Top administration officials want Fannie Mae and Freddie Mac to build up their capital levels and exit government control but avoid the strict oversight of a "too big to fail" regulatory label, they said at a key congressional hearing Sept. 10.
Building up a capital stockpile of approximately $100 billion could put the two mortgage giants on sound enough financial footing to make designating them as systemically important financial institutions unnecessary, Treasury Secretary Steven Mnuchin said before the Senate Banking Committee. Mnuchin chairs the Financial Stability Oversight Council, or FSOC, the regulatory body that makes SIFI designations.
At the marquee hearing, three White House administration officials shared in more detail what regulatory structure should oversee the government-sponsored enterprises after they are released from government control.
Mnuchin, Department of Housing and Urban Development Secretary Ben Carson and Federal Housing Finance Agency Director Mark Calabria discussed their plans following the release of landmark reports on the administration's vision for housing finance reform.
Mnuchin said while negotiations are ongoing between FHFA, Treasury, Fannie and Freddie, the group is working hard to allow the GSEs to build capital by removing the so-called net worth sweep, which requires the mortgage buyers to send any money they make above $3 billion per quarter to Treasury's coffers.
Ending the net worth sweep would be one of many steps regulators can take to recapitalize the GSEs and subsequently end their conservatorship, Mnuchin said.
"Our priority is to make sure that the GSEs have more capital," Mnuchin said. "We are in active discussions with [Calabria] and the FHFA about renegotiating our agreements with them which would allow for removing the net worth sweeps so that we would allow a significant amount of capital to be accumulated."

Deep in Treasury's report, the department laid out several recommendations on how the GSEs could raise capital so that they would not have to rely on the government to bail them out in the event of another economic downturn. Under current rules, if the companies report a net loss after a quarter, they can draw from Treasury funds.
Those recommendations included adjusting or ending the net worth sweep, allowing the GSEs to issue common or preferred shares through public or private offerings and putting the GSEs into receivership "to the extent permitted by law, to facilitate a restructuring of the capital structure."

Raising enough capital could let the companies exit government control without a SIFI label, though they might face other regulatory limits or rules, Mnuchin said.
Sen. Mark Warner, D-Va., expressed disappointment that Mnuchin would not commit to designating Fannie and Freddie as systemically important. Warner pointed to a June hearing where a consensus seemed to build among members of the committee as well as expert witnesses to impose an FSOC designation on the companies.
"My concern is that under the administrative proposal, that what you're really talking about on Fannie and Freddie is a 'recap and release,' which is going to keep us in a duopoly, even with higher capital standards, which is going to put us right back to where we were prior to 2008," Warner said. "I don't know how that gets rid of our too-big-to-fail issue."
During that hearing, members of the committee considered labeling the companies as systemically important financial market utilities, which would place the companies under enhanced supervision but would not impose capital, liquidity or stress testing requirements.
Warner cautioned that the plan described by the department mirrors the "recap and release" proposals some GSE investors have pushed for, which would recapitalize the GSEs and then release them from conservatorship without any other regulatory requirements. Warner said that plan would allow the GSEs to engage in the activities that contributed to the 2008 financial crisis.
But Mnuchin pushed back, saying the plan is "not a simple recap and release."
After the hearing, Mnuchin told reporters that Treasury and FHFA are currently negotiating the regulatory regime the GSEs would be under, including any FSOC designation.
"In the ideal world, the entities would have enough capital that when they're released, they don't need to be designated. So we would be working with FSOC to understand and make sure that they're properly capitalized," Mnuchin said.
