(Recasts, adds background)
By Richard Leong and Patrick Rucker
NEW YORK/WASHINGTON Nov 30 U.S. President-elect
Trump's nominee for Treasury Secretary, Steven Mnuchin, on
Wednesday waded into the long-running battle over the future
control of Fannie Mae and Freddie Mac, the largest players in
the U.S. home mortgage market, saying that the lenders should be
returned to private control.
Fannie and Freddie stood at the center of the 2008 financial
crisis. When the U.S. housing market collapsed beginning in
2006, it crippled their finances and forced a taxpayer-financed
rescue totaling $188 billion to help thwart the disintegration
of the U.S. financial system.
The Obama administration has argued for the past eight years
that Congress should pass legislation to reform the
housing-finance system but repeated efforts since the 2008
crisis to reform the two lenders and cut their ties to the
federal government have foundered.
On Wednesday, Trump's pick for Treasury secretary said
extracting Fannie and Freddie from government control would rank
as a "top 10" priority for the next administration.
"We've got to get Fannie and Freddie out of government
ownership," Mnuchin said in comments that sent shares of Fannie
and Freddie rocketing to their highest
levels since September 2014.
"It makes no sense that these are owned by the government
and have been controlled by the government for as long as they
have," Mnuchin said in an interview on Fox Business Network.
Since they were rescued in 2008, both lenders have operated
under the "conservatorship" of the U.S. Treasury but both are
now profitable again and have returned more than $240 billion to
federal government coffers.
The two so-called government-sponsored enterprises, or GSEs,
help the U.S. housing finance market by buying the mortgage
loans made by banks, freeing up space on lenders' balance sheets
to generate more loans.
Fannie and Freddie bundle those loans into marketable debt
securities, highly prized by global investors because they enjoy
an effective guarantee against default from the U.S. government.
In turn, that keeps American mortgage rates low and allows
borrowers to finance homes at fixed rates for as long as 30
years, a unique feature of the U.S. housing market.
Any significant change to that special guarantee
relationship could send U.S. home financing costs higher, or
even lead to the elimination of some products like the 30-year
But the government backing also allows Fannie and Freddie to
tap global debt markets at rates far below other private
borrowers and are seen as crowding out private lending in the
mortgage market while raising the risk to the government of
On Tuesday, Mnuchin said he planned to eliminate government
control of the companies but offered few details.
While the incoming Trump administration could tinker with
Fannie and Freddie policies, reforming the agencies would take
an act of Congress.
"We'll make sure that when they're restructured, they're
absolutely safe and they don't get taken over again," said
Mnuchin, a former Goldman Sachs banker.
Fannie shares soared 32 percent on Wednesday to $4.08, while
Freddie rose 31 percent to $3.99.
Any reform push for Fannie and Freddie will likely pit
housing market advocates, who argue the two companies help keep
mortgage rates low and encourage U.S. home ownership, against
fiscal conservatives in Congress.
Without a secondary market, mortgage interest rates would be
unnecessarily higher and unaffordable for many Americans, a
spokesman for the National Association of Realtors said on
But Texas Republican Congressman Jeb Hensarling, the chair
of the House Financial Services Committee, has argued that
Fannie and Freddie should be wound down, while Tennessee
Republican Senator Bob Corker also backs the elimination of
Fannie and Freddie to reduce the government's risk.
Market participants were skeptical a full separation from
the government was in the offing.
"People don't expect the government to just step away from
the GSEs," said Larry Milstein, head of government and agency
trading at R.W. Pressprich & Co in New York.
The federal government has controlled both Fannie and
Freddie since 2008 and the U.S. Treasury has warrants that give
it the right to a 79.9 percent ownership stake but has not
exercised those warrants.
So both lenders' shares are still publicly traded and backed
by some prominent investors who have advocated for their return
to private control.
Mutual fund Fidelity, along with Bill Ackman's Pershing
Square, and the Fairholme Funds, run by Bruce Berkowitz, are
Both Fairholme and Ackman have lawsuits outstanding over
governments control of Fannie and Freddie.
(Editing by Dan Burns and Clive McKeef)