mortgage-backed securities (MBS) would be supported by guarantees sold through Ginnie Mae, which currently performs that function for mortgages issued through the FHA, VA, and USDA.
Light said the two senators had considered breaking the GSEs into smaller companies “but received negative feedback from mortgage lenders and other housing-finance experts who expressed worry over the logistics of such a move, according to people who spoke to them or their staffs.”
The Senators also have no plans to regulate housing prices as would be the case with a utility. Instead, they hope competition through multiple companies would keep mortgage costs down. The plan could make some regulations tougher for large guarantors in the hope that doing so would encourage smaller companies step up.
Finally, Height Securities put out some bullet points about the GSEs for their investors. Its take is that the outlook improved significantly recently as housing finance reform was taken up by Congress. While the commentary didn’t cite which house, or name a specific bill, Height said “The GSEs will either lose their charters or the charters will be very limited,” and that they will continue under conservatorship until they are recapitalized.”
That pretty much brings us full circle as there seems no consensus on when or if it will, and no movement toward making it happen.