Fannie Mae: Event on Capitol Hill Highlights Need for Reform

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Fannie Mae: Investors Unite Event on Capitol Hill Highlights Need for Reform, Exit from Conservatorship by Investors Unite

On Thursday, Investors Unite held an event on Capitol Hill to discuss how the government could end the conservatorship of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), allowing them to get fully back to their mission to underpin the foundations of the U.S. housing market, which is about 15 to 20 percent of the country’s economy.

Hosted by IU Executive Director Timothy J. Pagliara, the event was well-attended both in-person and digitally with about 100  U.S. Senate staffers, media and investors gathered to hear from  Professor Dr. Cliff Rossi, who has held senior executive roles in risk management at several of the largest financial services companies including Fannie Mae and Freddie Mac. Now at University of Maryland Smith School of Business Executive-in-Residence, Dr. Rossi released a white paper entitled “The Government’ Path Out of Conservatorship for Fannie Mae and Freddie Mac.” Dr. Rossi’s paper can be found here; below is an excerpt from the Executive Summary:

Keys to ending Fannie Mae, Freddie Mac conservatorship

Designing an exit from conservatorship for Fannie Mae and Freddie Mac would need to be carefully crafted in order to not disrupt the mortgage market. But as mentioned in the previous section, such an outcome would be less likely to disrupt markets than receivership for one or both entities. The keys to ending conservatorship lie in meeting the following requirements:

  • Development of a recapitalization plan that complies with FHFA’s capital buffers for the agencies;
  • Development of a set of stringent risk-based capital requirements that would be phased-in over a specified period of time;
  • Termination of the sweep of profits from Fannie Mae and Freddie Mac to Treasury;
  • Strict executive compensation requirements imposed by FHFA;
  • Accelerated wind down of both Fannie Mae and Freddie Mac’s retained portfolios.

“In August, we passed the two-year anniversary of the decision by Treasury to sweep 100 percent dividend profits from Fannie Mae and Freddie Mac,” Pagliara said. “This marks a historic milestone in our government’s blatant disregard for the rule of law and disrespect for marketplace standards. This unilateral decision by the Treasury if one of the main reasons Investors Unite exists.”

Other highlights from the event:

  • The conservatorship is a “bankruptcy without rules.” When Congress gave the Federal Housing Finance Agency the authority to enact and run the conservatorship, it did not envision a perpetual process in which profitable enterprises were nationalized without compensation to shareholders.
  • Treasury Secretary Jack Lew is being disingenuous when he says Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) cannot pass a stress test, Pagliara said. Of course they can’t – with the government sweeping up all of the companies’ profits denying them the ability to build and retain capital there is no chance either could pass a stress test. And yet, regulators will use such results to inappropriately claim Fannie and Freddie should remain under the government’s heavy boot.
  • The Third Amendment sweep is also damaging investor confidence, causing them to be wary of and reconsider investing in the GSEs. But the lack of strong private investment hits Americans hard because it imperils the availability of the 30-year, fixed-rate mortgage and increases the likelihood of higher mortgage rates.
  • The Millennial Generation has the lowest percentage of homeownership of any previous generation. Those in their mid-20s to mid-30s, who should be well positioned to obtain affordable mortgages, are unable to get financing, creating, in Pagliara’s words, “a generation of debtors, of renters” who cannot enjoy the financial stability or equity that is built through home ownership.

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