Advisors to Clinton, Gore and Obama Admin.’s Lay out Fannie Mae and Freddie Mac Reform Strategy “for All Americans” – but, not really (all Americans) by Amanda Maher
In what some are considering a blow to the Obama Administration’s position on the “recap and release” of Fannie Mae and Freddie Mac (which is not to do so), an advisor to the administration released a report yesterday titled, “A Strategy to Promote Affordable Housing for All Americans by Recapitalizing Fannie Mae and Freddie Mac”. The report is co-authored by Dr. Robert Shapiro, a former Clinton administration official and current advisor to senior members of the Obama administration, and Dr. Elaine Kamarck, a lecturer at the Harvard Kennedy School of Government and former advisor to Vice President Al Gore.
The plan lays out four key elements to the recap and release of Fannie Mae and Freddie Mac:
1) In recognition of Fannie Mae and Freddie Mac ’s repayments to the Treasury of $239 billion, some $50 billion more than they received in bailout payments, the Treasury would write off any remaining balance owed by the enterprises under the “Preferred Stock Purchase Agreements” (PSPAs).
The Rationale: Writing off the remaining balance owed to the Treasury would accrue to the Treasury’s stock warrants, which would in turn increase funding for affordable housing funds through the stock due under those warrants.
2) The Treasury also would end its quarterly claim or “sweep” of the profits earned by Fannie Mae and Freddie Mac, so their future retained earnings can be used to build their capital reserves.
The Rationale: The government’s current sweep of profits to the Treasury limit Fannie Mae and Freddie Mac ’s capacity to expand access to affordable rental and homeownership opportunities through the Housing Trust Fund (HTF) and the Capital Magnet Fund (CMF) – as directed by the Housing and Economic Recovery Act of 2008 (HERA). Ending the sweep would also make common stocks (which are depressed to approximately $2.20 per share today) more valuable.
3) Fannie Mae and Freddie Mac also should raise roughly $100 billion in additional capital through several rounds of new common stock sales into the market.
The Rationale: Selling of new common stock will allow Fannie Mae and Freddie Mac to achieve 4.0% capital reserves, which will provide a much needed buffer in the event of another housing crisis. (It assumes four rounds of public offerings to raise $25 billion each.) The plan also notes that this strategy would dilute common stock held by outside investors today, but suggests that as Fannie and Freddie become more profitable, the value of each share will rise and shareholders will still “likely” receive healthy dividends.
4) The Treasury should transfer its warrants for 79.9% of Fannie Mae and Freddie Mac’s current common shares to the HTF and the CMF, which could sell the shares in a series of secondary stock offerings and use the proceeds, estimated at $100 billion, to endow their efforts to expand access to affordable housing for even very low-income households.
The Rationale: The HTF would receive $3.2 billion over 20 years ($2.9 billion after administrative costs) and could be used to support state programs for access to affordable rental housing (90%) and homeownership programs (10%). The CMF would be able to distribute $1.7 billion per year to community development non-profit organizations.
The authors posit that “recap and release” would need additional regulations, such as continued government oversight, regular financial monitoring and examinations and risk assessments by the Federal Housing Finance Agency.
The elements of this plan, implemented collectively, will support the creation of more than 4.4 million new rental units and 456,000 new owner-occupied homes for low-income families, the authors suggest. It would also create more than 175,000 new jobs by providing nearly $100 billion in federal grants for state housing programs.
The authors are quick to point out the flaws in others’ proposals (notably, calling out the proposal by Senators Tim Johnson and Mike Crapo, and the Protecting American Taxpayers and Homeowners Act – e.g. the “PATH” Act).
But Shapiro and Kamarck’s plan is not without its own flaws, either.
To begin, the plan assumes that FHFA or any other governmental agency will be able to retain any semblance of real oversight if the GSEs are recapitalized and released. By the authors’ own admission, FHFA has “failed to take any additional steps to ensure compliance [with a 2006 mandate to implement an adequate risk management system], and acknowledged in late 2011 that it lacked the capacity to effectively monitor and regulate Fannie Mae and Freddie Mac’s activities.”
Second, the plan assumes a dramatic increase in the value of GSE stocks. Given the agencies’ track record in recent years, few investors will be chomping at the bit to pay up for such an uncertain product in the midst of a still-unstable economy.
Third, if the goal is to help more low-income families buy homes, this plan misses the mark. Directing funds into HTF and CMF will have little impact on homeownership because of existing HERA regulations. For example, only 10% of grants from the HTF can be put towards homeownership – the other 90% must be used for affordable rental housing projects. Affordable rental housing does not help low-income families buy homes and build equity. Moreover, HERA stipulates that 75% of funding go to assist families with incomes below the poverty line or with incomes of less than 30% of the local median income. It is highly unlikely that families who are this low-income will be able to meet banks’ still strict lending requirements.
Given the restrictions imposed by HERA on the HTF and CMF, the plan – despite its title – does little to address housing for middle-income residents, a demographic that is increasingly burdened by the cost of housing but for which new construction offers little promise. Most new construction is concentrated in the luxury market; affordable housing can be built through subsidies such as the Low-Income Housing Tax Credit.
There’s hardly any new product coming online for middle-income families, who don’t qualify for low-income housing and are now spending well above 30% of their incomes on housing. “In 2013, the median rent for units in new multi-family housing was $1,290 per-month, a level that exceeds the standard measure of 30% of gross income for an estimated two-thirds of renting households,” the report notes without providing any anecdotes.
Policymakers remain too focused on increasing the supply of low-income housing options while generally ignoring the plight of middle-income earners.
The report also looks at housing affordability in a vacuum. It assumes that recapping and releasing Fannie Mae and Freddie Mac will have a significant impact on housing affordability, that it will create new (mostly temporary construction) jobs – and those two results will strengthen the economy (generally) and provide new opportunity (specifically, for those who are lower-income).
While the report acknowledges that homeownership trends have been declining, the report ignores broader economic trends that may be having as big of an impact – if not bigger – than Fannie Mae and Freddie Mac lingering in conservatorship. For instance, wages remain relatively stagnant in the face of inflation, consumer spending habits are changing, and the world is experiencing one of the greatest demographic shifts of all time with hundreds of thousands of Millennials and Baby Boomers moving back to the urban core. That new single-family construction starts are lagging the pre-Recession rates, could indeed have less to do with FHFA policies and more to do with the fact that fewer people want to live in suburban communities. Instead, people are opting to live in downtown, urban environments, which explains the uptick in multifamily housing production post-Recession.
The good news, at least, is Shapiro and Kamarck are reigniting the conversation about housing finance reform. But realistically, their 43-page roadmap (of which, only 13 pages actually addresses reform; the majority of the report is background information or analysis of other reform efforts) only provides surface-level suggestions into the much more complicated reforms that are needed to transition Fannie Mae and Freddie Mac from conservatorship back into the private market. What’s more, unless any of these reform conversations are put into the context of broader economic realities, reforms will only move the needle so far on increasing opportunity for lower-income Americans.
