Politics

A Terrible Valentine’s Day For Fannie Mae And Freddie Mac

Fannie Mae ended 2017 with a loss of $6.5 billion, leaving it with a deficit of $3.7 billion. Taxpayers will need to fill the gap since Fannie and Freddie are locked in a government-run conservatorship. Expect another hit for taxpayers tomorrow when Freddie Mac posts its numbers for the final quarter of 2017.

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None of this is a surprise.  The ink was barely dry on the new tax law late last year when the red ink on the government sponsored enterprises’ ledgers appeared. The Treasury Department and the Federal Housing Finance Agency hastily struck a deal to let Fannie and Freddie keep $3 billion in earnings instead of handing the money over to Treasury. The brief suspension of the Net Worth Sweep was clearly intended to hedge against the hit Fannie and Freddie would take when the new tax law sharply reduced the book value of certain assets. Alas, the systematic depletion of the GSEs’ capital base under way with the Sweep since 2012 could not be so easily covered up.

In probably anticipation of the possible shortfalls the tax law would create for the GSEs, the Administration’s budget documents released Monday estimate Fannie and Freddie would need to draw $5.1 billion from the Treasury. That is taxpayer money Fannie and Freddie would have had no need for had they kept the nearly $100 billion in additional funds they sent to Treasury – after having had paid back the $187.5 billion in emergency funds they received at the height of the 2008 financial crisis.

The absurdity of Fannie and Freddie being forced to surrender a fortune to the Treasury only to be forced to then return hat-in-hand for another bailout is not lost on taxpayers or the GSEs’ shareholders. But do Congress and the Administration really get it?

The Administration’s proposed fiscal 2019 budget would hike the fee the GSEs charge lenders for the government’s implicit support for mortgage-backed securities by one tenth of one percent, to .2 percent, between now and 2023.  That would bring in an additional $25.7 billion over the next ten years, according to OMB. The underlying assumption is that, so long as the GSEs are wards of the state, policymakers might as well wring a little more money out of them. So much for the rights of the shareholders who own the companies.

Not surprisingly, the small hike in the fee was not presented simply as a revenue stream for a debt-laden blueprint but rather, as a way to continue to level the playing field for private-sector players who want to get back into the GSEs’ mortgage securitization business. Granted, most of these financial services firms abandoned this work when the housing market began collapsing in 2007, thus exasperating the crisis. Nonetheless, there is bipartisan support for staying the course with FHFA’s steps to shrink the GSEs’ investment portfolios and transfer risk to private sector players.  In this regard, the Administration’s budget reflects this.

The budget also underscores the uncertainty of federal support for affordable housing. With expected draws on Treasury funds, the budget proposal directs FHFA to suspend allocating money to affordable housing trust funds. This is consistent with requirements of the Housing and Economic Recovery Act, the law that created the conservatorships ten years ago.

For now, let’s assume the budget proposal is just a placeholder. As a rule, the President proposes, the Congress disposes. That adage might be more apt in a year when the Administration and key lawmakers say they are determined to finally come together on comprehensive housing finance reform. Fannie and Freddie’s draw on billions of dollars in public funds should leave policymakers no choice but to act.

But if GSE reform has become closer to reality this week, it is striking that two of Secretary Mnuchin’s three starting principles for reform have already been rendered obsolete: Protecting taxpayers from having to subsidize market downturns and maintaining the federal commitment to affordable housing. A third, preserving the 30-year-fixed rate mortgage, could be in jeopardy if Congress has its way.

Sen. Bob Corker, R-TN, appears to be so determined to dismantle Fannie and Freddie he may reconsidering his plans for retirement. A draft bill he is putting the finishing touches on would put the GSEs in receivership and gradually shift their functions to private sector entities. That bill would saddle taxpayers with the risk of backing the mortgaged backed securities these entities would generate. That was already making conservatives uneasy. This week’s draw should make them downright queasy.

The bill’s repeal of the GSEs’ charter could also mean a lot more uncertainty about affordable housing and the availability of products such as the 30-year-fixed-rate mortgage, which has enabled countless American families to achieve the dream of homeownership. This and the ramifications of draws on public funds for the affordable housing trust funds discussed in the President’s budget should stiffen the resolve of Democrats to oppose Corker’s bill even if it is co-sponsored by Sen. Mark Warner, D-VA.

Ideally, this pending draws on taxpayer funds will be just the kick policymakers need to end the conservatorships and create a system built on GSEs with adequate capital and regulatory restraints. Hopefully, the fiscal 2019 budget proposal will be the last one that couches Fannie and Freddie in guesswork, uncertainty and gimmickry. Policymakers have run out of time in addressing the last, and probably most important piece of unfinished business from the 2008 financial crisis. There are solid ideas out there for needed reform but should Congress again prove unable to agree on a long-term plan, Mnuchin should think seriously about using the authority HERA grants Treasury and FHFA to finish the job.

This has been a terrible Valentine’s Day for taxpayers, average people looking for decent affordable housing, and Fannie and Freddie’s shareholders. Maybe Christmas will be better.