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New US administration unlikely to radically reform GSEs

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By Sam Kerr
24 Jan 2017

US Treasury secretary nominee Steve Mnuchin’s statement during his confirmation hearing that he did not support the recapitalisation and release of Fannie Mae and Freddie Mac should confirm observers’ suspicions that the new administration is not going to prioritise the reform of the government sponsored enterprises (GSEs).

Mnuchin’s comments last Thursday were a notable departure from his statement in November which strongly suggested he supported privatising both GSEs.

“My comments were never that there should be recap and release,” Mnuchin said during his time before the Senate Finance Committee. “I believe that these are very important entities to provide the necessary liquidity for housing finance.”

The change was a blow to Fannie and Freddie shareholders and indicates that the administration is unlikely to be eager to overhaul the mortgage finance giants.

Not only do Fannie and Freddie provide liquidity to the market, as Mnuchin said, but they comprise the bulk of the secondary market, as most conforming loans originated in US are sold on to the GSEs.

Along with Ginnie Mae, Fannie and Freddie are the primary source of supply of agency mortgage backed securities, which are among the largest and most liquid fixed income asset classes.

Both agencies have been consistent in transferring risk from their balance sheets via their credit risk transfer (CRT) programmes and the sale of whole loan securities.

This risk transfer effort will likely continue under president Trump, as the effort is broadly supported by Democrats and Republicans and supports the policy of de-risking the GSEs.

It seems likely that Trump and his administration will look to tackle more high profile political issues such as Dodd-Frank and international trade reform before focusing on housing finance, which is generally functioning and meeting the needs of US homeowners.

This may all change once a new treasury secretary is in place, but if Steve Mnuchin’s comments before committee showed anything, it was that there is real appreciation at the highest levels of how difficult housing market reform would be. The idea of a simple recap and release might not be on the cards and may not be the path to mortgage finance reform under the new president.

By Sam Kerr
24 Jan 2017