Fannie-Freddie Shareholder Coalition Responds to the Federal Housing Finance Agency (FHFA) Request for Input on Proposed Increased Guarantee Fees

Coalition Raises Concern Over 100% of Profits Directed Away From Housing Market, To Deficit Reduction

On June 18, 2014 Investors Unite Executive Director Tim Pagliara filed a response to the Federal Housing Finance Agency’s (FHFA) request for input on the proposed increase to guarantee fees (g-fees) that Fannie Mae and Freddie Mac charge lenders. On behalf of Fannie and Freddie shareholders, Mr. Pagliara encouraged FHFA Director Mel Watt to consider the new proposed policy in context of the Treasury Department’s 100 percent net worth sweep of the enterprises. 

“As long as Treasury is taking all of Fannie and Freddie’s profits, any increase in g-fees would amount to nothing more than a new tax applied to general deficit reduction, ” Pagliara said. “Ultimately, profits accumulated from g-fees and other business of Fannie and Freddie should be allowed to stay within the housing market and should be set at levels that help ensure safety and soundness of the GSEs, that protect long-term health of the housing market, and that respect the rights of all economic stakeholders-including the GSE’s shareholders.”

Pagliara also submitted to FHFA a recommended set of principles that should be considered for g-fees following reversal of the 2012 net worth sweep. They are as follows:

1. Fannie Mae and Freddie Mac have profit-making purposes onto which public mandates are layered, and they should charge guarantee fees that earn an appropriate market-based return on the capital employed, whether taxpayer capital or private capital. This is an absolutely critical factor “other than expected losses, unexpected losses and G&A fees” that should be considered when determining g-fees.

2. Increasing guarantee fees will provide more cash flow with which the GSEs can build capital and be restored to “safe and solvent condition.” Maximizing returns is not only consistent with, but arguably required by, the conservatorship.

3. FHFA as conservator has legal duties to the direct economic stakeholders – including all shareholders – that must be respected alongside the interests of other parties.

4. Earning an appropriate return on capital is entirely consistent with the conservatorship and affordable housing mandates. There is no conflict here between the GSEs building capital and setting aside funds for affordable housing. Indeed, it is only when the GSEs have earned their way back to a “safe and solvent condition” that they can sustainably meet their public affordable-housing mandates. After the GSEs have adequate capital, the suspension of those mandates can be reversed, i.e. the affordable housing support can be turned back on.

5. Keeping guarantee fees low to support the housing market in general, including homeowners and homebuyers that are well off and do not need help, is not as important as charging higher guarantee fees (a) to build a capital base to protect against future credit losses, and (b) to redistribute a portion of earnings to targeted constituencies that particularly need financial support.

6. Guarantee fee rates should be tied to sound underwriting standards. If FHFA directs the GSEs to relax underwriting standards, it is essential that guarantee fees be adjusted upwards to account for the greater credit risk assumed in doing so.