Treasury Official Pushes for More Risk-Sharing at GSEs

WASHINGTON — With prospects for an overhaul of Fannie Mae and Freddie Mac dimming in the near term, the Obama administration is encouraging housing officials to take on more risk-sharing projects to help ready the system for an eventual transition to a new housing finance system.

Michael Stegman, a top housing policy adviser at the Treasury Department, lauded Thursday recent moves by the Federal Housing Finance Agency, and urged regulators to find additional ways to bring private capital into the market, even in the absence of legislative momentum.

"While this progress is not a substitute for legislative reform, it can, over time, reduce the challenges to achieving a desired legislative outcome that puts in place a durable and fair housing finance system by advancing us down the path of transition," Stegman told attendees at a Goldman Sachs housing conference.

He also said the White House is not considering plans to recapitalize the two housing giants as long as they remain in conservatorship.

Lawmakers on both sides of the aisle introduced proposals to unwind the government-sponsored enterprises last Congress, but none, not even a bipartisan plan by Senate Banking Committee leaders, gained enough support for a vote by the full chamber. There's been little renewed activity so far this year, and it's unclear when lawmakers will again return to the issue in earnest.

Stegman detailed ongoing efforts to reduce risk at the GSEs, particularly in their retained portfolios, as well as plans to transfer more credit risk to private investors.

"The closer the GSEs can come to transferring the majority of risk to private market participants, the better," he said. "Such credit risk transfer activities serve to field-test the role of government as a guarantor of catastrophic risk while private capital bears the risk of the majority of potential losses."

The Treasury official also urged regulators to consider opening up the common securitization platform to non-GSE users "as early as it can be responsibly done" to help separate "industry's critical securitization infrastructure from the GSEs' credit risk-taking activities."

"Greater transparency, more concrete timelines, broader engagement with private stakeholders, and ultimately, expanded governance of the CSP joint venture to include non-GSE stakeholders are all in the interests of moving towards a more sustainable future housing finance system," he said.

At the same time, Stegman pushed back on critics of Treasury's plan to eliminate the GSEs' capital buffer by 2018. Some have raised warnings that the minimal cushion currently in place might not be enough to avoid another government bailout, though Stegman argued that any money used to capitalize the enterprises would also be coming from government coffers.

"The substantial remaining capital support left … gives market participants the confidence to buy 30-year GSE securities on a day-in and day-out basis. This is despite the fact that the companies remain in conservatorship and have minimal capital levels," he said. "Let me remind you, both recapitalization of the GSEs and draws against the existing Treasury backstop due to potential future losses would come at taxpayers' expense."

He reiterated that the White House is committed to a legislative fix for the GSEs, downplaying arguments that the two enterprises should be recapitalized and then privatized.

"If in the future the GSEs were to operate as they did prior to conservatorship, the GSEs' size and significance would certainly attract broad regulatory attention due to the financial stability implications of their possible failure," Stegman said. "Given this and the associated economic and regulatory ramifications, simply returning these entities to the way they were before is not practical nor is it a realistic consideration."