Trump Budget Raises G-Fees

In its 2019 spending plan released Monday, the administration asked Congress to raise the fees Fannie and Freddie charge to back payments on mortgage-backed securities by 0.1 percentage point, a move it said would reduce the federal budget deficit by $25.7 billion over the next decade.

The budget plan, while unlikely to be implemented by Congress, provides at least a small window into how the administration thinks about the future of Fannie, Freddie and the rest of the housing-finance system. It shows that administration officials want to reduce the government footprint in the mortgage market and possibly pull back on funding for affordable housing.

To help pay for a payroll tax cut during the recession, Congress told Fannie and Freddie to add a 0.1 percentage point fee to the guarantee fees, which are paid by borrowers. That increase is set to expire in 2021.
Affordable Housing

President Donald Trump’s budget request would extend the increase to 2023, while also raising it to 0.2 percentage point. It also calls for Fannie and Freddie to stop allocating money to trust funds used to help promote affordable housing.

More than a year into the administration, the Treasury Department has revealed little about what it wants to see happen with Fannie and Freddie. Recently, Treasury officials have said they want to work with Congress on housing-finance reform legislation, though in a recent hearing, Treasury Secretary Steven Mnuchin acknowledged that he has authority to implement some reforms without Congress.

Private shareholders of Fannie and Freddie stock, including some prominent hedge funds, have pushed for the Trump administration to move to release the companies from government control without Congress. But if the administration has any such plans, they’re not reflected in the budget.

Mnuchin and other Treasury officials have said that one of their goals is to increase the number of mortgages made that don’t have backing from Fannie, Freddie or other government-linked agencies. The private mortgage market, other than for high-balance jumbo mortgages, has been moribund since the financial crisis.

‘Private Lenders’
A budget document released Monday said the administration thinks raising Fannie’s and Freddie’s fees “would help to level the playing field for private lenders.”

Though Congress isn’t likely to implement the proposals, they could signal steps the Trump administration may take once they appoint a new director of the Federal Housing Finance Agency, Cowen analyst Jaret Seiberg said in a research note on Monday. The FHFA, which controls Fannie and Freddie, until 2019 is helmed by Mel Watt, an Obama appointee.

“While specifics in the budget are unlikely to materialize, it does reinforce our view that a Trump FHFA director will curb what Fannie and Freddie do even absent GSE reform,” Seiberg wrote.

Bailout Arrangements
Under the terms of their bailout arrangements, Fannie and Freddie send nearly all of their profits to the federal government, while the Treasury provides the companies with money when their net worth falls below zero. The companies, which report fourth-quarter and full-year financial results this week, may need to draw on that support for the first time since 2012 as a result of the tax cuts signed into law in December. The companies have assets they can use to offset taxes that became less valuable as a result of the tax cut, resulting in a one-time hit to earnings.

In its budget plan, the administration said it expects that issue to result in draws of about $5.1 billion, based on publicly available information. Fannie plans to report earnings on Wednesday, while Freddie reports on Thursday.

The Trump administration also said it expects Fannie and Freddie to pay the government nearly $185 billion over the next decade.