Fannie Mae and Freddie Mac’s watchdog has a vision for ending U.S. control of the mortgage giants that hinges on the companies holding more capital. But that dream could run into a cold political reality of making home loans more expensive as President Donald Trump ramps up his re-election bid.
Federal Housing Finance Agency Director Mark Calabria, who became Fannie and Freddie’s regulator in April, has said the companies need to raise capital buffers to protect against the kinds of catastrophic losses they had during the 2008 financial crisis. He doesn’t want to release Fannie and Freddie unless they have sufficient backstops to prevent another taxpayer bailout.
“It was insufficient capital that triggered the conservatorship, and it’s going to be sufficient capital that triggers an exit,” Calabria, a Trump appointee, said last month at a mortgage banking conference in New York. He added that he wants Fannie and Freddie ready to start raising funds by January.
To get there, Calabria has suggested the companies boost their capital levels to as much as 5% of assets, which would be a whopping $274 billion. For a cushion that high, mortgage finance experts say Fannie and Freddie would probably have to increase the fees they charge lenders to insure against borrower defaults. Those expenses would be passed along to home-buyers.
Economic Impact
A downside: mortgage costs could go up. Trump is heading into his re-election campaign with his approval stuck at less than 45% in almost every poll, and his chances for winning a second term may depend on the health of the economy next year. Any housing woes would add another potential impediment, along with his trade war with China and possible new tariffs on Mexico.
“It’s unnecessary and doesn’t make any sense,” said Mark Zandi, chief economist of Moody’s Analytics, who believes that fees Fannie and Freddie charge are already at appropriate levels. “Higher mortgage rates will raise payments and reduce demand. Less demand will mean lower house-price growth.”
Fannie rose 4.3% percent to $3.18 a share as of 9:50 am in New York trading, while Freddie gained 4.8% to $3.07.
Figuring out a fix for Fannie and Freddie, something Trump has called a “pretty urgent” problem, is the main unresolved issue from the 2008 meltdown.
The Treasury Department is near completion of a plan to return Fannie and Freddie to private ownership that could be released within weeks, said people familiar with the matter. The White House is reviewing a draft of the proposal, one of the people said. Treasury Secretary Steven Mnuchin would have to sign-off on the plan before it’s formally sent to the White House, and officials expect months to pass before any of it starts to be implemented.
An FHFA spokeswoman said the agency is still reviewing what would be sufficient capital levels for Fannie and Freddie. A Treasury spokesman didn’t respond to a request for comment.