New Bill to Let Fannie, Freddie Recapitalize Just In Time for 7th Anniversary of Conservatorship
- September 10, 2015
Legislation being drafted in the U.S. House by Rep. Mick Mulvaney (R-S.C.) would let Fannie Mae and Freddie Mac “once again build up their capital cushions,” reports Politico Pro. This is a great development. IU’s own Tim Pagliara says he’s extremely pleased this is being undertaken, and that the Third Amendment Sweep continues to put taxpayers at risk by depriving the GSEs of capital that would be a buffer against another economic downturn. The legislation would be a good partner with Rep. Marsha Blackburn’s legislation to put the money siphoned off under the Sweep into a separate holding account instead of getting lost in the U.S. Treasury’s general fund.
We also note that the timing of a Mulvaney bill couldn’t be more propitious. Last month we marked the third anniversary of the Net Worth Sweep, and this week marks the seventh anniversary of the conservatorship. We might submit the conservatorship to the Guinness Book of World Records since it has to be the longest one in history. Conservatorships, by definition, are meant to be short-term and temporary whereas this one has turned into a semi-permanent state.
The Politico article doesn’t give details of the new legislation except to note that it could have bipartisan support since it “would also send some of the housing giants’ profits into trust funds set up for affordable housing once a certain amount of capital has been built up.” That’s a nod to Democrats who cheered Federal Housing Finance Agency Director Mel Watt’s move to lift a suspension of funding the affordable housing trusts. The GSEs stopped sending money to the trusts once the conservatorship was put into place, and affordable housing activists criticized the suspension as detrimental to families in need of assistance.
Groups outside of Congress are lining up to try and get things moving. A coalition of 15 watchdog taxpayer groups issued an open letter recently to all members of the U.S. House and U.S. Senate calling on them to pass Rep. Blackburn’s bill.
In the most direct terms possible, The Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act is the only piece of legislation concerning the GSEs that does anything to protect taxpayers from the enormous risks presented by the complete lack of capital buffers at Fannie and Freddie. From the groups’ letter:
“H.R. 1673 would help protect taxpayers in the event that these two GSEs experience significant losses in the future. By creating a reserve fund using profits generated by the GSEs, the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act allows Fannie and Freddie to draw down such funds in the event of significant losses, rather than going back to the Treasury for additional resources. Once FHFA’s conservatorship of Fannie and Freddie ends, the reserve fund would dissolve. Simply put, the bill creates an insurance policy for taxpayers.
“As long as Fannie and Freddie are under conservatorship, any losses they experience are a threat to taxpayers. While H.R. 1673 is a wise proposal, it highlights the need for Congress to reduce dramatically the role of government in the housing finance system. In particular, Fannie and Freddie’s government support – implicit and explicit – should be phased out. Until lawmakers embrace comprehensive reform, however, they should pass the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act. And this measure must, as a first step, be part of any large appropriations or financial services bill that attempts to deal with Fannie and Freddie.”
John Berlau, who writes about policy effects on investors for the Competitive Enterprise Institute, wrote about the letter and harkened back to CEI founder Fred Smith testifying before Congress in 2000, well before the financial meltdown that precipitated such changes in the GSEs governing structure. Addressing the need to plan for the future of the companies, Smith said “as in traditional bankruptcies, the rights of both taxpayers and private investors should be sacrosanct.” Those rights are being ignored, and the longer it continues, the greater the risk potential.
Unlike every other financial institution in the country, the enterprises do not have capital requirements. That’s just really irresponsible and inherently dangerous.