that Fannie Mae and Freddie Mac assets are so extensive that no fu- ture federal bailout will be needed? In which case, was a bailout needed in the first place? COULD THE GSES HAVE SURVIVED THE MORTGAGE MELTDOWNWITHOUT FEDERAL ASSISTANCE? The Treasury advanced $191 bil- lion to Freddie Mac and Fannie Mae according to ProPublica. Not only did Fannie Mae and Freddie Mac repay their federal advances, they have also evolved into major — if involuntary — financial supporters of the government. Fannie Mae re- ceived $120 billion in advances and has paid back almost $172 billion to the Treasury, meaning the govern- ment has received $51.9 billion in profits. The story with Freddie Mac is much the same: it received $71.6 billion from the Treasury and has paid back $114 billion, leaving a $42.3 billion profit for the Feds. Congress certainly took notice of GSE revenues. Under the Temporary Payroll Tax Cut Continuation Act of 2011, it established a new charge of 10 basis points for loans purchased by Fannie Mae and Freddie Mac for most of 2012. This money was added to the general funds collected by the govern- ment. It was, very simply, a new and

additional tax on mortgage borrowers.

portfolios, access to the debt mar- ket, and more than $1.5 trillion in unpledged assets” from just a few weeks earlier? “The Conservatorship was created as an emergency, short term means of restoring Fannie and Freddie to a ‘sound and solvent’ condition and returning the GSEs to shareholders,” said Tim Pagliara, executive director of Investors Unite, a coalition of pri- vate-sector GSE investors. “It should have never lasted ten years. The law should have been followed.” “The GSEs were not in the dire straits officials feared at the height of the financial crisis in 2008,” Pagliara added. “Within a few years they reversed the non-cash charges put upon them and were profitable enough to pay back taxpayers for the infusion of cash plus interest.” SHAREHOLDERS While billions of GSE dollars were being sent to the Treasury, Fannie Mae and Freddie Mac shareholders got nothing. The natural result was court actions against the govern- ment, claiming that shareholders had been denied the “just compen- sation” required by the Constitution’s “takings clause.” The potential outcome of the shareholder action is a great un- known. If successful would it derail reform plans? Would it require a huge federal pay-out? If the odds of a shareholder victory seem long, take a look at the Su- preme Court’s Winstar decision. Savings and loan (S&L) sharehold- ers sued the government for stock losses after the government forced the sale of local S&Ls. The Court sided with S&L shareholders and the government was forced to pay out more than $20 billion. With the GSEs the stakes are far larger. The government has already taken more than $90 billion in profits from Fannie Mae and Freddie Mac. They continue to exist as active, prof-

THE PIVOTAL YEAR For Fannie Mae and Freddie Mac, the time of reckoning was mid-2008. The vast increase in foreclosure filings raised the obvious question: Would the GSEs be able to make good on promises to pay investors? To reassure the public, on July 10th, 2008, GSE regulator James B. Lock- hart, director of the Office of Fed- eral Housing Enterprise Oversight (OFHEO), stated that the GSEs were “adequately capitalized, holding cap- ital well in excess of the OFHEO-di- rected requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market, and more than $1.5 trillion in unpledged assets." Less than two months later, on September 7th, the government placed Fannie Mae and Freddie Mac into a conservancy. Treasury Secretary Henry Paulson explained, “these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial insti- tutions to the housing correction. Their statutory capital requirements are thin and poorly defined as com- pared to other institutions.” Thin and poorly defined? What happened to the “large liquidity

For FY 2018, the FHA Mutual Mortgage Insurance Fund had a capital ratio of 2.76 percent.

In the third quarter, the FDIC’s Deposit Insurance Fund reserve ratio reached 1.36 percent.

In 2017 Uncle Sam canceled $16 billion in debt owed to the Treasury by the National Flood Insurance Program (NFIP). The program is set to expire on May 31st, but without the NFIP, mortgaged properties in every state will be without required flood insurance coverage. The result is that Congress is virtually certain to approve a program extension.

40 | think realty housing news report :: june / july 2019

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