This week’s announcement that Fannie Mae and Freddie Mac will again turn profits over to the Treasury highlights a missed opportunity for the Trump Administration and specifically for Treasury Secretary Steven Mnuchin to protect taxpayers and preserve affordable housing.
Whatever the reason for continuing the Obama Administration policy of looting Fannie and Freddie to pay for unbudgeted expenditures, the Treasury Department seems to be ignoring a proven reality: Large financial institutions should keep capital in reserve for rainy days.
The latest scheduled quarterly dividend payment had been watched particularly closely because it was the first tangible action by the new Administration on Fannie and Freddie. Since the Obama Treasury took advantage of the conservatorship in 2012 to implement the Net Worth Sweep and drain enough of Fannie and Freddie’s capital to weaken but not kill them, the situation for taxpayers, home buyers, capital markets and, of course, shareholders has gone from bad to worse. The day when the under-capitalized government sponsored enterprises come to the taxpayer for more money draws near.
Secretary Mnuchin has made clear he wants to get Fannie and Freddie out of the government’s control. Secretary Mnuchin, who once ran the mortgage securities trading desk at Goldman Sachs, also knows that financial institutions that stand behind some $5 trillion in home loan debt should have capital buffers. And he certainly appreciates that the political blowback of another taxpayer-funded bailout would be very unwelcome.
If Fannie and Freddie need more taxpayer money, it will be a glaring reminder of Washington’s persistent gridlock and the subordination of the interests of average Americans to politics. Ending the Sweep as soon as possible would allow President Trump to rack up a tangible accomplishment as guardian of taxpayers and average Americans struggling with housing affordability. Given the litigation over the Sweep, drawn out by the astonishing government secrecy, Trump could also make a down payment on his pledge to “drain the swamp” and restore the rule of law in Washington.
Earlier this week, a letter sent to FHFA director Mel Watt by Senator Bob Corker (R-TN) and a handful of other Senators opposed stopping the sweep of Fannie and Freddie’s dividends. The letter combined overreach and presumptuousness. Under the Housing and Economic Recovery Act (HERA), which created the conservatorship, FHFA and Treasury Department are in the driver’s seat on Fannie and Freddie. Look no further than the fact that the Net Worth Sweep became policy almost five years completely independent of Congress. Accordingly, the decision to suspend the Sweep and recapitalize the GSEs will be FHFA’s call – with Treasury’s blessing – and not Congress’s.
In addition, it is not clear what legislative efforts to overhaul housing finance are so imminent that the Administration should stand down for now. Congress has failed year after year to come up with an alternative housing finance model that omits Fannie and Freddie but would be demonstrably better for taxpayers, homebuyers or capital markets.
Congress will eventually assert its authority in either revamping or dismantling Fannie and Freddie but the Administration would be better positioned to drive housing policy’s direction by taking action on a major impediment to reform, the Net Worth Sweep. Suspending the dividend payments would be a first step in to free the Trump Administration of the illegal and misguided policies of the Obama years.
It would serve no one’s interest if Director Watt’s prediction about the consequences for taxpayers and housing affordability of leaving the GSEs without capital plays out. The sooner the GSEs can retain their earnings, the sooner they can be evaluated based on their actual financial performance and the easier it would be to devise a housing finance model that works for taxpayers, people wishing to buy a home, and investors like us.