Menu

Who Thinks The GSEs Can? Who Thinks The GSEs Can?

A managing director at Graham Fisher & Co. has authored a paper that makes clear the stunning the knots U.S. Treasury and Federal Housing Finance Agency officials are tying themselves into to keep Fannie Mae and Freddie Mac undercapitalized and under the government’s thumb. Joshua Rosner, one of the first analysts to sound alarms about the GSEs a decade ago, tears apart all the double-talk and assertions that have been made lately.

The paper is so perfectly titled “FHFA: The Little Agency That Could (But Hasn’t).”

Rosner first tackles two of the biggest underlying currents in Washington, DC: 1, more than year out, the presidential election is already looming large over the landscape; and 2, the outgoing Administration is shifting into full legacy mode and, as Rosner writes, officials are looking to “cleanse the Administration’s record regarding unfinished business on mortgage market reform.” Rosner then pounces on the salient point that the Administration is hiding behind: the Preferred Stock Purchase Agreement between FHFA and the Treasury simply cannot trump federal law. That is antithetical to U.S. legal system; also referred to as, you know, the Constitution!

So what part of the law is being violated? It’s a dangerous misinterpretation of the Housing and Economic Recovery Act of 2008 (HERA) that requires the conservator (FHFA) to ensure the GSEs are adequately capitalized. But as Rosner writes:

“Still, six years after the GSEs were placed into conservatorship under HERA, the regulator has made no effort to take the actions required by the statute ‘to put the regulated entity in a sound and solvent condition’ or to ‘conserve the assets and property of the regulated entity.’ … FHFA as conservator has become the biggest opponent of such plans to restore the capital of the GSEs.”

But, as we all know, the Third Amendment Sweep is diverting the GSEs income into the general Treasury fund instead of being held for Fannie and Freddie making it impossible for them to become “sound and solvent.”

And then Rosner hits us with the very real and very scary implications of this willful misinterpretation of HERA:

“[I]f the GSEs were unable to become adequately capitalized, they would be at risk of mandatory receivership when the Treasury backstop agreement ends in 2018. As a result, the entire mortgage system could fail and the ensuing systemic risk would be impossible for financial markets, the government and the country to ignore.”

It’s like bureaucrats never learn their lessons. You can’t take two entities that underpin nearly 20 percent of the U.S. housing sector, lock them up and expect that nothing bad will happen. Aside from the constitutional crisis this sets up with agency officials deciding to interpret laws how they see fit rather than how Congress wrote and intended them to function, taxpayers are at enormous risk the longer this goes on.