Senate Banking Committee Chairman Richard Shelby (R-AL) asked the Government Accountability Office (GAO) and Congressional Budget Office (CBO) on April 18 to look into a series of recent decisions by the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac’s regulator. With their capital buffers scheduled to decline to zero by the end of next year, all Fannie and Freddie’s future profits will be swept to Treasury under the current bailout agreement - leaving a situation where a draw on Treasury becomes inevitable. Ultimately, the probe request by Senator Shelby is just one of numerous actions and news stories related to Fannie and Freddie that, as a whole, are raising eyebrows in Washington.
A Call for Action
Senator Shelby has asked the GAO to study whether the goals of Fannie and Freddie’s FHFA conservatorship have changed. He’s concerned that recent FHFA decisions, like permitting lower down payments on mortgages Fannie and Freddie purchase, is boxing out private competition or that channeling their profits to a pair of affordable housing trust funds may create additional burdens on taxpayers. As a result, Senator Shelby is asking the GAO to estimate the potential cost and barriers of entry for future competitors and for broader studies on how to reform the system. This includes how much capitol should backstop future loans and whether housing subsidies are encouraging additional debt.
In a letter to the CBO, Senator Shelby stressed concerns about a potential future bailout. He also emphasized that allowing Fannie and Freddie to rebuild capital "could potentially reduce incentives for Congress to enact statutory reforms.” Senator Shelby asked the CBO to study the consequences if Fannie and Freddie were allowed to dedicate some profits to rebuilding capital reserves - asking how taxpayers, the market and the federal budget would be impacted.
FHFA Acknowledges Capital Concerns
FHFA Director Mel Watt even acknowledged in a recent speech that Fannie and Freddie are unable to build capital due to the provisions of the Senior Preferred Stock Purchase Agreement. He expressed concern that a future draw on Treasury could lead to a legislative response adopted in haste or without the necessary forethought. Similarly, six House members are preparing a letter to Director Watt citing his remarks and asking him to begin to recapitalize Fannie and Freddie.
In addition, Representative Mick Mulvaney (R-SC) introduced a bill on April 11 that would enable Fannie and Freddie to recapitalize. Under the legislation, Treasury would keep all past payments, but moving forward Fannie and Freddie would retain their net income until each builds up a 10 percent risk adjusted capital base. The bill also calls for their FHFA conservatorship to come to an end after that capital reaches 5 percent.
More Spending, Less Capital
Several moves by FHFA are what is escalating Fannie and Freddie capital concerns on Capitol Hill. Specifically, they recently made their first contribution to the National Housing Trust Fund (NHTF) - totaling $186 million - for the production and preservation of affordable housing for low-income families nationwide. Never one to mince words, Representative Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said the decision “sows the seeds for the next housing crisis.”
This month, FHFA also announced a one-time Principal Reduction Modification program aimed at assisting seriously delinquent, underwater borrowers whose loans are owned or guaranteed by Fannie or Freddie.
Despite all the talk and focus, reform of Fannie and Freddie is unlikely during this election year. Nevertheless, NMHC/NAA continue to be engaged with policymakers and agency officials to ensure that the multifamily industry’s interests are protected.
- Treasury and FHFA Take First Step Towards Ending GSE Conservatorship
- A Closer Look at FHFA’s Guidance for Multifamily
- FHFA Director Announces New Multifamily Loan Purchase Caps at NMHC’s Fall Meeting
- NMHC Members Meet with Leading Lawmakers
- FHFA Director Mark Calabria Announces Plan to Revise Multifamily Loan Purchase Caps at NMHC’s Fall Meeting