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FactChecking Michael Stegman

Politico is reporting on remarks made by U.S. Treasury official Michael Stegman at a Goldman Sachs housing finance reform conference earlier today. 

Stegman, a housing policy counselor, reportedly said that “recapitalization of the GSEs and draws against the existing Treasury backstop due to future losses would come at taxpayer expense.” He also said that “simply returning these entities to the way they were before is not practical nor is it a realistic consideration.”  Stegman also delivered his now-familiar refrain that it was up to Congress to decide what to do with the companies, and that the government was “looking for new ways” for private investors to play a larger role in housing finance. 

We’re encouraged that Mr. Stegman is finally being forced to address critical issues related to the undercapitalization of the GSEs, and how the government’s illegal Third Amendment Sweep is actually exacerbating this problem by taking all of Fannie and Freddie’s profits.  But as it has been in the past, his analysis is wrong, and in conflict with HERA, which is the statute that actually governs the conservatorship. 

Let’s review: 

1. Recapitalization and Future Draws: Fannie Mae and Freddie Mac have paid back and then some the taxpayer loans they received in the wake of the 2008 financial crisis. To date, Fannie and Freddie have sent $228.2 billion to the Treasury – that is $40.5 billion more than what they took in draws from Treasury.  By not allowing them to rebuild capital, and by illegally diverting 100% of their profits to the Treasury each quarter, the government is violating HERA, and IS actually putting the taxpayers at risk from future draws.  .

2. Returning to the Way Things Were: This is a straw man argument, because nobody is advocating a return to how things were. Fannie and Freddie needed to be reformed, and they have been.  Any future reconstitution of these entities would incorporate needed reforms, including adequate capital levels. 

3. Congress: Stegman has repeatedly claimed that it is the responsibility of Congress to decide what to do with the companies. This is inaccurate.  Under the Housing Economic Reform Act of 2008, Congress named the Federal Housing Finance Agency as the conservator over Fannie and Freddie.  As the conservator, FHFA has certain responsibilities, one of which being the responsibility to return the companies to a solid economic position that helps ensure their long-term viability. Under this law, FHFA has the ability to let the GSEs begin rebuilding capital and also to end the conservatorship.  We refer our readers to this paper from Michael Krimminger and Mark Calabria, who were instrumental in the drafting of HERA.

4. Private Capital: Re: Stegman’s comments today that the government was looking for new ways for private investors to play a larger role in housing finance…Why should private investors be interested in this, when they have been burned by the government’s illegal Third Amendment Sweep? Mr. Stegman, capital follows the rule of law, and the government broke the law when it decided in 2012 to take all of Fannie and Freddie’s profits going forward. 

Policymakers are debating what to do about Fannie and Freddie, but we have a GSE Reform law called HERA.  Right now, HERA is being violated by the Treasury, and it was violated by Director Watt’s predecessor Ed DeMarco, who famously admitted to this at a Washington policy conference last year . It’s not too late to reverse course.  FHFA can begin rebuilding capital at Fannie and Freddie now, and has the statutory authority to do so under HERA.  This would be a good first step.