Fincher and Mulvaney Press FHFA and Treasury on Risks of Sweep

Two members of Congress want the Administration to answer a simple, multi-billion dollar question: What could happen as a result of Fannie and Freddie being required to keep no capital?

Reps. Stephen Lee Fincher, R-TN, and Mick Mulvaney, R-SC, sent a letter February 4 to Treasury Secretary Jack Lew and Federal Housing Finance Agency Director Mel Watt expressing concern about a policy that requires two of the largest companies in the country to send their capital to the Treasury Department every month.

“We respectfully ask that the FHFA and Treasury consider what effect compelling the GSEs to hold zero capital will have on our financial system and taxpayer exposure, and what specific steps the FHFA and Treasury can take in the near term to rectify the situation,” they wrote, requesting a reply no later than March 1.

The letter puts the Sweep in sobering context:

“It is extremely troubling that these massive agencies – deeply imbedded in our financial system with over $5 trillion in securities outstanding – are being specifically directed to deplete their capital reserves.  According to the 2013 FHFA report, four out of five mortgages are now backed by Fannie and Freddie, which is a level higher than before the crisis. Should a sudden shock to the system or even a normal downturn occur, it is American taxpayers that will have to fit the bill. The Enterprises would be solely reliant upon drawing from Treasury the capital that they previously transferred – capital which at that point will have been spent by the federal government.”

The letter also echoed an idea that housing policy experts from across the political spectrum have backed: Treat Fannie and Freddie like systemically-important financial institutions, or SIFIs. The two lawmakers cautioned that they oppose the authority of the Financial Stability Oversight Council to designate firms as SIFIs and have “serious concerns about the transparency of the FSOC designation process.”  However, the footprint of the GSEs must be taken into account in public policy. They wrote:

“….it is undeniable that Fannie Mae and Freddie Mac are as equally large and complex (if not more) as other large financial institutions in our economy. In the post-Dodd-Frank world, Fannie and Freddie will be the only significant financial institutions not voluntarily and mandatorily raising their capital: instead, they are being told to lower their capital – to zero. This does not make sense.”

While it remains very unlikely the Administration and Congress will reach an agreement on a way to recapitalize and release Fannie and Freddie in the 11 months President Obama has left in office, this letter serves to remind policymakers what is at stake due to inaction.

It is a bitter irony that, even though the 2008 financial crisis was a catalyst in ushering in the Obama presidency, the housing policies so inextricably related to the crisis have changed little or been made riskier under this Administration.