President Donald Trump on Wednesday issued a long-awaited memo calling for reform of Fannie Mae and Freddie Mac, but stepped back from suggestions his administration could push through wholesale changes while bypassing Congress.
The two companies, known as government-sponsored entities, or GSEs, were put into government conservatorship during the depths of the financial crisis. With combined balance sheets of about $5tn, they back the majority of US mortgages.
In a memo to his cabinet, the president directed the Treasury and the Department of Housing and Urban Development to develop a plan that would bring the GSEs out of conservatorship and increase private competition in mortgage finance.
Policy experts said the memo, which makes reference to “legislative” reform, represented a defeat for advocates of a unilateral executive approach to GSE reform — an idea floated by Steven Mnuchin, Treasury secretary, and Joseph Otting, acting head of the Federal Housing Finance Agency, which oversees the GSEs.
“This memo is a positive sign that the administration is ready to begin a process that will include formal engagement with Congress,” said Ed DeMarco, former acting director of the FHFA and president of the Housing Policy Council.
The memo “takes off the table the concern that there is going to be sweeping executive action in the near term to reform housing in the US”, said Ed Mills, US policy analyst at Raymond James.
He noted that the memo follows a pattern the White House set in reforming banking regulation last year — first asking agency heads to develop plans before pushing reforms through the legislative process.
The end of the conservatorship would end government control of the two entities, and channel billions of dollars in dividends that the two have been paying to the Treasury to private investors. Shares in the GSEs, reduced to penny stock status by conservatorship, rallied this year on speculation that this would happen.
Some analysts cast doubt on the significance of the memo. Brandon Barford of Beacon Policy Advisors described the memo as “a plan to make a plan”, and an example of “reform rhetoric outpacing action” because whatever plans cabinet members develop can only be meaningful with the support of the FHFA, which operates as an independent agency.
The memo stopped short of ending FHFA regulation of the GSEs. Many observers predict that ending government involvement with Fannie and Freddie — and the confidence that inspires in investors — could have a significant impact on the availability and cost of mortgages.
“There is only one place in the world with government backing for mortgages, and there is only one place in the world with 30-year fixed mortgages. You cannot end the GSEs and preserve the 30-year fixed mortgage,” Mr Mills said.
The president’s memo emphasised the importance of “preserving access for qualified homebuyers to 30-year fixed-rate mortgages”.