goals or incentives for the FMIC that compensate for this significant blow to affordable housing.
Though the legislation broadly instructs FMIC to support underserved areas, it provides no adequate framework or goals whatsoever to ensure that this happens.
In fact, the legislation specifically prohibits the FMIC from putting in place regulations that would require approved aggregators or guarantors to include loans to underserved areas as a portion of their business. It explicitly states that the FMIC’s standards for approving aggregators or guarantors cannot interfere with the guarantor’s or aggregator’s exercise of “business judgment” in mortgage loans. This is one of the ripest areas for incentivizing affordable housing and the legislation summarily prohibits it! Why?
In this sense, the legislation does little more than pay lip service to the importance of affordable housing, low-income housing, and serving underserved areas. Senator Elizabeth Warren was right, when speaking at a recent National Community Reinvestment Coalition conference, to warn that we should pump the brakes and not rush into a housing reform proposal that we will end up regretting. Senator Warren made the point that, “if we get housing finance wrong, the impact will be felt throughout America’s middle class.” And lower income Americans as well.
Johnson-Crapo leaves too many regulatory decisions up in the air, without a baseline:
The legislation consistently lays out the type of regulations FMIC should adopt. But it does not proscribe a baseline regulatory structure. Allowing the FMIC flexibility in setting its own regulations and some adaptability to be able to adjust to changing market conditions can be considered within limits. But there are certainly some basic regulations that we can agree on and simple baselines that should be outlined in this bill for many of the regulations it instructs the FMIC to codify on its own, besieged as it would be by corporate law firms.
In the proposed legislation there are instructions for the FMIC to set things like “capital and solvency standards for covered entities” without the legislation setting a baseline for what would be a minimally acceptable level.
Leaving the specifics of regulatory structure completely up to the FMIC seems like a recipe for these regulations being weakened under corporate pressure in the administrative and rulemaking process.
Johnson-Crapo sets an objectionable precedent for shareholder rights:
Fannie Mae and Freddie Mac are unjustly and unnecessarily wiped out. Many, if not almost all, of these reforms could be enacted within the current housing finance system.
Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders are left in limbo with this legislation, and it ignores them in the process of winding down the agencies. The FHFA is directed to sell off and liquidate the GSEs’ assets.
The federal government has used and abused the GSEs’ shareholders since putting them into conservatorship and not allowed them any ability to share in the GSEs’ recovery. The taxpayers should certainly be paid back first. But once that happens, with interest for the taxpayers’ investment, there is no reason that the shareholders (of whom I am one) should not be allowed to benefit from the recovery of the GSEs much in the same way that shareholders of other bailed out large corporations did – like those of AIG and Citi. This legislation would seemingly prevent this from happening.
When the FHFA established the conservatorship for Fannie Mae and Freddie Mac and assumed control of these two GSEs on September 7, 2008, shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled. The federal government received warrants to buy up to 79.9 percent of GSE common stock for $0.00001 per share – just shy of the 80 percent threshold to be reflected in the government’s budget. These actions turned the non-government shareholders into, in essence, zombie stockholders with no rights and no remedies against the GSEs or the FHFA.
Further, just as Fannie Mae and Freddie Mac began a swift turnaround and were on the verge of repaying the taxpayers for their investment, the Treasury in 2012, arbitrarily amended the government’s preferred stock purchase agreement to indefinitely sweep all profits of Fannie Mae and Freddie Mac into the Treasury’s coffers. This arrangement has allowed the federal government, and the budget, to benefit from Fannie Mae and Freddie Mac’ recoveries while at the same time keeping Fannie Mae and Freddie Mac’ liabilities off of the federal government’s books. Meanwhile, the shareholders continue to be used and remain beaten down.
By unilaterally winding down the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the legislation continues the federal government’s unfortunate precedent of using and abusing Fannie Mae and Freddie Mac’ shareholders.
Please consider these comments in your consideration of any new legislative framework for housing finance reform. I hope you will engage with all stakeholders in your deliberation on this important issue. I look forward to your thoughts and comments.
Sincerely,
Ralph Nader
P.O. Box 19312 Washington, D.C. 20036 202-387-8030
Fannie Mae and Freddie Mac Shareholders Launch Investors Unite,
Take to Congress to Make Their Voices Heard
Statement By Ralph Nader Wednesday, April 9, 2014
We join you today with the shareholders of Fannie Mae and Freddie Mac who have made the trip to Washington, D.C. to make their voices heard in Congress. As the housing finance reform debate heats up on Capitol Hill it is of the utmost importance that the voices of shareholders – which have, until now, been ignored – are heard. No more. Mr. Pagliara, a shareholder himself, deserves praise for the work he has put into this endeavor and the effort he has exerted to form the Investors Unite coalition being launched today.
Since the 2008 bailout of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and the beginning of their conservatorship, the stockholders of these two companies, of which I am one, have been stripped of their basic rights as shareholders. It is important that we begin with a bit of history which will document the use and abuse of shareholders and bring us to where we stand today.
Prior to the financial crisis, shareholders of these government sponsored enterprises (GSEs) had legal rights to challenge management decisions through the courts and through proxy battles, or by offering shareholder resolutions. Many prudent investors purchased Fannie Mae and Freddie Mac common stock because these stocks were considered safe investments. Shareholders who might otherwise have been apprehensive about keeping their Fannie Mae and Freddie Mac stock, even as the financial crisis was mushrooming, were led to believe these two prominent GSEs were financially sound. Even the most risk-averse, prudent investor was comfortable relying on statements, in the spring and summer of 2008, from knowledgeable, high-ranking government officials like the Federal Reserve Chairman Ben Bernanke, Treasury Secretary Hank Paulson, and the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’ regulator James B. Lockhart, who publically claimed Fannie Mae and Freddie Mac were rock-solid companies.
On September 7, 2008, when the U.S. Treasury and the Federal Housing Finance Agency (FHFA) established a conservatorship for Fannie Mae and Freddie Mac, common shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled. Share values plunged.
At the time, the administration, the FHFA, the Treasury, and Congress all left shareholders with the impression that the conservatorship was a necessary, but temporary, measure to address Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’ immediate liquidity concerns. The legal mandate of the conservatorship was – and is – to “conserve and preserve the assets” of the companies taken into conservatorship and “restore them to safe and sound condition.” But, at this point, neither goal is being advanced by the FHFA or the Treasury.
Under the conservatorship, the government received warrants to buy up to 79.9 % of GSE common stock for $0.00001 per share. To avoid putting the liabilities of the two GSEs on the government’s books, the government’s share had to remain just under 80 %. The shareholders, with zombie stock and no rights or remedies, were left to own the other 20 %.
The federal government – the Treasury, FHFA, and Congress – exploited and ignored the GSEs’ shareholders with zombie stock, and stuck them in financial limbo. The GSEs were required to pay above-market 10 percent dividends on Treasury’s investment, while many of the Wall Street banks that were bailed out with TARP money were required to pay dividends half of that rate. On top of this, the shareholders of their bailed out banks were preserved and given a chance to participate in their financial recovery. The federal government provided funds to help stabilize American
