Why investors shouldn’t worry about Trump’s mortgage reform plan

Scott Saloway

Treasury Secretary Steven Mnuchin and HUD Secretary Ben Carson are facing questions from the Senate on Tuesday over the Trump administration’s plan to reform mortgage giants Fannie Mae and Freddie Mac, more than 10 years after they entered conservatorship at the height of the financial crisis.

“The continued conservatorships of [Fannie Mae & Freddie Mac] have perpetuated far-reaching government influence over the housing finance sector. The lack of reform has left taxpayers exposed to future bailouts,” Mnuchin said in prepared remarks. “No conservatorship is meant to be permanent.”

With all the reforms that have already taken place in the mortgage market, Compass Point Director of Policy Research Isaac Boltansky says it may simply be time for the government to be more hands-off.

“In a lot of ways Fannie and Freddie are the unfinished business of the financial crisis,” Boltansky told Yahoo Finance’s “The First Trade.” “The Fannie and Freddie of 2019 are not the Fannie and Freddie of 2007.”

But they remain undercapitalized and are barred from holding more than $3 billion each to protect against losses. Under the government’s control, they have access to additional funds from the Treasury Department if they run into trouble. The Trump administration wants to see that cap lifted and new private competitors take on some of the risk, a change that would require Congressional action.

FILE - This Aug. 8, 2011 file photo shows the front of the Fannie Mae headquarters in Washington.  The mortgage giant  reported net income of $2 billion from July through September, 2015 down from $3.9 billion a year earlier. The results posted Thursday, Nov. 5, 2015 marked the 15th straight profitable quarter for Washington-based Fannie Mae. (AP Photo/Manuel Balce Ceneta, File)
FILE - The Fannie Mae headquarters in Washington, D.C. (AP Photo/Manuel Balce Ceneta, File)

Lawmakers have been unable to agree on what to do with Fannie and Freddie. And it seems unlikely this plan will get much bipartisan support. Sen. Sherrod Brown (D., OH) said in the hearing today, this “plan will make mortgages more expensive and harder to get.”

“There is simply no path to passage for any comprehensive mortgage reform in this Congress,” Boltansky said. That means few changes, for now, except some administrative reforms. And he says the White House knows it cannot mess with mortgage market.

“The 30-year fixed-rate mortgage is sacrosanct in Washington,” Boltansky said. “It’s right up there in the pantheon of Americana with apple pie and American football.”

“The policy decision has been made to support the 30-year fixed rate mortgage, and Fannie and Freddie are the best transmission mechanism for mortgage credit given their role in the market,” Boltansky said. “They are pillars of the mortgage market, they are necessary for the mortgage market to continue functioning.”

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