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Capital Continues to Matter

“Capital matters a lot,” Fannie Mae CEO Tim Mayopoulos was quoted by Politico as saying at a luncheon hosted by the Exchequer Club in Washington Wednesday.

The fact that it was newsworthy that the CEO of one of the nation’s largest financial services firms thinks a capital buffer is useful is just another act in the surreal drama that continues to surround the conservatorship of Fannie Mae and Freddie Mac.

The capital levels at the GSEs are scheduled to decline to zero by the end of next year as the Treasury Department’s sweep of their profits continues.  This strikes many policy experts as absurd. Investors Unite Executive Director Tim Pagliara argued over a year ago that setting standards similar to those of Systemically Important Financial Institutions, or SIFIs, would make sense. Around that time we noted more and more experts and stakeholders had come to our conclusion that capital matters.

Unfortunately, not much has changed, leaving shareholders, taxpayers and homebuyers in the same dubious position.

“I’m not going to offer an answer on exactly what the right number is, but I do know that we do not have sufficient capital today,” Mayopoulos said. “At the same time, we would note that it’s essential to have sufficient capital, but we also know that higher capital requirements mean higher costs to borrowers.”

Interestingly, his comments come amid reports that Mel Watt, director of the Federal Housing Finance Agency (Fannie and Freddie’s government conservator), is so concerned about their capital levels he might consider raising g-fees, which lending institutions pay Fannie and Freddie to minimize losses from possible individual loan defaults. This too would mean more expensive borrowing costs for perspective homebuyers. Two months ago Watt turned up the volume on the alarm about the perils of dwindling capital levels.

Thus far, Administration officials seem to think there is nothing to worry about. They have said the GSEs still have a credit line of over $200 billion. Revenues from the mortgage companies can pay off those credit lines rather than building up capital buffers. In essence, the government has seen to it that Fannie and Freddie are putting all the money aside they will be forced to borrow as a result of having their capital depleted by Treasury. Think about that construct for a moment.

Thus, everything seems to be going according to the plan hatched at Treasury with the advice and consent of mortgage bankers years ago: With the vilified Fannie and Freddie captive in a conservatorship, Treasury makes their exit all the more impossible with loans the GSEs neither needed nor requested. Then it confiscates their capital to use for whatever the government sees fit. By raising the bar for recapitalizing and releasing Fannie and Freddie, support would grow for simply dismantling them.

The only problem for Treasury’s plans is that shareholders are gaining ground as they press ahead in lawsuits that are exposing the folly, irresponsibility, secrecy and sheer dishonesty at work in the conservatorship.

At some point, a Fannie Mae CEO might make news for explaining to shareholders how capital buffers are sufficient to protect them and taxpayers alike for even a worst-case economic scenario. One day, FHFA’s director might announce new initiatives to make affordable homeownership more accessible instead of thinking about squeezing more money from g-fees to keep Fannie and Freddie solvent.

But we’re not there yet.