Mark Calabria, the new director of the Federal Housing Finance Agency, says that the Trump administration is close to completing negotiations to allow Fannie Mae and Freddie Mac to retain profits so that they can begin building up capital. Ostensibly, this move will help the companies “operate as private companies again.”

In reality, Fannie and Freddie have never operated as truly private companies, so this entire effort is somewhat of a charade. Nonetheless, it appears that the administration is attempting several major reforms, some of which could help protect taxpayers and start to level the playing field in housing finance markets.

Based on the latest reports, the new deal could let Freddie and Fannie retain about one year’s worth of profits, approximately $20 billion. Based on Freddie Mac’s estimates, though, this amount would leave the firms close to $300 billion shy of the capital needed to meet the FHFA’s proposed (but suspended) capital requirements.

Moreover, the firms still need to make good on close to $200 billion in financial obligations incurred under their government bailouts. It is difficult to see how retaining $20 billion in profits does much unless the federal government provides yet another bailout that lessens those obligations and capital requirements.

The timing of Calabria’s announcement gives taxpayers an idea of what’s ahead: it came shortly after the administration released its Housing Reform Plan. That plan suggests amending the preferred stock purchase agreements (PSPAs) that set the terms of the previous bailouts.

In particular, Treasury recommends (on page 3) amending the PSPAs in order to “enhance Treasury’s ability to mitigate the risk of a draw on the commitment after the conservatorships.” In other words, the companies can’t possibly pay back the amount they currently owe in a timely fashion without endangering their financial health, so the federal government is going to negotiate some kind of forgiveness plan.

Ironically, the Treasury report chronicles the original bailouts and recognizes (on page 10) that the current net worth sweep was initiated because “[n]either GSE was able to consistently generate earnings to cover the required dividend.” In effect, Fannie and Freddie were borrowing money from Treasury in order to pay back what they owed to Treasury. (As I’ve written on multiple occasions, shareholders fighting this sweep deserve their day in court, but the final outcome of that process does not change the fact that Fannie and Freddie are not really private companies and the U.S. does not need such an arrangement in its housing finance market.)

Even more ironically, the report (on page 7) highlights a well-known fact: The GSEs have had virtually no real impact on the U.S. homeownership rate. It has barely budged since the GSEs were created in the late 1960s. The rate has remained nearly the same whether the companies were a small part of the market (e.g., in 1981 when they owned less than 10 percent of single family mortgage debt), a medium part of the market (at the end of the ‘80s when they owned 25 percent), or a large part of the market (close to 45 percent since early 2000s).

The report even chronicles that the GSEs remained a small part of the market until government policies – higher capital requirements in the banking sector – helped the GSEs exploit their funding advantage from being implicitly backed by the federal government.

To Treasury’s credit, the report recognizes that the funding advantage provided by less-stringent capital requirements needs to be eliminated. It is simply bizarre, though, that Treasury could simultaneously call for an explicit federal guarantee on mortgage-backed securities and releasing the companies from conservatorship while they still dominate the mortgage market.

There is only so much private competition can do in the face of these giant firms, and Freddie and Fannie are giants purely because of the government advantages they were given. That whole system needs to be shut down if the administration really wants a vibrant market based on competitive private firms. (It is also very strange that Treasury did not simply call for Fannie and Freddie to get out of the multifamily market, but that issue is for another column.)

Overall, the Treasury report provides an excellent account of the state of the housing finance market and includes some very good ideas to reform the market. It also highlights that some of the most important reforms can be made by the Consumer Financial Protection Bureau (CFPB) and the FHFA without waiting on Congress to act.

For instance, the CFPB has announced that they will allow the Qualified Mortgage (QM) patch to expire, and they have solicited comments as they prepare to reform the QM rules. Treasury endorsed these moves and suggested the CFPB allow the time a loan performs without delinquencies to determine its QM status. (For more on this idea, and eight additional QM-related reforms, see this comment letter that I submitted along with AEI’s Ed Pinto and Tobias Peter).

The report (pages 18 and 19) also calls on the FHFA to “solicit information on whether to tailor support for cash-out refinancings, investor loans, vacation home loans, higher principal balance loans, or other subsets of GSE-acquired mortgage loans.” The FHFA should view these sensible reforms as the low hanging fruit of reform, because immediately forcing the GSEs out of these lines would have no bearing on home ownership.

Separately, the Treasury report (and HUD’s companion report) calls for harmonizing the government’s efforts to support low-and-moderate-income housing programs so that Fannie and Freddie are no longer duplicating (and competing with) the FHA’s efforts.

This structural problem – Fannie and Freddie competing with the FHA – is a long running disaster that needs to be stopped. It would have been even better, though, if Treasury had called for the agencies and Congress to explain why government support is needed for moderate-income buyers in the first place, and if it had admitted that existing support for low-income buyers has made housing less affordable.

One does have to begin somewhere, though, so maybe things are looking up for housing finance reform. Given that Congress appears unlikely to act on housing finance reform in the near future, the Treasury report gives some reason to hope.