Will GSE reform come from the White House, Congress … or both?


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WASHINGTON — Last week’s developments in government efforts to reform the housing finance system may have given off the impression that the White House and Congress were in direct competition on crafting a plan.

But analysts say policymakers’ ultimate goal is more likely a reform framework that relies on coordination from both branches of government.

Remarks attributed to acting Federal Housing Finance Agency Director Joseph Otting set off a wave of speculation last week that the administration was trying to sidestep Congress and use existing FHFA authority to release Fannie Mae and Freddie Mac from conservatorship.

Senate Banking Committee Chairman Mike Crapo and Treasury Secretary Steven Mnuchin

After signs that the administration is readying a housing finance reform plan, Senate Banking Committee Chairman Mike Crapo, R-Idaho, left, released his own legislative outline, raising the prospects that lawmakers still want to reform the government-sponsored enterprises with a bipartisan deal.

Bloomberg News

Otting reportedly told agency employees at a staff meeting last month to expect significant progress toward ending conservatorship in the next six to 18 months. Then on Friday, Senate Banking Committee Chairman Mike Crapo, R-Idaho, by releasing his own legislative outline, raised the prospects that lawmakers still want to reform the government-sponsored enterprises with a bipartisan deal.

While the release of Otting’s comments were unintentional, observers say they may have had a positive effect, reviving lawmakers’ focus on GSE reform.

“I don’t know the history or the genesis of the Crapo document, but I think it’s interesting that a week or two ago, GSE reform wasn’t even really on the radar,” said Ron Haynie, the senior vice president for mortgage policy at the Independent Community Bankers of America. “The chairman has certainly been involved in the GSE reform debate and probably just wanted to say, ‘Hey look, we still have a role here that we’re looking to play.’ ”

Experts say the administration is likely preparing its GSE plan as a fail-safe in case Congress does not act. Comprehensive housing finance reform has eluded Capitol Hill for years.

The White House attempted to clarify Otting’s comments last week. According to published reports, a White House spokesperson acknowledged that while the administration was preparing to release a housing finance framework shortly, officials were still looking to work with Congress on a comprehensive plan.

“The administration gets to play a pretty sophisticated and subtle hand here. They have to be deferential,” said Charles Gabriel, the president of Capital Alpha Partners. “The reveal of all of this, I’m persuaded, was unintended.”

Others say the White House and Treasury Department are unlikely to make significant changes to Fannie and Freddie before Mark Calabria — President Trump’s nominee for the role of permanent FHFA director — is confirmed. Signs point to Crapo’s committee aiming to schedule a nomination hearing for Calabria sooner rather than later.

“People who were at the Otting meeting and heard the entire speech told me they did not take him at all to mean they would act before Calabria came on board — they would just take steps to fix this if Congress didn’t,” said Ike Brannon, the president of Capital Policy Analytics.

Craig Phillips, the counselor to Treasury Secretary Steven Mnuchin, is reportedly among the members of the administration seeking to take action on reform, and could be the point person between Congress and the administration.

“Then there have been reports that Craig Phillips will be heavily engaged from here, either at FHFA or staying at Treasury, and that he will sort of lead some initial discussions with Crapo to see if and where they can find some common ground,” said Gabriel.

Still, there is an underlying question of how much a divided Congress can accomplish. Crapo’s plan has already drawn criticism for its proposed changes to the affordable housing goals in the current GSE framework. And soon much if not all of the attention in Washington will be on the 2020 presidential election.

“I don’t think anybody is really feeling the pressure. There’s so much other stuff going on in Congress,” said Laurence Platt, a partner at Mayer Brown. “Now, they’ve certainly said that it’s a priority on the banking side — Crapo said it’s a priority I think irrespective of what the administration is saying.”

The administration threatening to take reform into its own hands might not be enough to mitigate some of the crucial obstacles that have prevented Congress from passing legislation before, such as affordable housing provisions and the risk of increased mortgage rates, said Gabriel.

“This is not enough to nudge Congress to pass the four or five major hurdles to pass legislation,” he said. “There are transition costs to moving away from the status quo.”

The four GSE reform bills introduced in the last decade all failed to make it to the Senate floor, and some don’t see a path to success for Crapo’s framework either, which hasn’t even been introduced as a bill yet.

“There appears to be no momentum in Congress for GSE reform, so it appears that any changes to the status of the GSEs in the near term will be driven by the White House and the FHFA,” analysts from Keefe, Bruyette & Woods said in a Feb. 4 note.

Yet pressure from the administration could be the long-awaited impetus to push through reform on a bipartisan basis.

“They do want to prod Congress to act and I don’t think legislation on this is impossible,” said Brannon.

However, at the same time, officials have long indicated that GSE reform is a priority and are invested in creating a new system that prioritizes safety and soundness, said Haynie.

“There are individuals within the administration that understand the value that the GSEs provide to the industry and to the housing market in general, and I don’t believe they want to blow that up,” he said. “In fact, we’ve heard that specifically from folks within the administration. They don’t want to blow up Fannie and Freddie because they do support the housing market.”

If, as Otting said, the administration is planning on a significant housing finance overhaul in the next six to 18 months, it is probable that there is some kind of deadline for Congress to act before the administration takes it up on its own, said Gabriel.

“They need to be deferential and respectful, particularly even more so because of the way they laid this out,” he said. “I think that at least through summer recess, you’ve got to let Congress try to do something, and they’ll be engaged in testifying on this.”

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