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More Confirmation That Treasury Loves the GSE’s Money if not the GSEs Themselves

In two different venues, miles apart, on Tuesday it became clearer that the ongoing conservatorship of Fannie Mae and Freddie Mac serves the twin purposes of providing a revenue stream for the Treasury and guaranteeing that the GSE’s days are done.  

During a House Financial Services Committee hearing on the Treasury’s FY2016 budget, Rep. Michael Capuano, D-MA, asked Treasury Secretary Jack Lew point blank when Treasury was going to stop using Fannie Mae and Freddie Mac as a “piggy bank?”  Capuano noted the GSEs have paid back more than $40 billion on top of what they borrowed during the height of 2008 financial crisis and asked about their capital reserves.

Lew dodged both questions but acknowledged that the payments had become part of the Treasury’s general fund to help reduce the country’s debt.  We can give Lew credit for candor but fortunately Capuano pressed Lew on how long the Administration plans to hold the GSEs “hostage” and forcing homeowners to pay an additional tax.

At that same hour in Roanoke, VA those in attendance at a Ferrum College forum were treated to a history lesson on the role of Fannie Mae and Freddie Mac in U.S. housing policy, especially in the turbulent years that led up to 2008 financial crisis. However, the question posed by the event’s title, “U.S. Housing Finance Reform: Can we manage and control taxpayer risk while assuring continued innovation in the market?” remained largely unanswered.

Former Acting Director of the Federal Housing Finance Agency Ed DeMarco lauded Congress and Administration officials for meeting the 2008 crisis head-on with the enactment of the Housing and Economic Recovery Act of 2008, the infusion of funds from the  Treasury, and the establishment of conservatorships for the GSEs. He said these steps allowed the secondary housing market to function and recover.

But, if stability and liquidity were so important, why did DeMarco and others sanction the Third Amendment sweep as soon as the GSEs began turning a corner in 2012? This continues to undermine the GSE’s ability to recapitalize and expose the taxpayer to additional losses. DeMarco was not asked that question directly but, as we noted Monday, he puts the onus on Congress to enact meaningful, long-term GSE reform. He lamented that not much has changed on the legislative front and insisted that we still need an act of Congress to bring conservatorship to end.

“When we first put them into conservatorship, I never would have said that we’d still be here six and half years later,” he said.

We can be certain Michael Stegman, a senior Treasury official, would have said the same thing about the need to wait for Congress had he been on hand as a panelist, as planned.  He was unable to attend at the last minute, denying us the chance to again hammer away at his determination to make sure the GSE’s never get again back on their feet.  We can only hope our fact check last week that explained that HERA gave FHFA authority over the GSEs as conservator to bring them to an end after they have been restored to a “sound and solvent” state have raised uncomfortable questions.

Lew’s candor at least provided a glimpse into the Administration’s rationale for justifying the sweep in the first place.  Openness has been in short supply on this issue. During the forum in Roanoke Gretchen Morgenson of the New York Times again expressed concern that the government has gone to great lengths to conceal the rationale for the sweep, going  so far as to exert executive privilege repeatedly to keep documents secret in litigation launched by investors.

“Isn’t the government’s obligation to let the sun shine on its action?” she asked at the end of the forum.

After yesterday, we at least know the government has appreciated the extra money Fannie and Freddie provide and will continue to defer to Congress on the fate of the GSEs, HERA notwithstanding. But what happens when there’s nothing left in the piggy bank? Taxpayers and shareholders will have to keep asking this question.