Former Clinton administration official Robert Shapiro, who also advises senior members of the Obama administration, reiterated the need for a 4-pronged approach to Fannie Mae and Freddie Mac reform last week in an article for Bloomberg Government.
The article, “Protecting the economy and homeowners: Four ways to restore Fannie and Freddie,” acknowledges the many reasons why Obama should be proud of his tenure in office – 14 million new jobs, record profits, an unemployment rate of just 5%, and growth that has outpaced other global economies. The elephant in Obama’s legacy will be housing finance reform if the administration leaves it unaddressed.
Fannie Mae, Freddie Mac reform must entail four key pieces
To ensure Fannie Mae and Freddie Mac can withstand a downturn in the economy in the future, Shapiro says reform must entail four key pieces.
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- Ensure the GSEs’ solvency by allowing then to maintain capital reserves of four percent, which is consistent with the Treasury’s 2011 internal analysis recommending capital reserves of three to four percent.
- Allow the GSEs to rebuild capital. “In recognition of Fannie Mae and Freddie Mac’s repayments to the government of $239 billion, again some $50 billion more than they received in bailout payments, the Treasury would close the books on any remaining balance which they owe,” Shapiro wrote. And music to investors’ ears: “Therefore, the Treasury would end its quarterly sweep” of the GSEs profits so future earnings could be used to rebuild capital reserves and operating funds.
- Transition to private ownership by issuing $100 billion in new common stock in the equity market – again, to rebuild capital – but also to move back toward private ownership. Shapiro estimates issuing these new stocks and their retained earnings, coupled with the ending of the Treasury sweep, would be more than sufficient to reach four percent capital reserves.
- Fund affordable housing through the Housing Trust Fund and the Capital Magnet Fund, which were, after all, created by Congress in 2008 to support the construction of affordable rental housing. By transferring the Treasury’s warrants for 80% of Fannie Mae and Freddie Mac’s current common shares to the two trust funds, it would provide nearly $100 billion to endow efforts to create affordable housing. The end result would be 250,000 additional affordable rental housing units per year for 20 years, plus an additional 160,000 construction jobs per year, Shapiro estimates.
Shapiro’s article largely draws upon the whitepaper he co-authored with Dr. Elaine Kamarak, lecturer at the Harvard Kennedy School of Government and former advisor to Al Gore, last fall: “A Strategy to Promote Affordable Housing for All Americans by Recapitalizing Fannie and Freddie.”
While many would agree with Shapiro’s assessment that ending the Treasury’s sweep and “recapping and releasing” the GSEs are long overdue, they would likely have one point of contention with Shapiro’s latest article. “The Obama Administration and Congress clearly have the ability to carry out those reforms, especially by underwriting the operating terms and mission requirements of Fannie Mae and Freddie Mac,” Shapiro argues.
No matter how amenable the bones of Shapiro’s plan may be, there are few who would agree that the Obama administration or this Congress have the aptitude to pass any meaningful reform at this stage in the game. Any efforts will be piecemeal at best, with the Obama administration already declaring it has no intention of recapitalizing and releasing the GSEs in the foreseeable future.
Sounds like the advisor’s advice is falling on deaf ears—yet again.