Dave Stevens Doesn’t Understand Investors, or the Rule of Law
- April 13, 2015
Many of our members took offense to accusations from Mortgage Bankers Association CEO David Stevens posted on LinkedIn on Friday. Why? Because Stevens argues that investors aren’t interested in sound policy, only policies that will benefit them. He is wrong. His analysis belies a fundamental misunderstanding of how markets work. The fact is that sound policy, rule of law and economic growth go hand in hand.
Investors in Fannie Mae and Freddie Mac aren’t reckless or shortsighted, as Stevens claims. They understand the importance of making smart decisions they hope will yield a decent return, and they understand the concept of risk. Here’s the important point that Stevens doesn’t seem to get: Regardless of how things turn out with regard to the conservatorship of Fannie Mae and Freddie Mac, investors should be able to count on the rule of law. If anyone is being shortsighted and reckless it is officials at the U.S. Treasury who subverted the law when they decided in 2012 to unilaterally change the terms of the conservatorship to take 100% of the GSEs’ profits and use the money for general revenue. This abrupt action to strip Fannie and Freddie of all of their capital has put taxpayers at risk.
Mr. Stevens summarizes the current situation and its inherent dangers well enough:
“Where are we today? We’re in the same place we were 7 years ago – Fannie and Freddie remain in perpetual conservatorship; they are still private companies being run by the government. Permanent conservatorship is not healthy for the market. The GSEs remain at risk because they have veritably no capital buffer to prevent draws on their line of credit with Treasury. And to be clear, the likelihood of one or both GSEs needing a draw from the Treasury department at some point in the future is almost a certainty. While the treasury line is certainly large enough to support any draw, the political risk of taking a draw threatens the entire system.”
But he runs off the rails when he closes with this:
“Protecting what Fannie Mae and Freddie Mac do in support of the housing market and making sure the system protects taxpayers has to supersede the narrow, profit-focused motives of the shareholders of these two companies.”
It’s not clear, other than advancing his own anti-shareholder agenda, what Dave Stevens means when he says something like this. Yes, investors do hope to earn a return on their holdings, but investments in Fannie Mae and Freddie Mac can only do well when the companies do well – and when the companies are doing well, the nation’s housing market is doing well, which in turns benefits current and prospective homeowners. It’s a synergistic relationship so that when one component breaks down, the others are affected as well.
It is critical to keep in mind that the Housing and Economic Recovery Act (HERA) was never intended to vacate the rights of shareholders. As then-senior Senate Banking Committee aide Mark Calabria and former FDIC General Counsel Michael Krimminger have written, even if HERA diluted the value of the existing shareholders’ interests in the GSEs, “…the shares continued to exist and nationalization of the institutions was consciously avoided.”
And Former Secretary Paulson said, “…conservatorship does not eliminate the outstanding preferred stock.” Indeed, at the time Paulson stressed that the conservatorship was to maintain market stability and access to mortgage credit and to protect the U.S. taxpayer. Importantly, Secretary Paulson also indicated that conservatorship was intended to be a short-term solution to the enterprises’ financial problems so they could be placed into a “safe and solvent condition.”
Therefore, the Third Amendment sweep was an illegal taking from investors. It has undercapitalized Fannie and Freddie and put them in a precarious position, exposing the taxpayer to needless and excessive risk. This was unnecessary and unlawful, and it’s why Investors Unite has advocated for a reversal of the sweep. It’s unfortunate that Dave Stevens would equate investors’ conviction that government ought to live by the rules with greed and speculation. But we’re actually heartened by the increasing intensity of opposition to our campaign from pro-sweepers like Dave Stevens. He and his confederates – including Jon Carney, Ed DeMarco and Michael Stegman – are being forced to respond to the legitimate issues of capital, rule of law and what HERA actually says. That’s a good thing, and we think it’s only going to get better. Stay tuned!