FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?
USMI reform means a system that works for borrowers, lenders, and other stakeholders as well as enough time and flexibility to ensure a stable transition. She added that “many of the recent legislative proposals seem to understand this risk and allow for measurable benchmarks to occur before major transitions are made. We believe the plan should be flexible to allow it to move faster or slower depending on the benchmarks met and to ensure minimal disruption.” Second, GSE shareholder claims must be resolved otherwise a future court decision could re-open reform efforts. Third, the fate of Fannie Mae and Freddie Mac must be determined. “More than a decade has passed since the federal government as- sumed control of Fannie Mae and Freddie Mac. While the housing USMI believes that transition risk is one of the most difficult components to get right within any housing finance reform plan. USMI has stated as one of our principles of housing finance reform, that ‘reform should utilize the part so the system that work for borrowers, lenders, and other participants while allowing for sufficient time and flexibility to ensure a stable transition.’”
serve is a debatable question. Today the Fannie Mae and Freddie Mac reserves are limited to $3 bil- lion each, reserves designed to sup- port some $5.4 trillion in mortgage securities they own or guarantee. The GSE reserve limitations were created in 2012 under a “full income sweep of all future Fannie Mae and Freddie Mac earnings.” Every dime in GSE profits above the reserve re- quirement will go to the government. The sweep, said the Treasury, was designed to make sure “every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.” Will $6 billion be enough to support Fannie Mae and Freddie Mac guar- antees if markets turn down? If not, will the government step in? Or, is the sweep a de facto recognition that Fannie Mae and Freddie Mac assets are so extensive that no future federal bailout will be needed? In which case, was a bailout needed in the first place? The Treasury advanced $191 bil- lion to Freddie Mac and Fannie Mae according to ProPublica. Not only did Fannie Mae and Freddie Mac re- pay their federal advances, they have also evolved into major — if invol- untary — financial supporters of the government. Fannie Mae received $120 billion in advances and has paid back almost $172 billion to the Trea- sury, meaning the government 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 COULD THE GSES HAVE SURVIVED THE MORTGAGE MELTDOWNWITHOUT FEDERAL ASSISTANCE?
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. It should have never lasted ten years. The law should have been followed.”
TIM PAGLIARA
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 vic- tory seem long, take a look at the Supreme 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- it-making companies. A government loss in court could reduce or end GSE payments to the Treasury at a time when the deficit is soaring. WHAT HAPPENS NEXT? More than a decade after the con- servancy was established it’s unclear what happens next. At this writing there is the Crapo plan, a just-an- nounced proposal by the National Association of Realtors (NAR), and potentially additional plans by other stakeholders. It has been report- ed that the Administration is also working on a proposal. All plans, regardless of their source, will need to address several basic issues. First, the secondary market must continue. A secondary-market interruption would be catastrophic, stopping sales, lowering values, re- ducing tax collections, and damaging housing markets across the country. USMI believes that transition risk is one of the most difficult components to get right within any housing finance reform plan,” said Lindsey Johnson, president of the association for private insurance providers. She explained that to
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 add- ed to the general funds collected by the government. It was, very simply, a new and additional tax on mort- gage borrowers. 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 institutions to the housing correction. Their statutory capital re- quirements are thin and poorly defined as compared to other institutions.” Thin and poorly defined? What happened to the “large liquidity 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
LINDSEY JOHNSON
12 think realty housing news report
april 2019 13
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