Capital Follows the Rule of Law
- August 24, 2015
There was lots of coverage this morning on Ed DeMarco’s recent op-ed in the Wall Street Journal, including a very interesting post at the Mortgage Bankers Association from CEO David Stevens. We note Mr. Stevens on his ever-evolving position on the GSEs and will continue to watch where he eventually winds up. The last time Mr. Stevens appeared dramatically on our radar screen he was talking about the need for capital for Fannie Mae and Freddie Mac, which is something we had long espoused. And today his comment about shareholders is notable for its candor.
“Importantly, I am truly indifferent to the shareholder cause. Whether the lawsuits succeed or fail, I only care about the long term viability of a vibrant and sustainable housing finance system,” he wrote.
It’s been long clear to even casual observers that Mr. Stevens cares not for shareholder rights and the rule of law. It’s just rather stunning to see his rigid adherence to limited facts on full display. If the lawsuits fail and the government is not compelled to uphold the rule of law, there will likely not be a “vibrant and sustainable housing finance system.” We can’t imagine that the members of Mr. Stevens’ association would find that desirable.
Meanwhile, as noted, Ed DeMarco, the former Acting Director of the Federal Housing Finance Agency, wrote in the Wall Street Journal that presidential candidates should take a look at reforming Fannie Mae and Freddie Mac to reduce taxpayer risk without a trace of irony over the fact that he oversaw the companies when an inordinate amount of taxpayer risk was codified into their current structure. The op-ed, cleverly headlined “Put Fannie and Freddie Out of Taxpayers’ Misery,” recommends legislation to ensure that “within four years all securitizations involve enough risk transfer so that taxpayers are left with credit risk only in catastrophic circumstances.”
We agree that the risk to taxpayers should be significantly lessened and, as DeMarco writes, they “shouldn’t be left holding the bag for mortgage defaults.” But it’s DeMarco’s next sentence that lands his op-ed in the realm of fantasy:
“Instead, private capital needs to be brought back into this system.”
True. But surely DeMarco is not arguing the government should force private capital to step up. The government can merely create the conditions. Ironically, the actions DeMarco oversaw as the acting director at FHFA are in fact keeping private capital at bay. We, of course, refer to the Net Worth Sweep, which DeMarco conveniently neglects to mention.
FHFA was created through the Housing and Economic Reform Act (HERA) as the conservator for the GSEs. Congress could have chosen to put the companies into receivership but it consciously did not go that route, deciding instead for a conservatorship, which should have given the companies space to strengthen their foundations before being released. That was in 2008. In 2009, DeMarco moved from the U.S. Treasury’s Office of Federal Housing Enterprise Oversight before taking charge of the newly created FHFA. Three years later, just as the companies were becoming profitable again and it appeared as though they could emerge from the conservatorship, the terms of the arrangement suddenly changed to become the Net Worth Sweep.
While the details of how the Net Worth Sweep came into existence are still buried in mountains of discovery documents, we do know the profits that could have been used to rebuild capital have gone to the great government spending machine putting taxpayers at enormous risk for another bailout.
GSE reform is certainly a pressing issue, but before any sweeping actions are taken, the conservatorship and illegal sweep must end, shareholder rights must be restored and the government must respect the rule of law – until that happens, private capital will continue to be unwilling to engage in this sector. DeMarco cannot rewrite the history of Fannie Mae and Freddie Mac to exclude shareholders and his involvement in putting the enterprises on shakier ground than they were on when they entered conservatorship.