Treasury secretary says GSE reform on hold until 2018

Written By: Joel Palmer, Op-Ed Writer

At the beginning of 2017, reforming the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac was a top 10 priority of the recently elected Trump administration.

By May, reform had taken a backseat to regulatory and tax reform. But the administration still anticipated reform by the end of the year, even though it didn’t seem to be a priority of Congress.

In July, administration officials testified to Congress that transferring the GSEs from government conservatorship was still a top priority.

But at this point it’s not happening until next year at the earliest.

That’s according to Treasury Secretary Steven Mnuchin. Earlier this month, Mnuchin told an audience at a Politico conference that a reform plan for Fannie and Freddie won’t be addressed until next year. 

In the meantime, the GSEs will remain under federal government control as they have been since the 2008 financial crisis. 

That means they will also continuing paying dividends to Treasury. Under the conservatorship arrangement, Fannie’s and Freddie’s profits have been paid to the U.S. Treasury, totaling more than $270 billion, far more than the $188 billion spent by Treasury to bail out the GSEs.

Why the delay? It’s certainly not unusual for Washington to change its priorities. Health care and immigration have taken up a considerable amount of time in both the legislative and executive branches and are still unresolved. Then there are the recent distractions from hurricanes and North Korea that politicians have had to contend with. 

According to Bloomberg’s account of Mnuchin’s speech, the Treasury secretary said more work is needed before Fannie and Freddie can be released from government control. 

According to Bloomberg, Mnuchin said: “We need to fix Fannie and Freddie. Realistically this is a 2018 issue, but we’re going to fix it and when we fix it we want to make sure we never put the taxpayers at risk.”

Next year is also when the capital buffers of Fannie and Freddie are set to be drawn down to $0, which was part of the government’s Preferred Stock Purchase Agreement (PSPA).

That could change as well. A group of Democratic senators advocated for Fannie and Freddie to be able to keep some of its capital reserves instead of being forced to surrender all of its capital.

In a letter dated Sept. 13, the senators wrote: “As soon as there are losses at either GSE, the Treasury Department will need to step in and make up the difference. This arrangement is contrary to the governments’s stated policy toward other large financial institutions.”

Likewise, the Republican National Committee recently passed a resolutionurging policy makers to allow the GSEs to keep capital, though for a different reason. The RNC is advocating on behalf of major shareholders of Fannie and Freddie that have fought to secure part of the companies’ profits.

Allowing Fannie and Freddie to keep some of their profits and build their capital base would at least be a step in the direction of releasing them from government ownership. And unless reform efforts actually do rise to the top of the legislative priority list in 2018, it may be the only step for for the foreseeable future.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

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