Tags: Regulators | Fannie Mae | Freddie Mac | Mortgages

Regulators Urged to Set Fannie-Freddie Free From US Control

Thursday, 20 November 2014 01:07 PM

Tim Johnson, the South Dakota Democrat who wrote a bill to eliminate Fannie Mae and Freddie Mac, sat in the walnut-paneled chambers of the Senate Banking Committee and said Congress might never get rid of the two companies.

Johnson looked at Mel Watt, the director of the Federal Housing Finance Agency who was testifying before the committee, and told him to terminate U.S. control of the two companies. That would end a six-year political battle over dissolving the two mortgage giants, giving them another chance to prove they can carry the home loan system as private companies.

“If Congress cannot agree on a smooth, more certain path forward, I urge you, Director Watt, to engage the Treasury Department in talks to end the conservatorship,” said Johnson, who is set to retire in December.

Johnson is the first lawmaker to publicly say that regulators may have to take control of the companies’ futures. He echoes the predictions of housing analysts that there is no chance the Republican leadership taking over the Senate will reach an agreement with Democrats and President Barack Obama to reform a system that guarantees affordable mortgages to most Americans. That would leave the overhaul to Watt, who has already begun to make a series of changes, from streamlining operations to transfers of mortgage-bond risk to private investors.

“If we could get Congress to do something that would pass, it would be the best solution,” said Clifford Rossi, a finance professor at the University of Maryland’s Robert H. Smith School of Business in College Park. “But it’s clear that it’s highly unlikely, particularly after the midterm elections, that we’re going to get legislation again.”

Shares of Fannie Mae and Freddie Mac soared Wednesday on the news. After the hearing, Watt told reporters that he wouldn’t rule out talks with Treasury about ending conservatorship in the long term. Fannie Mae shares ended the trading day in New York up 13 percent to $2.33. Freddie Mac rose 11 percent to $2.24.

Taxpayer Bailout

Fannie Mae and Freddie Mac, which buy mortgages and package them into bonds backed by a government guarantee, were seized by regulators in 2008 as losses on defaulted loans pushed them toward insolvency.

After a $187.5 billion taxpayer bailout, Fannie Mae and Freddie Mac rebounded and are now required to send the Treasury all of their profits. They’ve paid a combined $225.5 billion, which is counted as a return on the U.S. investment and not as repayment, leaving the government-sponsored enterprises without a legal avenue to exit conservatorship on their own. The U.S. government owns a 79 percent senior stake in the two companies.

The extent of Treasury and FHFA’s power to free Fannie Mae and Freddie Mac from government control is under debate.

Jim Parrott, a senior fellow at the Urban Institute and former housing-policy adviser to Obama, said Treasury and FHFA would need congressional approval to change the current system.

“They can do a great deal administratively to prepare for the eventual exit or the eventual wind-down, but it’s very difficult for them to take the final steps that you’d need to take to transition to the new system,” he said.

The fate of current shareholders in the two companies also likely rests with Congress, Parrott said.

Interim Steps

Rossi said his reading of the laws that created the conservatorship lead him to the opposite conclusion.

“Can the FHFA actually take action without Congress?” he said. “The answer to that is yes.”

Watt said Treasury would have to initiate talks with him if Congress isn’t able to come up with a solution. Treasury spokesman Adam Hodge said the Obama administration “continues to believe that the best way to responsibly end the conservatorship is through comprehensive housing finance reform legislation.”

Watt has been working with executives at Fannie Mae and Freddie Mac on interim steps to change the way mortgages are securitized and reduce the amount of risk backed by taxpayers.

The two companies, which back $5 trillion in mortgages, have been experimenting with deals in which they transfer a portion of their credit risk to private investors. They’ve completed $352 billion in such deals, Watt said yesterday.

Common Security

Fannie Mae and Freddie Mac each currently issue their own mortgage bonds. At the direction of the FHFA, they’re working on developing a single common security.

Those are necessary steps toward a future housing-finance system, said Julia Gordon, director of housing finance and policy at the Center for American Progress, a group affiliated with Democrats. Still, she said, only Congress can determine whether there will be a government guarantee if a new system is created or if Fannie Mae and Freddie Mac are allowed to become independent again.

“All of that can help reduce risk, but at the end of the day, if something happens — say there’s some external factor that tanks the economy — is the government making good on these bonds or not?” she said.

Some of the strongest support for keeping Fannie Mae and Freddie Mac operating is coming from consumer advocates and civil-rights groups which see the companies as the best way to guarantee that low-income families and minorities have access to the mortgage market. Those groups helped stall the legislation winding down the two companies this year as they lobbied Democrats including Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio not to support it.

Private Label

In a letter to Watt on Nov. 18, they said they believed he could act without Congress to allow Fannie Mae and Freddie Mac to accumulate capital and unwind the conservatorship.

“Given the demise of GSE overhaul legislation on Capitol Hill, it is clear that any successful policy must involve strong leadership into the future by Fannie Mae and Freddie Mac,” Wade Henderson, president of the Leadership Conference on Civil and Human Rights, and Janet Murguia, president of the National Council of La Raza, wrote to Watt.

If there were more support for a private label market, Fannie and Freddie could be liquidated, said Patricia McCoy, a professor at Boston College Law School and former assistant director for mortgage markets at the Consumer Financial Protection Bureau. Since that isn’t likely, she said, the more realistic options are for Watt to end the conservatorship or keep things as is.

“It’s a lot safer for Watt to preserve the status quo keeping them in conservatorship and then see how things play out on the Hill,” McCoy said. “Then he can tinker around the edges.”

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Tim Johnson, the South Dakota Democrat who wrote a bill to eliminate Fannie Mae and Freddie Mac, sat in the walnut-paneled chambers of the Senate Banking Committee and said Congress might never get rid of the two companies.
Regulators, Fannie Mae, Freddie Mac, Mortgages
Thursday, 20 November 2014 01:07 PM
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