Watt: “Financial Operations of Fannie Mae Have Stabilized To A Sufficient Level” by Todd Sullivan, ValuePlays

In 2008 HERA created the Housing Trust but also allowed for the suspensions of payments to it from the GSE’s via edict from FHFA under the following conditions:

HERA authorizes the Director of the Federal Housing Finance Agency (FHFA) to suspend these allocations temporarily upon a finding by the Director that such allocations (1) are contributing, or would contribute, to the financial instability of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA); (2) are causing, or would cause, Fannie Mae to be classified as undercapitalized;

In July 2013 FHFA said when housing groups sued FHFA for the non-payments:

FHFA spokesperson said agency officials are reviewing the lawsuit. “But it is important to note that in 2008 when the Affordable Housing Trust Fund payments were suspended, in line with governing law, the financial viability and future of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was uncertain; that remains the case today,” the FHFA spokesperson said.

Today director Watt has directed the GSE’s to resume payments because:

1) The Director of FI-WA had the authority to temporarily suspend the set aside and allocations under Section 4567(b) and exercised his discretion to do so temporarily under the circumstances that existed at that time. However, circumstances have changed and the temporary suspension is no longer justified;

2) The set aside and allocation would not contribute to the financial instability of Fannie Mae as provided in Section 4567(b)(l) in that the financial operations of Fannie Mae have stabilized to a sufficient level. This is evidenced by the fact that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) has not required a draw from the Department of the Treasury under the SPSPA since the fourth quarter of 2011 and since 2013 Fannie Mae has paid approximately $99 billion in dividends to the Treasury Department. This determination relates solely to whether contributions to these Funds would cause financial instability and is not a finding for any other purpose;

Now, of course the last sentence there is directed at those wanting the GSE’s out of conservatorship. But it is a hollow sentence in that the entities cannot now be in a “safe and solvent condition” for one purpose and not for another. They either are or they aren’t. Let’s go to the FHFA’s own words to determine when the conservatorship should end:

From the FHFA

Q: What are the goals of this conservatorship?

A: The purpose of appointing the Conservator is to preserve and conserve the Company’s assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly to the instability in the current market.

There is no reason for concern regarding the ongoing operations of the Company. The Company’s operation will not be impaired and business will continue without interruption.

Q: When will the conservatorship period end?

A: Upon the Director’s determination that the Conservator’s plan to restore the Company to a safe and solvent condition has been completed successfully, the Director will issue an order terminating the conservatorship. At present, there is no exact be given as to when this conservatorship may end.

But, what is the Housing Trust Fund:

The National Housing Trust Fund (Trust Fund) is a permanent federal fund authorized by the Housing and Economic Recovery Act of 2008 (HERA). It provides grants to states to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low-income families and individuals.

HFAs and the Trust Fund

Each state will decide whether its HFA or another state entity will receive these grants, which will be allocated according to a needs-based formula to be developed by HUD. Eligible Trust Fund activities are defined as the production, preservation, and rehabilitation of rental housing; and the production, preservation, and rehabilitation of housing for homeownership, including down payment assistance, closing cost assistance, and assistance for interest rate buy-downs. All assistance must be used to benefit very low-income families (with incomes not greater than 50 percent of area median income (AMI)) and at least 75 percent of assistance received must be used to benefit extremely low-income families (with incomes not greater than 30 percent of AMI). State spending on homeownership activities is limited to not more than 10 percent of total assistance provided.

HERA requires Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (the GSEs) to transfer a percentage of their new business to finance the Trust Fund. Since enactment of the legislation, Fannie Mae and Freddie Mac have been placed into conservatorship. Their conservator, the Federal Housing Finance Agency (FHFA), has directed the GSEs to suspend their contributions to the Trust Fund indefinitely because it has determined they are undercapitalized.

So the Housing Trust Fund is controlled by HUD, not the GSE’s and this matters because of below:

From the Senior Preferred Stock Agreement between Treasury and FHFA/GSE’s (link)

5.1. Restricted Payments. Seller shall not, and shall not permit any of its subsidiaries to, in each case without the prior written consent of Purchaser, declare or pay any dividend (preferred or otherwise) or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any of Seller’s Equity Interests (other than with respect to the Senior Preferred Stock or the Warrant) or directly or indirectly redeem, purchase, retire or otherwise acquire for value any of Seller’s Equity Interests (other than the Senior Preferred Stock or the Warrant), or set aside any amount for any such purpose.

So, if the FHFA is directing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to make a payment to another entity other than Treasury, according to the SPSA Treasury has signed off on it.  We can also then gleam that Treasury agrees with FHFA that the entities are in a “sound and solvent” condition in that they are able to make the payments with no risk the the financial conditions of the GSE’s.

Soooo, why are they still in conservatorship?

Watt: "Financial Operations of Fannie Mae Have Stabilized To A Sufficient Level"