David Stevens to Mel Watt: You Better Not Even Think about Doing Your Job by Investors Unite
The saga of Fannie and Freddie keeps getting stranger. This week in a commentary in The Hill, Mortgage Bankers Association President David Stevens provided an astounding rationale for warning why Federal Housing Finance Agency Director Mel Watt should refrain from any moves to recapitalize Fannie Mae and Freddie Mac.
First, he said that if FHFA were to allow the GSEs to retain capital, “it would be doing so in direct defiance of both the Administration and Congress.” He might be right but this is ironic. The Housing and Economic Recovery Act required FHFA, as conservator, to return Fannie and Freddie to “a sound and solvent” condition precisely so they could be released to perform their historic roles in housing finance. Congress grabbed back the authority it gave FHFA with the oddly-named Jumpstart GSE Reform bill late last year. It was passed after years of stalemate between various factions in Congress and the Administration. Rather than advancing the reforms Stevens says are needed, the bill largely codifies the status quo and allows the continuation of Treasury’s program of confiscating the revenues of Fannie and Freddie. In essence, Treasury has effectively prevented the legally appointed conservator from carrying out HERA and Congress has moved to tie FHFA’s hands even more tightly.
Is value investing dead? These managers don’t think so
Second, Stevens asserted once again that the lack of a capital buffer for these trillion-dollar institutions is not the problem Watt says it is. The reason is that the Treasury stands ready to provide credit lines of up to $200 billion in securities. He confidently asserts that, “these lines of credit eliminate any real economic risk, to either institution or to the investors in their securities.” What about taxpayers? Where does the Treasury’s backstop money come from?
Third, Stevens acknowledged that FHFA has undertaken a lot of the structural reforms many agreed were needed to correct distortions that fed the scope and depth of the 2008 financial crisis. But he presented “recap and release” as antithetical to reform. In fact, both are needed. The diverse group of community lenders, civil rights groups, individual shareholders and major investors has repeatedly said it would be ill-advised to return to the pre-2008 arrangement. They just don’t think pillaging the capital of private companies is the way to advance reform. If Fannie and Freddie had retained the roughly $260 billion they have been forced to surrender to Treasury since 2012, comprehensive reform would have been an easier undertaking.
In addition, the reforms he cited, such as the creation of a single security and constructing the Common Securitization Platform, are incremental steps with possible unintended (or intended) consequences. A year ago, we noted the Community Mortgage Lenders of America and the Community Home Lenders Association wrote to Watt to raise concerns the CSP could benefit the nation’s largest banks disproportionately. On top of that, William Isaac, a former chairman of the Federal Deposit Insurance Corporation, has raised serious questions about whether there are adequate capital pools as FHFA seeks to transfer more risk to the private sector.
Finally, Stevens impugned the motives of those who argue for recap and release. He suggests there is something unholy in the alliance of housing advocates and everyday Americans who made what they figured was a good investment in Fannie and Freddie. Let’s be clear: Investors who want their investments to be profitable have no stake in the failure of the secondary mortgage market and restricted access to capital for aspiring homebuyers. There is nothing cynical in finding common purpose with those whose chief mission is expanding access to affordable housing and homeownership. Mortgage bankers have no monopoly on virtue when it comes to the health of the housing finance system. It is disingenuous to cast banks as non-profits when in fact lending money to make money is their business.
Stevens can probably rest assured that Director Watt is not going to unilaterally allow Fannie and Freddie to retain their capital. Watt likely cares deeply about the long-term health of the secondary mortgage market and appreciates is importance to average Americans. That is why he has turned up the volume on his warnings that letting their capital levels dwindle to zero is perilous.
All stakeholders – from mortgage bankers to civil rights groups – want a housing finance system that serves working families, taxpayers, and investors. It is regrettable that recapitalization and reform of the GSEs envisioned by HERA has not happened and has even been impeded by Congress and the Treasury in recent years. We hope comprehensive reform that affirms the missions of Fannie and Freddie, protects taxpayers and honors obligations to shareholders will one day be achieved. For now, it is hard to see how depleting them of capital and piecemeal reforms is the best path for getting there.