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Bob Corker’s “Jump Start GSE Reform” Will Only Prolong the Conservatorship of Fannie and Freddie

Today’s Washington Post editorial “A New Housing Finance System” threw support behind legislation being championed by Senator Bob Corker (R-TN) that would prevent Treasury from selling any of its preferred equity in Fannie and Freddie without Congressional approval.  Ironically, putting the title of the editorial aside, there was very little in this piece which actually discussed a new housing finance system, and the editorial even admitted that Corker’s bill wouldn’t create one.   

In fact, Corker’s legislation would do nothing to hasten GSE reform but would bog it down even more.  Congress has done nothing to address the conservatorships in the seven years since they were originated in 2008.  Waiting endlessly for Congress to get its act together only perpetuates the status quo, the worst of all possible worlds – where the two largest financial institutions in the United States are running with no capital. 

Earlier this month, the Jumpstart GSE Reform Act appeared to be headed for fairly quick consideration by the Senate since it was tied to a broadly popular bill to limit compensation of the Fannie Mae and Freddie Mac CEOs, and because it had the co-sponsorship of Democratic Senators Elizabeth Warren of Massachusetts and Mark Warner of Virginia. Then, however, Warren withdrew her support, reportedly because it no longer included the prohibition on using G-Fees for general purposes. That provision has stoked concern that low-income borrowers would end up having to absorb those costs.  By the time that issue was resolved the CEO compensation bill moved on its own.

But even with this missed opportunity, Corker’s bad piece of legislation is not derailed altogether.  The revised bill has been re-introduced by Senators Corker, Warner and Warren, and could be considered again before the year is up. 

Most importantly, here’s what is being lost in the debate over “Jump Start GSE Reform”:  The Housing and Economic Recovery Act of 2008 (HERA) is the statute that governs the conservatorship of Fannie and Freddie.  HERA states that the Federal Housing Finance Agency (FHFA), not Congress, and not the Treasury Department, have a duty to preserve and conserve the assets of Fannie and Freddie while they’re under conservatorship.  A recent piece in Bloomberg BNA, “The Lawless Limbo of the Fannie and Freddie Conservatorships,”  by Mark Calabria and Ike Brannon, articulated this very well, stating, “HERA provides FHFA all the tools it needed to resolve a troubled GSE — conservatorship or receivership, depending upon the circumstances, with both being well-tested by the FDIC.”  

When the Treasury Department decided to subvert HERA by enacting the net worth profit sweep in 2012, it broke the law requiring the conservator of Fannie and Freddie to “preserve and conserve” their assets.  In doing so, it also put the taxpayer at massive risk by not allowing Fannie and Freddie to build a capital buffer.  Here’s another great quote from the Calabria/Brannon piece which speaks to Treasury’s unilateral action in enacting the sweep: 

Despite the clear intentions of Congress, the Treasury Department and FHFA made a different decision — or rather a nondecision. As noted above, HERA allows for conservatorship, with an eventual exit, or receivership with a resolution. Apparently Treasury Secretaries Henry Paulson and Timothy Geithner did not share the preferences of Congress and decided to pursue a third path despite lacking any statutory authority to do so.”

FHFA’s Director Mel Watt has a legal duty under HERA, as the GSEs’ safety and soundness regulator, to make sure the GSEs have sufficient capital over the housing cycle.  Senator Corker should not undermine Director Watt unless Congress is ready to re-examine HERA altogether, and his stopgap bill falls well short of this.  One thing is clear:  On the facts, HERA has been a success.  The GSEs’ underwriting is tighter, their loan portfolios are smaller and the taxpayers have been paid back with $50 billion in profit.  Now it’s time for the illegal sweep to end, and for Fannie and Freddie to begin rebuilding their capital base so that the taxpayer is protected.