The Treasury Can Kill Fannie and Freddie Without Congress

Earlier this month, the Treasury released its aggressive plan to wind down government-sponsored enterprises Fannie Mae and Freddie Mac. The report also included three options for how the government's role in housing finance might evolve going forward without the firms. The going assumption was that the Treasury's plan was all subject to legislation by Congress. In a divided government, that could mean no action. However, Congress' input isn't technically necessary for the Treasury to take significant action.

It's easy to make this mistake: Congress tends to be associated with lawmaking, so doesn't it need to pass some legislation to allow the Treasury to carry out its planned shuttering of Fannie and Freddie? In fact, the Obama administration already has sufficient power to implement most of its plan without any Congressional consent.

To be sure, the GSEs are chartered by Congress, so the Treasury can't change that without legislation. But through its statutory power over its GSE guarantee, it can partially control their market share. since the Federal Housing Finance Agency took over Fannie and Freddie, the Treasury can exercise its power over the agency to control the GSEs* That means it can lower their market share by increasing the price for their guarantee fee. It can also raise Fannie's and Freddie's underwriting standards and limit the mortgages they accept. So the Treasury can essentially shift the government-guaranteed portion of new mortgage originations to only the 15% or so of financing aimed at lower-income homeownership initiatives called for in its report.

Put another way, there's little standing in the way of the Obama administration winding down Fannie and Freddie -- except for Congress. Although the Treasury has the ability to do most of this work without Congressional consent, if Congress feels strongly about Fannie and Freddie maintaining their influence, then it can pass legislation attempting to stop the Treasury from its planned reduction of the GSEs' influence. But then, considering how politically poisonous Fannie and Freddie have become, it's a little hard to believe many in Congress would be willing to stand behind the companies, which have cost taxpayers over $150 billion and counting.

So does the Treasury need Congress for anything related to housing finance? That's where its options for the future of housing finance come in. The Treasury can already take some action to implement its various proposed frameworks on its own. For example, it could slowly raise the guarantee fee to make a government backing too expensive to compete with the private market, as one of its options suggests.

But really, Congress needs to lend a helping hand to provide the private market with the ability to support mortgage funding without Uncle Sam's deep pockets. As explained here, certain legislation will be necessary to help make private mortgage securitization easier and to allow for the development of a covered bond market.

That makes the situation somewhat complicated. Although the Treasury has the ability to wean the mortgage market off government support, it would probably be irresponsible for it to do so before Congress acts by passing legislation that provides the private market a more conducive framework for supporting funding itself.

Of course, any action by the Treasury will likely be gradual. It's fairly obvious that the housing market is too fragile at this time for any drastic changes, so implementation would likely last at least a decade. Although Congress tends to move slowly, it should be able to pass some legislation to support a more private mortgage market over the next several years -- in time to prevent any major negative market shock from Fannie and Freddie's slow death.

* Slight correction: The Treasury's power doesn't result from any power over the FHFA, but from its statutory power over the GSE guarantee. The reasoning above remains the same.