Banks didn't win much in the budget deal lawmakers unveiled earlier this week, but there's one bright spot for advocates of housing finance reform.
The spending package included a key provision from a bipartisan bill that would prohibit the Treasury Department from selling its stake in Fannie Mae or Freddie Mac until at least Jan. 1, 2018. The Jumpstart GSE Reform Act, co-authored by Sen. Bob Corker, R-Tenn., ensures that Congress will lead any efforts to unwind the government-sponsored enterprises over the next two years.
It also includes a "sense of Congress" that lawmakers should determine the future of Fannie and Freddie and that Treasury should not sell or otherwise get rid of its preferred shares in the housing giants until after that time.
"Jumpstart was very important to make it clear that the responsibility is going to lie with Congress," Corker said in an interview.
The provision is a temporary blow to advocates urging that the White House recapitalize and spin off the GSEs. Some on the left are hoping to preserve Fannie and Freddie's housing goals to help low and middle-class families access the mortgage market.
But the debate is rife with political complications, with a number of hedge funds set to win billions if the GSEs are returned to the market. Some of those firms are also fighting the issue in court, charging that Treasury unfairly changed the terms of its agreement with the GSEs, "sweeping" all profits into government coffers as long as the housing giants are in conservatorship.
Corker, who helped lead the effort to overhaul the housing market last term, sat down with American Banker on Wednesday, following the release of the budget deal late Tuesday night. Below is a transcript of that conversation, condensed and lightly edited for clarity.
Why was Jumpstart important to do now, and was the Obama administration supportive of that effort?
The administration has been very supportive of Congress taking the lead on housing finance reform. We've worked with them very closely with them, as a matter of fact, over the last several years.
And we understand — as do they and others — that the model right now of having these two behemoths that have in essence a government guarantee behind them that used to be implicit, now it's explicit, is not a way to have a dynamic housing system and certainly poses tremendous risk to taxpayers.
The hedge funds have a big stake in this. One of them has got a $388 million investment and if they can cause these entities to be re-IPOed as they now exist, that stake turns to $8.4 billion. That's just one of the entities.
So there's been a lot of lobbying up here by these hedge funds to just re-IPO them like they are. So Jumpstart was very important to make it clear that the responsibility is going to lie with Congress, that Congress will determine how housing finance reform is going to be and that re-IPOing them in the form that they are is not something that's good for our nation.
How did the sunset provision come about? I imagine that was a compromise position?
It was, but we have the "strong sense of the Congress" language in there and it's language we believe certainly can be extended.
Do you worry about a draw from Treasury as capital is ratcheted down to zero at the GSEs, or what do you make of those arguments being made?
Either way, American taxpayers are fully at risk now, so I guess what I worry about far more is ensuring we pass appropriate housing finance reform so we don't find ourselves back in the situation that we found ourselves in 2008.
One thing I will say is that people are trying to compare these entities to other entities that failed during that time. The difference is Congress created these, Congress chartered these, and it's Congress's responsibility to figure out a way to create that kind of system and deal with significant reforms.
What do you make of the recent New York Times pieces we've seen — worrying aboutinfluence from housing officials from the Obama administration, concerns that government's being overly hard on the GSEs or that the banks want to come in and take the future GSE profits?
I think the hedge funds have done a really good job of creating a public relations campaign at every level. Obviously, they bought shares at pennies on the dollar after they were put into conservatorship and I think they've been working overtime to try to cast doubt, if you will, on those people who truly want to see an appropriate housing reform take place.
Given your interest in pursuing an overhaul of the housing system, what's your view on piecemeal reforms in the interim — things like making changes to the common securitization platform or mandating increased risk-sharing at the GSEs? Sen. Shelby has included such provisions in his regulatory reform package and Chairman Hensarling indicated last week that he may pursue similar measures next year. Does that move us in the right direction or does that take away momentum?
I think they definitely move us in the right direction. We've spent a good deal of time with FHFA [Federal Housing Finance Agency] and certainly have spent time with market participants and trying to understand the pluses and minuses relative to various risk-sharing opportunities.
We are encouraged by the fact that FHFA is continuing to go down the path, really the vision in many ways, that was laid out by Corker-Warner or Crapo-Johnson. It really is that same vision. If we can give additional directions relative to risk-sharing and do what we can to speed that process up, I think that's a very good step. Certainly the continued diminishment of Fannie and Freddie's portfolios just continues to alleviate risk within the two entities — that's obviously a plus. They actually can be trust-building steps from my standpoint.
I'd love to see us continue that. But at the same time, this whole effort around Jumpstart has created a level of discussion and dialogue that just had not happened for several months. And I think what it's done is primed the pump relative to people's desire to get on with this and to move towards significant and important housing finance reform.
Where are you seeing that additional interest? How do you see that playing out next year?
To accomplish what we were able to accomplish over the last short period of time involved many, many conversations on both the Democratic and Republican side. And so, again, there's a renewed interest, a renewed push towards that end.
I'm not just saying this to make nice — this Jumpstart discussion has reignited in a very significant way people's desire to address this issue. I understand what the dynamics are going to be in 2016 — I understand it's a presidential year, I understand the calendar is short. But my guess is, because of what has happened, people will be working on a foundational opportunity for something really big after the elections, if not before, and the incremental pieces you're talking about to me are a real possibility this next year.
Do you worry at all that the recap and release advocates — both the hedge funds and some on the left — will prevail ultimately if Congress continues to drag its feet?
When you've got that much money at stake — and there are multiple entities by the way, that have stakes they bought at pennies on the dollar which can turn into billions if these entities are just re-IPOed in the form that they are today, which again for me would be a really bad thing for our nation — then yes, a lot of money gets spread around, unfortunately.
I hate to say it, but it can have an effect on things. I'll be the first to admit that we saw the product of that over the last few weeks. There are people that are highly motivated. These are huge amounts of dollars that are at stake.
I'm not trying to deny rights to anyone. My goal is to end up, though, with a good policy that's good for our nation. And when there's so much money at stake, sometimes, unfortunately, that can have a negative effect on the process.
I think your question is a valid question and I do think it's incumbent on Congress to act.