One of the Trump Administration’s top priorities in 2018 is supposed to be reforming the nation’s housing system by reorganizing Fannie Mae and Freddie Mac.

US Treasury Secretary Steve Mnuchin went on record saying, “This has been an unresolved issue for far too long and one we are committed to fixing,” in May, 2017 to the Senate Banking Committee and again in July 2017 to the House Finance Committee.” All good intentions however…

The conservatorship established for Fannie Mae and Freddie Mac was to have been temporary. The $187B government loan to these government sponsored housing entities GSEs) in 2008 has been more than repaid. Therefore, now would be an opportune time to seize reorganization of these GSEs.

The Republican tax bill has complicated matters however. Lowering the corporate tax rate also lowers the value of assets sitting on the balance sheets of each entity. Because future rates will be lower, due to the tax bill, this asset, currently valued at $45B, will also be lower and worth less. 2017 summaries may be reported at a loss t=due to this lower valuation and could require both Fannie and Freddie to tap into their respective $3B Treasury credit lines.

Also, this $3B credit line to each entity reduces any incentive to move ahead with broader reform as the status quo is far from ideal in terms of inefficiencies and awkward incentives.

Despite the GSEs being more healthy today than in 2008 due to fee increases and tighter lending standards, each system has its own costly management structure and each has an incentive to “compete to the bottom” to gain more market share by loosening those standards and fees.

One approach to help move these GSEs forward might be to merge them into one entity. That one entity could then move forward to lower the risk by issuing securities to the private sector. The government has already taken steps in just this direction as the two entities are to issue one single standardized mortgage security by Q1 2019.

Will this step toward standardized securities be enough to begin to take on the crisis of housing affordability currently felt throughout the nation? Or, will Freddie and Fannie in their double down efforts to finance workforce housing, continue to invest or ensure nearly 90% of the nation’s mortgages and return ownership of these mortgages to private shareholders just as it happened in 2008?

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