MReport March 2017

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12 | TH E M R EP O RT COVER STORY O f all the questions one could ask about government-spon- sored entity (GSE) reform, there is one that keeps coming up: Will it be something the Trump adminis - tration can get to soon, or is the issue just too complicated for a speedy solution? Everyone and no one seems to have an answer. Almost daily, news outlets, analysts, pundits, and financial experts present the idea that administration officials want to tackle the issue imme - diately, yet it is just as frequently followed with explanations to why it won't happen any time soon. Even Treasury Secretary Steven Mnuchin, whose stance on releas - ing Fannie Mae and Freddie Mac from federal conservatorship and recapitalizing the GSEs with pri- vate investor funds was of major appeal to President Donald Trump, has already waffled on that idea—something that Tim Rood, Chairman of the Collingwood Group in Washington, D.C., says strikes him a bit like the movie Fight Club. "The first rule of GSE reform is that you don't talk about GSE reform," Rood told MReport. In other words, talking about reforming the GSEs and actually having a real plan to do it with- out crippling the future solvency of the mortgage and housing industries are rather different endeavors. But if there is one thing that seems largely agreed upon, it's that taking the government out of the mortgage business is an im - mensely risky proposition. After all, housing comprises a fifth of the U.S. economy. And in an economy struggling to grow at a steady 2 percent, retooling housing and mortgages can be a risk too great to attempt. At least right now. Still, the question of what effect the Trump administration can have on the GSEs looms. Reforming for ROI P art of the issue about what to do with the GSEs centers on that $187 billion infusion the enterprises got after they went insolvent in 2008. Investors are currently suing the federal government for a return on that investment in the wake of the GSEs having paid back the Treasury and turned a profit. On the one hand, the business- friendly Trump administration and its reform-friendly Treasury chief could exert considerable pressure over the GSEs, leading to some kind of settlement. On the other hand, there is little, if any, public outcry to fix the GSEs now that the system has been in a relatively good working stasis for the past few years. Christopher Whalen, Senior Managing Director of Financial Institutions at Kroll Bond Rating Agency in New York, says the only people crying out for GSE reform are the investors who seem to want to get paid and just walk away. That, of course, doesn't mean it couldn't happen. Rood says there are enough influencers in the Trump camp who want the GSEs dealt with that there could be some kind of settlement that would benefit investors and not hurt the mortgage industry or the public. To get there, though, would require a solution not mired in what Rood calls "political calculus." He says it's hard to argue against reform in purely capitalistic terms—investors have put up money and want it back. But, he explains, it's not really possible to remove politics from an inherently political issue that has a strong rallying cry for both sides. For conservatives, there's the notion of sound financial machi - nations. For progressives, there's the call to help the underserved and financially struggling. This dynamic, Rood says, is one of the things holding up easy answers as to what to do about GSE reform. Complicating things is the fact that the Obama administration withheld 11,000 documents related to the Treasury's profit sweep of the GSEs, claiming various forms of executive privilege as reasons not to release the files. If those files get released—a real possibil - ity in the Trump administra- tion—and they show any kind of malfeasance on the government's behalf, it could be a real opportu- nity for the new administration to blame the old one. But even that, says Rood, is not a guarantee of smooth sailing. Just as easily as Trump could make a show of reimbursing investors, his enemies could cry cronyism, which would return us to no resolution. And even if there is a settlement with investors that works out for taxpayers and the government, he says, that alone doesn't mean the system is reformed. A Tipping Point With proposals to privatize Fannie Mae and Freddie Mac popping up as part of an overall housing makeover, government and industry officials weigh the risks and rewards of various plans carefully since few are calling for wholesale reform. By Scott Morgan

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