Menu

Which is it Mike and Ed? Ample Capital or No Capital?

After almost ten years, it is easy to assume that everything that needs to be said about Fannie Mae and Freddie Mac has been said and that everyone’s position is clear. However, recent comments about the Federal Housing Finance Agency’s (FHFA) proposed rule for revised capital requirements for the government sponsored enterprises include a few surprises from housing finance veterans.

Michael Stegman, one of the architects of the Net Worth Sweep, which has systematically stripped Fannie and Freddie of their reserve capital, commended the FHFA’s prudence in refining and strengthening capital requirements at a recent American Enterprise Institute event, “Should Fannie Mae and Freddie Mac be shrinking or expanding their activities?” 

Stegman is now a senior fellow at the Milken Institute Center for Financial Markets but served as senior policy advisor for housing on the staff at the National Economic Council in the last two years of the Obama Administration. For more than three years before that, he was counselor to the Secretary of the Treasury on housing finance policy. It was during this time that the U.S. Treasury came up with the plan to siphon the GSEs’ earnings to Treasury coffers, supposedly to protect taxpayers from more bailouts.

It is now widely understood that the policy was unnecessary as the GSEs were on the road to huge and sustained profits. The conservatorship should have ended and the GSEs should have been returned to the shareholders who owned them, while policymakers considered needed reforms. If the idea was to hasten such policy changes, that didn’t happen either. Fannie and Freddie remain wards of the state and neither the Trump Administration nor Congress can be credibly expected to do anything about it before well into next year, if then.

As the GSEs’ conservator, the FHFA opened a 90-day comment period on June 12 for a new framework for risk-based capital requirements and two alternatives for an updated minimum leverage capital requirement.  There have been 27 comments filed thus far.

There have been numerous studies, panel discussions, industry proposals and Congressional hearings in the last eight years so one would expect Ed DeMarco, former FHFA Acting Director and current president of the Financial Services Roundtable’s Housing Policy Center, to have well-formed views on the GSEs’ capital requirements. However, he recommends a go-slow approach.

“This rule is much too important and far too complex to be digested and commented on in 60 days,” DeMarco commented at the AEI event. “A critical question in evaluating this FHFA proposal is whether it perpetuates substantially lower capital requirements for the GSEs relative to banks and insurance companies or not…”

That is great question coming from a man who was central in maneuvering the adoption of a policy that put the GSEs on the path to zero buffer capital.

The Housing Policy Center was among several trade associations, including the Mortgage Bankers Association and the American Bankers Association, which filed comments on the rule and requested more time, saying, “The challenges of providing thoughtful feedback on these topics and the importance to the housing finance system of a carefully calibrated rule require that stakeholders be allowed more than 60 days to comment.”

However complex capital standards are, professionals who dwell in this policy area every day should be able to offer their views within a three-month window. But it is possible that industry stakeholders think it is wise to impede FHFA Director Mel Watt’s ability to tackle this issue before his tenure ends early next year. It is widely assumed President Trump is eager to replace the former Democratic Congressman with his own pick. DeMarco is said to be among the candidates, according to Inside Mortgage Finance.

In this world of shifting views and alliances, the insights and concerns of average shareholders remain remarkably consistent, practical, and earnest.

“FHFA needs to immediately stop the net worth sweep of Fannie Mae & Freddie Mac. Dividends shall return to the companies until each company has 40 billion on the balance sheet before dividends to all shareholders commence,” wrote Jack Mehoffer . “Private property rights must be respected. FHFA must require both GSE’s to list on the NYSE & allow for private shareholder voting & approval of the boards.”

Michael Connelly, spoke for thousands of shareholders, in posting, “I have been robbed–I’ve owned Preferred shares since 2010 and have not received ONE penny in dividends.  I hope this gets me back on track as I’ve had to work my butt off to replace the Money that my own Government has stolen from me.”