MBA Introduces GSE Reform Proposal
With government-sponsored enterprise (GSE) reform highly likely under the new administration, the Mortgage Bankers Association (MBA) is wasting no time and in February introduced its own proposal for what should happen to Fannie Mae and Freddie Mac.
Similar to previous proposals that have been floated about during the past several years by various groups (including the association), the MBA’s plan calls for the GSEs to be “congressionally re-chartered” – in other words, re-privatized – and, importantly, calls for an “explicit guarantee” on the mortgage-backed securities they issue.
The MBA’s plan, as outlined in a soon-to-be-released white paper, calls for the establishment of a “new, durable foundation for the secondary mortgage market,” the MBA says in a release.
Specifically, the white paper outlines a preferred end state, the principles that should be incorporated in any future system, and the key components and guardrails of the end state, as well as emphasizes the need to ensure a smooth transition to a reformed secondary mortgage market.
The white paper, which will likely be released in April, is derived from the work of the MBA’s Task Force for a Future Secondary Mortgage Market, which considered the benefits and drawbacks of many potential models in developing its recommendation.
Consistent with the MBA’s previous recommendation, the paper calls for an “end state that would encourage multiple guarantors” that “would be organized as privately owned utilities with a regulated rate of return.”
These guarantors “could purchase from a newly created insurance fund an explicit federal guarantee on a defined class of eligible securities,” the MBA says in a release. “The guarantee would only be for the securities and not the entities issuing them.
“The entities would have a public purpose of providing sustainable credit availability to the conventional single-family and multifamily mortgage market and providing equitable access to lenders of all sizes and business models,” the MBA says. “To address underserved markets nationwide, the entities would be responsible for executing an affordable housing strategy to ensure broad access to credit.”
The full white paper will also include more detailed end state reform recommendations, including a comprehensive transition plan and affordable housing strategy.
Appeals Court Rules Against Fannie, Freddie Investors
A federal appeals court in February issued a ruling that will prevent investors in government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac from fully recouping on their investments.
Investors from Perry Capital and others allege that they were illegally duped out of the gains on their shares in the companies when the Treasury Department in 2012 implemented the so-called “third amendment sweep,” which allowed the U.S. government to “sweep” all of the GSEs’ profits to the Treasury.
In a 2-1 ruling, however, the D.C. Court of Appeals ruled that shareholders cannot pursue their claims related to the sweep, basically because of the broad powers granted to the Federal Housing Finance Agency (FHFA), conservator for Fannie Mae and Freddie Mac, under the Housing and Economic Recovery Act (HERA). However, some of the investors’ claims are to be remanded back down to lower courts for future rulings.
As per the court’s ruling, certain “contract-based claims regarding liquidation preferences and dividend rights are remanded to the district court for further proceedings.”
The investors were hoping that, should the GSEs be taken out of conservatorship, which could happen soon under the Trump administration, they would be re-capitalized and re-privatized, which would then pave the way for investors to recoup.
Several other hedge funds have similar suits claiming the government was illegally seizing profits from Fannie and Freddie and destroying shareholder value.
In a statement, Tim Pagliara, founder of Investors Unite, a coalition of more than 1,100 Fannie Mae and Freddie Mac investors who are seeking to recoup on their stocks, says he is pleased that some parts of the suit will be allowed to move forward.
“We are pleased that the D.C. Circuit acknowledged that shareholders have direct contract rights, which must be respected, and we look forward to a resolution of those rights,” Pagliara says.
“We respectfully disagree with the opinion that FHFA has the power to do whatever it wants with Fannie Mae and Freddie Mac,” Pagliara adds. “Neither HERA nor any other statute gives it such power. Meanwhile, the net worth sweep continues to place the U.S. taxpayer at risk by depriving these companies of adequate capital. We hope that the Trump administration will put an end to this wrong by ending the sweep now and restoring the rights of shareholders.”
According to a statement on the Investors Unite website, investors can still appeal the D.C. Appeals Court’s decision to the U.S. Supreme Court.