Treasury Officials Squash Fannie, Freddie 'Recap and Release' Rumors

WASHINGTON – The White House is pushing back on suggestions that it will cut a deal to recapitalize Fannie Mae and Freddie Mac before the end of President Obama’s term, putting the pressure back on Congress for a solution.

Rumors swirled in recent weeks that the Obama administration was in talks to potentially release the government-sponsored enterprises from conservatorship, based in part on a report earlier this month by political intelligence firm Political Alpha.

There’s been very little momentum for housing finance reform legislation in Congress this term, which left some wondering whether the White House would pursue an administrative solution rather than pass the issue on to the next president – particularly if a Republican takes office who could work to remove government from the housing market entirely.

But Treasury Secretary Jack Lew dismissed the idea Monday that the White House would consent to recapitalizing the GSEs as they currently stand, saying that “the right answer is to get real reform.”

“The long-term solution … is to have a clearly articulated exposure of risk,” Lew said during an interview on CNBC. “It’s overdue. I wish that we could work through the congressional process to get legislation. We’re doing what we can administratively in the meantime. But the right answer is not to recap and release, as some say.”

Lew’s comments mirrored those by one of his top advisors, Antonio Weiss, who penned a Bloomberg op-ed Monday morning. The full court press appears to be a response to pressure from both ends of the political spectrum for the GSEs to be returned to the market, including by current Fannie and Freddie shareholders who could profit immensely from such a move.

“The default must not be a return to a model that failed. We owe it to the American people to create the housing finance system they deserve,” Weiss wrote, warning that “recap and release” proposals are unlikely to help low-income buyers or renters.

He added that while the mortgage giants have paid back a considerable amount to the government, they have not yet repaid their debt to Treasury under current rules.

“Taxpayers have now received more in total dividends than they injected into Fannie and Freddie. However, the dividends alone aren't adequate compensation for the extraordinary risk taxpayers took on and continue to bear,” Weiss argued.

Moreover, it could take years – even decades – for the GSEs to fully recapitalize even if they were permitted to retain their earnings. Currently, under an agreement with Treasury, any earnings posted by Fannie and Freddie are “swept” into the government’s coffers. Their capital is also set to be ratcheted down to zero by 2018.

“Some have suggested the federal government could stop supporting Fannie and Freddie in the near term by allowing the companies to retain their earnings. This overlooks the high level of capital required to adequately cover the risk of the $5 trillion in assets on the GSEs' books,” he wrote.

Michael Stegman, a top advisor to the White House on housing, is slated to speak Monday afternoon at the Mortgage Bankers Association’s annual convention in San Diego, where he could further highlight the administration’s position.

Analysts noted that the coordinated effort was significant, because it puts to rest rumors of an executive branch solution for the GSEs and potentially reorients the discussion back to Capitol Hill.

“It really is some expression of frustration with the conversation that’s sort of pushed away from reform,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “Their hope is this generates a little bit more momentum for reform.”

Jaret Seiberg, an analyst with Guggenheim Securities, added in a note to clients that similar rumors “surface every several months like clockwork.”

He downplayed the idea that the White House would turn to a unilateral solution for the GSEs after repeatedly calling for a legislative solution. Obama administration officials worked closely with Senate lawmakers last Congress on a bipartisan plan to unwind the GSEs and establish an explicit government backstop behind private market risk.

“There is always speculation about whether the President would change his position in response to pressure from housing groups or because he fears embarrassing documents being released as part of the GSE litigation,” Seiberg said. “We believe the White House wanted to stomp out this speculation with some of its strongest arguments to date against the recapitalize and release position.”

Still, the Obama administration’s efforts left some scratching their heads, as the strong pushback in some ways draws more attention to the rumors than would a single rebuttal or ignoring the chatter altogether.

“It’s one of the oldest rules in town – the scale of response is directly proportional to the veracity of the rumor,” said one lender lobbyist who spoke on condition of anonymity.

And it’s notable that the Weiss op-ed did not explicitly mention getting rid of the GSEs entirely, underscoring how the debate over what to do with the housing giants continues to evolve.

“While Treasury’s position regarding the GSEs is unchanged, it’s important to note there’s been shift in the broader reform conversation away from winding down GSEs to simply reforming the GSEs,” said Isaac Boltansky, an analyst at Compass Point Research & Trading. “Even though Weiss said the White House is against reform and release, nowhere in the op-ed did he reference ‘winding down’ the GSEs.”

Regardless, the move now centers the focus back on Congress to address housing reform in coming years. But while lawmakers in the House and Senate may introduce and debate plans to overhaul the mortgage finance system leading up to the elections, getting anything passed into law remains a major uphill battle.

“Barring a downturn in the housing market – where the GSEs start losing money again – I think we’re in this limbo for a while,” said Calabria.