Will anyone ever fix Fannie Mae and Freddie Mac?

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When the two mortgage giants were taken underfederal control a decade ago — the same year Donald Trump kickedoff the first season of Celebrity Apprentice — regulators saw themove as a short timeout.

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Last month, Trump's administration effectively acknowledged thatit's no closer to figuring out what to do with Fannie and Freddie.Treasury Secretary Steven Mnuchin said there'll likely be no end tofederal control during this Congress. In the meantime, the duo hasonly become more crucial to America's booming-again housing market, standing behind about$5 trillion of loans.

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Trump's team hasn't decided how to restructure the companies —or even who should do it, the White House or Congress. It's stillin the earliest stages of figuring out what a new housing-financesystem should look like, according to interviews with officialsinside and outside the administration. Some of them likened theprocess to Groundhog Day.
Fannie and Freddie still get taxpayer bailouts — about $4 billion between them inMarch, though that was the result of a one-time quirk in Trump'stax law. Fund-managers who bought the stocks near record lows,betting on a fix that would suddenly restore value, are stilltelling investors that the Trump bonanza is on the way –- butthey've had to keep pushing back the date.

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The two companies buy mortgages, wrap them into securities, andguarantee those instruments in case homeowners default. Since 2008they've been under control of the Federal Housing Finance Agency,while almost all their profits go to the Treasury.

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Most people say the arrangement is untenable. But a new oneinvolves weighing the availability of mortgages, the cost to thepublic purse, and the profits that shareholders, including big oneslike Paulson & Co. and Fairholme Funds Inc., are entitled tomake. On those priorities, there's little agreement amongRepublicans, Democrats, lenders and investors.
Last summer, it briefly looked as if the GOP was warming up to ashareholder-friendly fix.

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The Republican National Committee in August passed a resolutiondeclaring that Fannie and Freddie investors deserved to see areturn, and that the companies should be allowed to build capitalby retaining profits. It was a stark turnaround for a party thathad often argued for their abolition. The shares surged.

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Most Republicans involved in setting Fannie-Freddie policyproceeded as if the resolution never happened. It turned out tohave been written by a shareholder, a semi-retired money managerwho's married to the Republican who introduced it.

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“I sent out an email kind of chastising these guys'' for notheeding the resolution, said Dane Fulmer, whose wife Jonelle isArkansas' RNC committeewoman. Fulmer said he owns thousands ofFannie-Freddie preferred shares, both individually and in funds hemanages for friends and family. Jonelle Fulmer said she still hopesthat Republican lawmakers will act on the resolution. “We just keepwaiting,” she said. An RNC spokeswoman didn't respond to requestsfor comment.
In the fall, the heavyweights were supposed to weigh in.

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White House officials including Mnuchin, Office of Managementand Budget Director Mick Mulvaney and then-director of the NationalEconomic Council, Gary Cohn, met to discuss issues including whatthe administration wanted to say about Fannie and Freddie — ifanything.

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On the table was an executive order that would formally kick offa push to end government control, according to people familiar withthe meeting. A draft version set out some goals: To “'enhance theability of consumers to obtain housing,'' while eliminatingimplicit federal guarantees for Fannie Mae and Freddie Mac, andending their “duopoly.''

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But no definitive path was laid out. The order called for astudy of options by various agencies -– and it became clear at themeeting that the heads of those agencies weren't on the samepage.

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Mulvaney asked why the administration couldn't just recapitalizeFannie and Freddie, then release them from government control,according to a person familiar with the meeting. (Two other peoplesaid he's stuck to that line since then.) Others in the roomprotested that the companies needed reforms before that couldhappen. Mnuchin said he needed to focus on the tax bill. The orderwas never signed.
Fast-forward to spring 2018, and another round of meetings.

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Some of the players have changed. Cohn is gone, replaced byLarry Kudlow, who's expressed mixed views. He's written columnsarguing that the government should stop subsidizing Fannie andFreddie; he's also voiced sympathy on Twitter for shareholders whoaren't getting any of the profits.

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But the latest talks have circled around the same questions,according to people familiar with them. One meeting set the clockback decades, as participants discussed whether mortgage bonds evenneed a federal guarantee (most agreed that they do), and whethercompetitors for Fannie and Freddie should be created.

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There's still no consensus on whether the administration shouldattempt reform on its own, wait for Congress or try a mix of both.In Congress, various drafts and proposals have circulated andfailed to gain enough backing.

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If it's starting to feel like Groundhog Day for the peopletasked with fixing Fannie and Freddie, the same is true for thepeople who hold their stock.
Some preferred shares jumped 25 percent after Trump's election inNovember 2016 – then almost doubled later that month when Mnuchinsaid the new administration would get the companies out ofgovernment control quickly.

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“We believe there is a high probability of a resolution beforethe end of 2017,'' John Paulson wrote in a December 2016 note toinvestors.

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It didn't happen, and the shares gave up most of those gains.Still, in March 2018 Paulson hit the same optimistic note, sayinghe saw “a high probability of a favorable resolution thisyear.''

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That's not happening either, Mnuchin told Fox Business on April30.

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Even before the Treasury secretary closed the door, somestakeholders were already digging in for a much longer fight.

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The Center for Responsible Lending, a left-leaning nonprofit,advocates for wide credit access and is calling for highlyregulated versions of Fannie and Freddie to be preserved. The groupsays it's so unclear what the Trump administration wants that nextyear is likely to end up looking much like 2018.

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There's reason to think Congress might eventually try again, butlawmakers didn't really get serious about Fannie and Freddie untilabout five years ago, CRL President Mike Calhoun said. “These majorpieces of legislation usually take a decade.''

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