Will housing finance reform ever really happen? At this point, it has become a sad case of neglect. In early October, Mel Watt, director of the Federal Housing Finance Agency, told members of the House Financial Services Committee that government-sponsored enterprise (GSE) reform is needed urgently, mainly because Fannie Mae and Freddie Mac’s Treasury “buffers” will be drawn down to zero by the end of this year, leaving taxpayers vulnerable to another bailout should either company fall into the red.
In September, the GSEs entered their 10th year of conservatorship – which seems hard to believe. Although there have been numerous housing finance reform proposals introduced in Congress during the past several years, there is yet to be a consensus on which path forward is the safest for the industry and for consumers.
The urgency now, as Watt said, stems from the fact that the dollar limits set out in the GSEs’ Senior Preferred Stock Purchase Agreements (PSPAs) with the Treasury are set to wind down by Jan. 1, 2018.
“As a result of prior draws totaling $187.5 billion against the PSPA commitments, the PSPA commitment still available to Fannie Mae is now limited to $117.6 billion, and the commitment still available to Freddie Mac is $140.5 billion,” he said. “Additional draws would reduce these commitments further; however, dividend payments do not replenish or increase the commitments under the terms of the PSPAs.”
Interestingly, Watt and the FHFA are in the somewhat tricky position of possibly having to tell Fannie and Freddie to build up their capital reserves in order to protect against a taxpayer bailout. As Watt told Congress, it is the FHFA’s mandate, as conservator of the GSEs, to ensure that each enterprise “operates in a safe and sound manner” and fosters “liquid, efficient, competitive and resilient national housing finance markets.”
However, the FHFA has to be exceedingly careful to emphasize that by building up the companies’ buffers, it is not preparing them for “recap and release.” That’s why Watt has repeatedly said that GSE reform is the domain of Congress, not the FHFA.
It is a fine distinction but a very important one for the FHFA: One could easily argue that by ordering Fannie and Freddie to build up some reserves, they are, in effect, being told to “recapitalize.” However, in this case, the FHFA’s telling the GSEs to add some “buffer” is not the same thing as the companies’ recapitalizing themselves in preparation to be released back to the private market, mainly because the process is entirely different.
It’s kind of ironic that the watchdog of the GSEs is frantically telling Congress to take them out of conservatorship and yet there is currently so little attention being paid to the topic of GSE reform.
It’s also kind of ironic that the FHFA finds itself in the precarious position of possibly having to build up the GSEs’ capital buffers while at the same time trying not to influence policymakers regarding which path to take to reform.
Although Watt said it would be “irresponsible” to let the GSEs’ capital buffers drop to zero – which could, he said, result in a loss of investor confidence – the FHFA at the same time can’t wait for Congress to act on GSE reform. As he indicated, the FHFA won’t hesitate to have the companies start building reserves in order to protect taxpayers.
Should the FHFA decide to have the GSEs build some reserves, that action should not be misconstrued as “interference with the prerogatives of Congress” or as “an effort to influence the outcome of housing finance reform.”
For now, all we can do is pray that it doesn’t take a serious problem in order for GSE reform to finally become a reality.
SME concurs with Watt: Conservatorship is unsustainable, and GSE reform needs to happen yesterday.