The tricky calculus of housing finance reform
By Ian McKendry
The Senate is set to begin teeing up housing finance reform discussions at a Banking Committee hearing on Thursday, but many are skeptical that Congress will be able to succeed where it has failed in the past. Despite moves toward a bipartisan solution, the political atmosphere remains hyperpartisan, with Republicans and Democrats agreeing on very little. “There is a political chasm between the two parties and it is difficult to be optimistic about any significant legislation in this Congress,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. Chief among the issues facing lawmakers is that currently Fannie and Freddie give all of their profits to the U.S. government. At a time when the Trump administration is pushing tax reform and policymakers are searching for new government revenue, the “profit sweep” is difficult to give up. But even if lawmakers don’t act, the situation is untenable. Fannie and Freddie have not been allowed to rebuild capital, making it certain that — sooner or later — they will require a draw on the Treasury Department to stay afloat. That could spark a panic in the market. “They just have to wobble a little bit and it gets very ugly from a systemic perspective very fast,” said Karen Shaw Petrou, co-founder and managing partner of Federal Financial Analytics. Federal Housing Finance Agency Director Mel Watt has warned lawmakers he won’t let it get to that point. Although the profit sweep rests on a joint move by the FHFA and Treasury several years ago, Watt has said he may unilaterally scrap it if Fannie and Freddie begin to run low on capital.