Dive Brief:

• The Treasury Department, in a report unveiled Thursday, urged Congress to charter competitors to Fannie Mae and Freddie Mac and asked lawmakers to create an explicit federal guarantee of Fannie and Freddie mortgage bonds.
• Treasury also suggested several reforms government agencies can undertake without Congress to free the secondary mortgage market companies from government conservatorship, under which they've operated since 2008.
• Treasury Secretary Steven Mnuchin, Housing and Urban Development (HUD) Secretary Ben Carson and Federal Housing Finance Agency (FHFA) Director Mark Calabria are set to testify Sept. 10 at a hearing before the Senate Banking Committee, presumably to discuss potential paths forward.

Dive Insight:

Treasury called on policy makers to address regulatory gaps between the Fannie and Freddie and private-market competitors.

"Reform should not and need not wait on Congress," Treasury wrote in its plan, adding that the FHFA, Fannie and Freddie's regulator, "should begin the process of ending" the conservatorships.

Treasury left vague its timeline for instituting its suggestions.

A key to setting Fannie and Freddie free lies in letting them raise capital and retain profits. That may involve a deal between Mnuchin and Calabria to alter the "net worth sweep," an arrangement barring the companies from holding more than $3 billion in capital apiece to protect against losses.

In conservatorship, Fannie and Freddie have access to about $250 billion in Treasury funds. Treasury expects it will have to keep that line open. Availability of such financing, in exchange for a fee, should assure bond investors that Fannie and Freddie mortgage securities have no credit risk, a senior Treasury official told Bloomberg.

Treasury also recommended that the administration make permanent a cash window for smaller lenders and a ban on volume-based discounts, according to American Banker.

The report also indicates Treasury is open to putting Fannie and Freddie in receivership, a form of bankruptcy. Calabria earlier suggested that course, but it could pose substantial risk for the companies' shareholders. Another route to recapitalization could be through issuing shares of common or preferred stock.

Treasury also called for "further revisions" to the Consumer Financial Protection Bureau's ability-to-repay rule to keep open a safe harbor for mortgage lenders after the qualified mortgage patch expires in 2021.

Congress is divided on the role of Fannie and Freddie, with Democrats pushing the companies to help lower-income borrowers and Republicans looking to keep the government out of the mortgage market altogether. 

Senate Banking Committee Chairman Mike Crapo, R-ID, said in a statement Thursday that although he preferred to fix the U.S. housing finance system through legislation, "it is important for the administration to begin moving forward on key administrative reforms."

The panel's ranking member, Sen. Sherrod Brown, D-OH, warned that the Treasury report's suggestions would destabilize the economy, raise mortgage and rent costs and limit access to mortgages.

"I'm urging the President: Make it easier for working people to buy or rent their homes, not harder," he said in a statement.

Treasury called on Congress to replace statutory affordable housing goals with a more transparent mechanism to support underserved borrowers.

The department threw support behind the idea that Ginnie Mae, the mortgage guarantor under HUD that has a mission to expand affordable housing, should serve as a backstop for Fannie and Freddie.

HUD released its own set of suggestions, which include seeking more autonomy for the Federal Housing Administration and strengthening a reverse mortgage program. HUD proposed that Congress establish the FHA, the Department of Veterans Affairs and the Agriculture Department as the "sole source of low down-payment financing for borrowers not served by the conventional market," its report said. HUD also proposed a scorecard for homeownership to track the performance of loans over time, to ensure borrowers are taking out loans they can afford.

HUD said it seeks to coordinate with FHFA to identify overlap between FHA and Fannie and Freddie, with respect to loans with high debt-to-income ratios and cash-out refinances.

Fannie Mae and Freddie Mac were taken over and bailed out with $191.5 billion in taxpayer funds, Bloomberg reported. They have since become profitable and paid more than $300 billion to the Treasury.

President Donald Trump issued a memo in March directing Treasury and HUD to develop a plan to modernize the housing finance system and end Fannie Mae and Freddie Mac's conservatorship.

The Treasury plan was originally set to be released in June but was delayed as the administration became reluctant to push big changes before the 2020 election, lest the plan make home loans more expensive and damage the economy.