Worst Week in Washington: Administration Pledges to Starve GSEs

Secretary Jack Lew and other Treasury officials this week seemed almost boastful in admitting that their only plans for Fannie Mae and Freddie Mac are to keep the institutions undercapitalized and to let their successors and the next Congress deal with them.

Lew, in an interview on CNBC, said a “clearly articulated exposure of risk” is the heart of a real, long-term reform of housing finance. He added, “It’s overdue. I wish that we could work through the congressional process to get legislation. We’re doing what we can administratively in the meantime. But the right answer is not to recap and release, as some say.”

His assertion, essentially, was that Administration officials are at least protecting taxpayers by preventing the GSEs from resuming their pre-2008 role in the mortgage finance market.

In the eighth year of what was supposed to be a short-term conservatorship, the U.S. Treasury Secretary is still “wishing” officials could have found some common ground with Congress? The Housing and Economic Recovery Act stipulated that the Federal Housing Finance Agency was to restore the GSEs to a “sound and solvent” condition. Instead, Treasury continues to sweep up the GSEs’ earnings and expose taxpayers to the risk of having to make up for losses – and then top officials lament that they are at an impasse with Congress.

Bethany McLean, author of Shaky Ground: The Strange Saga of the U.S. Mortgage Giants, regards the Treasury’s latest declaration as a “total example of government dysfunction.”

In an interview on PBS’s The News Hour on Thursday, she reminded viewers that Fannie and Freddie play an important role in keeping the housing market stable and liquid. She seemed a little exasperated by public officials who say they are protecting the taxpayer by making sure Fannie and Freddie are not allowed to retain earnings and rebuild their capital.

 “The fact is, since the financial crisis, the hue and cry has been ‘more capital, give banks more capital and the financial system will be safe.’ Fannie and Freddie, with their over $5 trillion of securities outstanding, are operating on next to no capital,” she said. “If there’s a sudden shock to the system, if interest rates go up, if they suffer a loss, taxpayers will have to foot the bill again.”

Pressed to affirm that there is indeed risk to taxpayers, she said, “That risk is still there and it’s a total example of government dysfunction that we’ve had seven years to figure out this problem and we’ve done nothing.”

Earlier this week Fannie Mae CEO Tim Mayopoulos acknowledged in POLITICO that the institution could need another infusion of taxpayer money in the near future. The $1.8-billion capital buffer Fannie had at the end of the second quarter will decline to zero in 2018 with the Third Amendment Sweep enacted in 2012.  

Mayopoulos said the difference between $1.8 billion and zero on $3 trillion balance sheet is not big but commented, “If people are worried about that in the future, they should be concerned about that now, because that is the condition that we operate in.” Of course, no one knows how large bailouts could be if the housing market suffered a major reversal.

Regardless, this week Treasury officials confirmed that they are chiefly concerned with not letting the GSEs recapitalize during the remaining 15 months of their watch. In an op-ed on Bloomberg View Monday, Treasury Counselor Antonio Weiss made that very clear, albeit with a myriad of flawed assumptions and unsubstantiated claims. He was also unapologetic in acknowledging that there is no time left to take on what is widely regarded as ground zero in the 2008 financial crisis: housing policy.

“But on one point, we should all agree: Seven years after the crisis, the housing finance system remains the great unfinished business of financial reform. The U.S. still needs a system that ensures sustainable, fair and affordable access to housing and limits the risk of a taxpayer-funded bailout,” Weiss wrote.

Thus, after all this time, senior Treasury officials this week declared that at least there is a consensus that there is a problem but then steadfastly affirmed their refusal to address the GSEs’ lack of capital – which is what the law directed them to do. That is not much of a housing policy legacy.