Will Congress Listen to Mel Watt On Fannie Mae?

Will Congress   Listen to Mel Watt On Fannie Mae?
By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

When Federal Housing Finance Agency (FHFA) Director Mel Watt testifies before the House Financial Services Committee on Tuesday, October 3rd he will almost certainly reiterate that Fannie Mae and Freddie Mac’s lack of buffer capital poses an imminent threat to taxpayers.  Unfortunately to date, his warnings to Congress have fallen on deaf ears.

The committee’s chairman, Rep. Jeb Hensarling, R-TX, and many lawmakers seem to believe even the most prudent actions to address immediate realities facing the government sponsored enterprises’ balance sheets will set in motion so-called “recap and release” from the conservatorship under which GSEs have operated for nine years. Having set up this straw man argument, these lawmakers demand the sole right to determine the fate of the GSEs – specifically to dismantle them and replace them with a yet-to-be defined structure.

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It has been over a year and a half since Watt spoke in stark terms of the consequences of the Net Worth Sweep, the policy shift the Obama Administration orchestrated in 2012 that compels the GSEs to turn their profits over to the U.S. Treasury each quarter. In a February 2016 speech at the Bipartisan Policy Center Watt sought to spur action on GSE reform saying, “The most serious risk and the one that has the most potential for escalating in the future is the Enterprises’ lack of capital.”

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Since then, the GSEs’ capital has just kept rolling into Treasury’s coffers. The latest installment of $5.1 billion arrived last Friday September 29 – – $3.1 billion from Fannie and $2 billion from Freddie. That brings the total to about $268 billion – and about $85 billion more than the $187.5 in emergency loans the GSEs were provided during the 2008 financial crisis. It also leaves companies that back over $5 trillion in home loans with a little more than a half billion in reserve capital between them. By the start of 2018 they will have no reserve capital. At that point, even relatively small losses will have to be covered by public funds – by any definition, a bailout.

A few weeks ago, a number of groups that represent smaller lenders urged Watt to use his authority to build a cushion and develop a recapitalization plan. Last month, Sen. Sherrod Brown, D-OH, and five fellow Democratic senators wrote letters to Watt and Mnuchin urging that Fannie and Freddie build up some reserve capital.

During Mel Watt’s tenure as FHFA Director, Fannie and Freddie have been substantially de-risked.  The companies have dramatically trimmed their holdings, shifted billions in mortgage risk to the private sector, and adopted safeguards to prevent a returning to overleverage of the pre-crisis years.  It’s time to finish the job.  HERA explicitly gives Watt the authority to act unilaterally as conservator, but he has been working, in vain, to forge consensus.  He has not shied away from warning that a draw on Treasury funds would be disruptive to the mortgage market. Late last month, Watt reiterated his concern about the dwindling buffers and said FHFA was “committed to working with Secretary Mnuchin to address the issue.” He has also tried to assuage the fears of policymakers by explaining that maintaining reserve capital is not the last word in GSE reform. Indeed, any lawmaker who wants meaningful GSE reform should recognize that the goal will be easier to attain if Fannie and Freddie are not the center of an explosive political battle over their perilous financial condition.

If Watt was still a member of the Financial Services Committee, among the questions he might ask a FHFA director is why it makes sense for Fannie and Freddie to send Treasury money the companies would in turn need to tap when their backup capital vanishes next year. He might also observe that if his fellow lawmakers felt strongly about GSE reform, they should have come up with a workable bipartisan plan in the last eight years.

But Watt isn’t in Congress anymore.  As FHFA director, he has the authority to act on his own public recommendations, power granted to him specifically by HERA.  He should use it, and act to defend taxpayers. Nobody would be able to credibly argue that he didn’t give Congress their chance.

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