Republican lawmakers are raising the possibility of wrapping two top priorities — extending tax cuts and reducing the government’s footprint in the housing market — into one deal as part of next year’s must-pass tax legislation. The idea — selling off the government’s stake in Fannie Mae and Freddie Mac to help pay for extending tax cuts — is simple in theory. Fannie and Freddie, the government-controlled giants that back roughly half the $16 trillion residential mortgage market, have languished in conservatorship since Treasury bailed them out in 2008. Bipartisan efforts to overhaul the so-called government-sponsored enterprises have repeatedly foundered in Congress over questions about the companies’ future role and the fallout for the mortgage market. The first Donald Trump administration made some headway toward recapitalizing and releasing the GSEs before the pandemic struck, and — depending on whom Trump names to run their regulator, the Federal Housing Finance Agency — the second administration is likely to revive the effort. That’s where Congress could come in. Republicans are expected to use the reconciliation process to move tax legislation next year. Now, there’s talk of including language to mandate the release of the GSEs in the process as a way to offset revenue losses from extending the expiring tax cuts. Rep. Andy Barr, who is running to lead the House Financial Services Committee next year, is bullish on the idea: “There's more work to do to recapitalize the GSEs before they can be released,” he told our Eleanor Mueller. “But the point is, if you can get the GSEs into better financial shape, then it could be a substantial pay-for for the tax legislation, and it can deliver a more sustainable housing finance system.” Barr said he has discussed the GSEs with Scott Bessent, Trump’s nominee to lead the Treasury Department. Rep. French Hill, another contender for the top spot on Financial Services, left the reconciliation option on the table for Fannie and Freddie and suggested Congress should be involved in any process to release the companies: “Although some changes can be achieved through administrative actions, certain important reforms are only possible through statutory changes,” Hill told MM in an email. “If Congress uses budget reconciliation, that money should be used to fund President Trump’s policy priorities.” Incoming Senate Banking Chair Tim Scott declined to comment. Democrats are leery of the idea, assuming an if-it-ain’t-broke-don’t-fix-it attitude toward the housing finance market. They’re also keen to maintain Fannie and Freddie’s affordable housing goals. “The notion of ‘releasing’ two government-sponsored enterprises that backstop half of a massive, multitrillion-dollar mortgage market, on the strength of an unstated government guarantee, strikes me as irresponsible and reckless,” Rep. Ritchie Torres told MM. “Fannie Mae and Freddie Mac present a systemic risk to the economy and therefore should remain in the grip of conservatorship.” Torres, a New York Democrat, raises one of the key questions complicating the process: what to do with the government guarantee — the market’s belief that the government would once again bail out Fannie and Freddie. Another question: “Fannie and Freddie currently have a liquidation preference with Treasury — that is, how much money they owe the department — of over $330 billion. How's that getting resolved?” said former FHFA Director Ed DeMarco, now president of the Housing Policy Council. “In a world where we operate with huge government deficits, writing off $330 billion that's owed just through the liquidation preference, you know, is a pretty big step.” The future of Fannie and Freddie’s credit risk transfer programs would also have to be sorted out, DeMarco said, adding that he is skeptical of the reconciliation idea given the number of complicated questions policymakers would have to answer to make it happen. “Fannie and Freddie represent about half of [the residential mortgage market],” DeMarco said. “So I think that taking time to really think through these broader questions about the impact on the mortgage market ought to be primary relative to, you know, whether it raises a modest offset for the tax cut.” Even if lawmakers manage to sort everything out in the next year, there’s another question hanging over the process — how would the Congressional Budget Office score it? A 2020 CBO report on releasing the companies pointed out that “the net financial cost of an asset sale incorporates the present value of the expected proceeds from the sale, the loss of future revenues from the asset, and changes in future spending that would have occurred if the asset had remained in federal ownership.” Or, as Structured Finance Association CEO Michael Bright put it, “I can't see how it's free money.” “It's possible CBO scores a sale as positive because it removes future bailout risk,” he said. “But I don't see how it could be valued at the amount of revenue a sale would raise, because the government is letting go of revenue.” It’s Monday — Get in touch with me at kodonnell@politico.com. And, as always, you can find Sam at ssutton@politico.com.
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