Leaked Treasury Memo On Fannie Mae, Freddie Mac Shows Fraud Says Pagliara by Chad Truelove, CapWealth Advisors
Winding down Fannie Mae and Freddie Mac, says Goldstein in the memo, is a “bank-centric model” that “benefits larger institutions,” putting the system at risk with lenders too big to fail and raising costs for borrowers from smaller institutions. The memo goes on to state that ending Fannie Mae and Freddie Mac would imperil the 30-year, fixed-rate mortgage and “markets would be subject to greater swings in spreads and liquidity and credit pricing would be more pro-cyclical.” Furthermore, it contradicts Treasury’s public claims that the GSEs would need a capital ratio of 10% by saying the number is actually closer to 3-4%.
In short, it’s a top official at Treasury making the exact same warnings and capitalization arguments that Tim Pagliara, Investors Unite, many of the nation’s legal and economic experts, and a host of GSE shareholders across the country have been making for years.
Says Tim in a HousingWire article published today (read it here):
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
“I think part of what’s going on is that people have some explaining to do, because they need to explain how they said they had to have a 10% capital requirement and their own people said it’s 3%-4%,” Pagliara said. “This isn’t some one-off, it was signed off on by seven people in Treasury including the general counsel’s office. When the private sector is saying that you need 2.5%-5% capitalization and they ridicule and attack you, then you see the inconsistency when Treasury itself is saying 3%-4%.
“We have said all along that any of these plans to get rid of the GSEs put the 30-year mortgage in jeopardy, and they said it doesn’t,” Pagliara said.
The memo does state that under the option of winding down Fannie Mae and Freddie Mac, the downside would be that it would “reduce prevalence of 30yr fixed rate mortgages and predominance of 3yr and 5yr hybrids” among other problems.
“You have to explain to affordable housing people that even the Treasury finds that it would put 30-year mortgages and affordable housing in jeopardy,” Pagliara said.
But he said the memo’s most damning content is that, he believes, it shows a clear violation of federal law in two primary areas.
“One, they knew that FHFA has the ability to end conservatorship and was supposed to be an independent agency. These are smart people. They understood what they were doing,” Pagliara says. “And two, they violated it with full understanding of what HERA was and was intended to do – to preserve and protect the housing system and put it on sound footing.”
Pagliara says that with the money Treasury has already taken out of the GSEs, it could have fully recapitalized Fannie Mae and Freddie Mac at the 3%-4% level the Treasury memo states is needed.
“The GSEs are far more profitable than anyone thought. That’s why they paid $10.2 billion in income tax last year – making them (together) the fourth-largest taxpayer behind Apple, Chevron and ExxonMobil,” he said. “You don’t destroy a profitable taxpaying industry. Why is the Treasury doing this? They have a lot of explaining to do. This is fraud.”
Read the full, 8-page memo below.