Fannie Mae, Freddie Mac: U.S. House Panel Focuses on Capital by Investors Unite

Federal Housing Finance Agency Director Mel Watt testified yesterday before the U.S. House Committee on Financial Services.  Unfortunately, much of what was discussed echoed the misguided and illegal decisions made by his predecessor, Ed DeMarco.

Republicans on the panel raised a bit of a ruckus about Mr. Watt’s decision that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will again divert funds to the affordable housing trusts.  That wasn’t surprising to us, but we were pleasantly surprised that these Republicans were pointing out that Fannie Mae and Freddie Mac were undercapitalized by the Third Amendment, putting taxpayers at risk. Congressman Lutkemeyer was among the first to orient his questions around the need for Fannie Mae and Freddie Mac to retain capital.  Congressman Barr later followed, asking why Fannie Mae and Freddie Mac are still in conservatorship if they are adequately capitalized.

Watt seemed almost apologetic at times, stating that his predecessor had made the decisions he now lived with.  He’s right of course.  Former FHFA Director Ed DeMarco, and not Watt, made the decision to allow Treasury to deprive Fannie Mae and Freddie Mac of all of their capital.  Recall that back in October, DeMarco appeared at the annual Housing Summit for the Bipartisan Policy Center and told the crowd this:

“During my tenure, I believe that FHFA had a responsibility not just to operate the conservatorships according to the law, but to be attentive to the direction the administration and lawmakers were going.”

Here’s the thing, though: it’s not up to an agency director to make law.  In fact, Congress has already made a law governing the conservatorship – it’s called HERA.   So when Director Watt tells a House Committee that even though the PSPA changes championed by DeMarco trumps HERA, and that he now has to live with these changes, he’s just factually wrong.  We can’t think of another instance in which an agreement between two federal agencies trumps federal statute, and this is no exception.

All in all, it was refreshing to see Members focused on capital at yesterday’s hearing.  Fannie Mae and Freddie Mac are systemically important institutions by any definition.  As such, they require capital.  But by taking all of their profits, the government is making it impossible for the GSEs to build capital. In addition to robbing investors of their contractually owed dividends, the Sweep is fully putting taxpayers on the hook for any losses that Fannie Mae and Freddie Mac might sustain because the companies cannot build capital. If the GSEs were to face a downturn, and need to draw on capital, there will be nowhere to turn except the taxpayer.

Finally, Investors Unite thanks Congresswoman Maxine Waters for noting in yesterday’s hearing that Fannie Mae and Freddie Mac have repaid the taxpayers more than they were loaned in the first place.

The Investors Unite Twitter account kept a good record of the exchanges that occurred during the four-hour hearing. You can find our Twitter account here.

Fannie Mae, Freddie Mac: U.S. House Panel Focuses on Capital