Mnuchin: GSE Reform On Hold

Back in June, the U.S. Senate Committee on Banking, Housing, and Urban Affairs, spearheaded by its Chairman, Senator Mike Crapo (R-Idaho), held a hearing on the necessity of reform for the government sponsored enterprises, Fannie Mae and Freddie Mac. Ginnie Mae’s model was a good starting point, he said.

“Fannie and Freddie are currently earning profits, but if the housing market experiences a downturn, and at some point, it will, taxpayers could again be on the hook for many billions of dollars,” Crapo said in his prepared remarks. “Reform is urgently needed, and the Committee is actively exploring a variety of options.”

The most important issues at hand, according to Crapo, were taxpayer protections, and preserving the interest of lenders, investors, and consumers.

Now, however, Secretary of the Treasury Steve Mnuchin is of the opinion that both companies aren’t ready to be released from government’s conservatorship, according to a recent report by Bloomberg.

Mnuchin told a panel at a Politico conference that the GSEs would continue turning over profits to the Treasury for the time being, and that any reform would most likely be put on the back burner until 2018.

Since 2012, when the government changed the terms of Fannie and Freddie’s bailout from a rate of 10 percent dividend to virtually all the GSE’s profits, the two mortgage giants have paid the Treasury Department over $270 billion dollars in dividends. Mnuchin, after the conference, told reporters he expected dividends to continue to be paid.

There has pressure from investors and hedge funds to secure a portion of that profit. According to Bloomberg, some firms, including Fairholme Funds Inc., Paulson & Co. and Perry Capital, have brought suit against the government, and various lobbying efforts have been prevalent in Washington to encourage quicker reform to remove the GSEs from government conservatorship.

Six Senate Banking Committee Democrats took a less extreme stance in a letter sent to the Treasury Department and the Federal Housing Finance Agency on Tuesday, urging the agency to reduce dividend payouts and allow the GSEs to build capital, which they said would ultimately protect consumers—and the government—in the event another bailout is required.

You can read the full letter below: