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The Wrong Kind of Panic from Corker and Colleagues

Sens. Bob Corker, R-TN, Mark Warner, D-VA and others are deeply concerned that Federal Housing Finance Agency Director Mel Watt will follow the law and enable Fannie and Freddie to rebuild capital and exit the conservatorship.

On Wednesday, the Senators sent Watt a letter “strongly encouraging” him to avoid doing anything that would facilitate Fannie and Freddie’s release from conservatorship and “to focus your efforts on steps that would help, not hurt, housing finance reform legislation.”

“Hurt” and “help” are subjective words in this context. The Senators asserted there was broad agreement that reforms to the government sponsored enterprises’ existing structure were needed, but insisted that those changes should be enacted by Congress and “not unilateral action by this or any future Administration.”  They reminded Watt that Congress essentially clipped FHFA’s statutory authority with inclusion of some provisions of the so-called Jump Start bill in the 2016 omnibus spending measure and restricted the release of Treasury’s shares in the GSEs. 

No doubt, the Senators are on edge that Watt could finally move to address what he has warned is the untenable situation of the GSEs having their capital buffers systematically whittled to nothing.  That would upend their hopes for reform, or more accurately stated, for dismantling the companies.

While the letter stressed that unilateral action by the Administration would be very counterproductive in reform efforts, they cheered unilateral actions that are in fact taking place, such as the advance of risk sharing and the winding down of the GSEs’ existing portfolios. With back-end risk sharing well under way, FHFA last week called for input on how to implement front-end risk sharing.  And why would Corker and others welcome these ambitious efforts? Because risk sharing systematically forces Fannie and Freddie to give up both risk as well as return – the guaranty fees that make up the core of their business. Fannie and Freddie are transferring risk to the private sector not because it is good for their business but because it was mandated they do so by bureaucratic fiat.  And yet, Corker and others raise no objections that this is encroaching on Congress’ authority.

Interestingly, the letter came out the same day FHFA announced the Common Securitization Platform (CSP), which would marry the respective administrative infrastructures for securitizing the loans of Fannie and Freddie purchase and eventually be used by banks and other loan originators, could be in place by 2018. This would be perfect timing for foes of Fannie and Freddie. This is just around the time that their capital buffers would disappear. So with risk sharing moving along nicely and a new securitization infrastructure in place, the only thing to do would be to put the companies into receivership and hand them over to banks and other private sector interests.

Once again, it bears repeating that the Housing and Economic Recovery Act of 2008 empowered FHFA, not Congress, to “preserve and conserve” the assets of the GSEs and to take whatever steps were needed to return them to a “sound and solvent” condition so they could resume their traditional marketplace role. No doubt, reforms were and are needed, and Congress and the Administration had an obligation to work together on that. Along the way, however, the Net Worth Sweep was implemented. This empowered Treasury officials and lawmakers who shared a desire to shut down the GSEs to implement ways to hollow out their business.

Anyone who wants to create a better housing finance policy that serves homeowners, taxpayers and investors is right to be worried about what has transpired. But Corker and company are worried for the wrong reason: the fear that the back-door plan for dismantling Fannie and Freddie could be sabotaged if the companies were allowed to keep their capital.