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Now, Everybody is Talking About Capital

The Federal Housing Finance Agency’s Inspector General acknowledged early today that no one should assume Fannie Mae and Freddie Mac will remain profitable and declared the, “…scheduled decline in capital reserves … increases the chances the two companies will need another bailout from taxpayers again.”

Everybody is talking about capital (or the lack thereof) in Fannie and Freddie.  That should come as no surprise.  As we have often pointed out, the Administration’s policy since 2012 to divert all of Fannie’s and Freddie’s profits into the U.S. Treasury to pay down the deficit is precisely what has put Fannie and Freddie in this situation.  By stripping the GSEs of 100% of their capital, Treasury has put them in a vulnerable position, and put the taxpayer at risk.

We’re pleased to see the recent focus on capital, because it goes to the heart of how the sweep violates HERA and has put the taxpayers at risk for future draws.  Recently, we corrected Treasury official Michael Stegman’s remarks at a Goldman Sachs conference after he raised the possibility of draws by Fannie and Freddie and suggested that anybody who favored recapitalizing the entities to prevent such draws wanted to “go back to the way things were.”  Stegman is wrong with his assessment, but we can’t help but notice that he’s being forced to talk about the effect of the Third Amendment sweep in public.  That’s a good thing.     

Just the same, as Politico Pro reported, there are Administration officials who remain unconcerned about a little dip in profits but perhaps more concerned that GSE’s will actually be given the chance to rebuild their capital.

“Current and former Obama administration officials have said Fannie and Freddie are likely to remain profitable and that there is significant authority for the government to cover losses should they run into trouble again. A top housing official at the Treasury recently said allowing the two companies to rebuild capital would be problematic and could still come at a cost to taxpayers because currently the companies’ profits are sent to the Treasury,” Politico reported.

Here’s what we wrote when Fannie and Freddie issued their 2014 fourth-quarter earnings reports recently:

“Fannie’s earnings report today notes that it pulled in $1.3 billion in profit for the fourth quarter of the year. Freddie’s report yesterday noted $200 million in profit for the same quarter. And when the payments are due to Treasury in March, Freddie will send another $900 million and Fannie will send $1.9 billion.

“Clearly the companies are profitable, but Fannie CEO Tim Mayopoulos said during a press call this morning that because the company does not have a capital reserve, there is a risk that it may be forced to rely on taxpayers for another loan. According to reports, Mayopoulos said that the ‘possibility of needing to take a draw from Treasury increases over time.’”

Here are the facts:  Fannie and Freddie have sent a combined $228.2 billion to Treasury since the sweep was enacted in 2012. That’s $40.5 billion more than the original bailout.  So it’s disingenuous to claim that all of this money was needed to pay back the taxpayer.  Instead of playing games with the conservatorship, and using Fannie and Freddie as a permanent slush fund for Treasury, policymakers should get serious about following the law (in this case, HERA), and begin allowing the GSEs to begin rebuilding capital so that the taxpayers aren’t forced to loan them money in the future.