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MReport September 2019

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60 | TH E M R EP O RT SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T The Financial Importance of Being Fannie and Freddie Learn about what experts feel about the two GSEs being designated as SIFIs. T he Senate Committee on Banking, Housing, and Urban Affairs held a hearing recently titled "Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions (SIFI)?" Witnesses included Alex J. Pollock, Distinguished Senior Fellow, R Street Institute; Douglas Holtz-Eakin, President, American Action Forum; and The Honorable Susan M. Wachter, Sussman Pro- fessor of Real Estate and Professor of Finance, The Wharton School of the University of Pennsylvania. In his opening statement, Committee Chairman Sen. Mike Crapo discussed the importance of reevaluating the GSEs' place in the mortgage market, noting FHFA Director Mark Calabria's push to end the conservatorship of Fannie and Freddie. According to Crapo, Fannie and Freddie are too big to fail, and "hold far less capital, and are far more leveraged, than any other currently-designated SIFI." The witnesses each answered the question, "are Fannie Mae and Freddie Mac systematically impor- tant?" According to Pollock, they are. He noted that the Financial Stability Oversight Council (FSOC) should designate Fannie and Freddie as SIFIs. "That would be consistent with the clear provisions of the Dodd- Frank Act," Pollock stated. "In my opinion, the country needs Fannie and Freddie to be integrated into the efforts to understand and deal with systemic risk. Without including Fannie and Freddie, these efforts are woefully incomplete." Holtz-Eakin echoed Crapo's statement on the GSEs, stating that "Fannie Mae and Freddie Mac continue to be risky, too-big-to-fail institutions," and noted the GSEs' tentative SIFI status. "Fannie Mae and Freddie Mac were put into conservatorship because they were deemed too big to fail, the very concept that under- pinned the creation of the SIFI des- ignation," Holtz-Eakin said. "Thus, we would automatically expect the government-sponsored enterprises (GSEs) released from conservator- ship to be considered SIFIs." While Holtz-Eakin and Pollock suggested a SIFI desig- nation, Wachter suggested the GSEs should be designated as Systemically Important Financial Market Utilities (SIFMUs). "I believe a SIFMU designation is the correct designation because the GSEs provide a structural founda- tion to the secondary mortgage market," Wachter said. "The GSEs are characterized by the consider- ations established for the SIFMU designation—that is, the aggregate value of transactions processed by the financial market utility, the aggregate exposure of the financial market utility, the relationship, interdependencies, or other interac- tions of the financial market utility, and the effect that the failure of or a disruption to the financial market utility would have on critical mar- kets, financial institutions, or the broader financial system. All four of these characterize the GSEs." Moving Timelines Latest reports point to the Trump Administration putting plans for GSE reform on hold for now. T he Donald Trump administration's plan for Fannie Mae and Freddie Mac may not be pub- lished until September. Reuters reports that the U.S. Treasury is dealing with several other issues, putting the plan for the GSEs on hold for now. Mark Calabria, Director, the Federal Housing Finance Administration (FHFA), has said that he hopes Fannie and Freddie would have exited or will be ready to exit conservatorship before his term ends in 2024. Calabria told Reuters that he is not operating toward a hard deadline. "That's my time horizon," he said. "I'm under no expectation to try to get all this done. ...So if in four years, nine months they're not out of conservatorship, I'm not pushing them out." Calabria stated that Treasury Secretary Steven Mnuchin is cur- rently "juggling a number of balls," while Craig Phillips, Mnuchin's adviser who had been closely involved in the reform plan, also left in June. Additionally, Calabria told Reuters that the Treasury will back some form of government guar- antee for Fannie and Freddie, and notes that the government does not have "forever to overhaul them" and needs to "progress while the housing market remains stable." "The market looks pretty strong now, so that to me is the time when we want to make real repairs," he said. Earlier this year, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled "Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions?" In his opening statement, Committee Chairman Sen. Mike Crapo discussed the importance of reevaluating the GSE's place in the mortgage market, noting FHFA Director Mark Calabria's push to end the conservatorship of Fannie and Freddie. "In recent weeks, FHFA Director Mark Calabria has re- peatedly stated, quoting President Kennedy, that 'the time to repair the roof is not in the middle of a downpour but when the sun is shining,'" Crapo said in his opening statement. "I agree with this sentiment. We have a key opportunity right now, while the sun shines on our economy and mortgage markets are healthy, to put our housing finance system on a durable, sustainable course that can withstand any market cycle." "The market looks pretty strong now, so that to me is the time when we want to make real repairs." —Mark Calabria, Director, the Federal Housing Finance Administration

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