In the wake of a weak third quarter that saw Fannie Mae’s net income cut in half and Freddie Mac take a loss for the first time in four years, two groups of community lenders are pushing the Obama administration to rebuild the capital reserves of the government-sponsored enterprises and develop a plan to end conservatorship of the GSEs.
In a letter sent earlier this week to President Obama, the Community Home Lenders Association and Community Mortgage Lenders of America urge the administration to not wait for Congress and recapitalize Fannie and Freddie because in their current structure, the GSEs cannot fully support the housing market.
“We write to urge you not to put reform of Fannie Mae and Freddie Mac on hold while waiting for comprehensive Congressional reform,” the groups write. “Instead, we urge you to take action to re-build the GSEs’ capital reserves and to develop a plan for them to emerge from their 7-year long conservatorship. We believe these steps are vital to maintain and improve the availability and affordability of home mortgage financing for American homebuyers, many of whom are now locked out of homeownership.”
The groups say that the need to act on GSE reform is only reinforced by Freddie Mac’s net loss of $475 million for the third quarter of 2015, significantly down from net income of $4.2 billion for the second quarter of 2015.
“The risks inherent in this zero capital requirement was evidenced today as Freddie Mac reported a $501 million third quarter comprehensive “loss, “ further draining Freddie’s reserves,” the groups write.
“In fact, Freddie Mac had a profit on its core business – but only reported a loss because of an accounting ‘mark to market’ adjustment related to hedging activities that are designed to reduce risk,” the groups continue.
“Ironically, just the quarter before Freddie Mac reported a $1.5 billion gain from these very same hedging activities,” the groups write. “But under the Sweep Agreement the 2nd quarter profits – which for Freddie were $3.9 billion – were taken away – but the $501 million 3rd quarter net loss comes out of their reserves. This is arbitrary and unfair.”
The groups write that the loss taken by Freddie Mac in the third quarter depletes its already thin layer of capital, which is only going get smaller over time.
“Each GSE now holds less than $2 billion in reserves – and under the Sweep Agreement, $600 million in reserves is taken away in each of the next few years,” the groups write. “As a result, it is only a matter of time until the GSEs will run out of reserves and be forced to get an advance from Treasury – notwithstanding that the GSEs paid back all their Treasury advances plus tens of billions in additional profits.”
The groups write that the looming need to tap the Treasury for more funds “can only have negative political repercussions and tighten lending even further, particularly if some refer to such an action as a ‘bailout.’”
The groups argue that bailout is a “misleading term,” since the GSEs have been prohibited from retaining profits as capital, which could “obfuscate the need” for additional taxpayer dollars.
The groups offer up two recommendations for what can be done about the GSEs right now, while still allowing for a Congressional push for GSE reform as well.
The groups recommend that the Sweep Agreement be amended to allow the GSEs to rebuild a capital buffer. “The Administration used its authority under the statute to establish the Senior Preferred Stock Purchase Agreements; it can use this same authority to modify it and does not need to wait for Congressional action,” the groups write.
The groups also say that the Obama administration can act now to “help remove the uncertainty that shrouds the viability and the future of the GSEs,” by using the authority granted to the White House by the Housing Economic Reform Act of 2008 to direct the Federal Housing Finance Agency to release the GSEs from conservatorship.
“The FHFA has certain responsibilities, one of which is an obligation to return the GSEs to a sound economic position that helps ensure their long-term viability,” the groups write.
“In fact, HERA grants the FHFA the authority to allow the GSEs to both rebuild capital and to end the conservatorship,” the groups continue. “A plan out of conservatorship can be implemented through amendments to the PSPAs. Such amendments should establish Fannie and Freddie as utilities in the mortgage market, providing needed liquidity and capital markets access to small and mid-size lenders and the consumers they serve.”
The groups say that taking these steps would not preclude Congress from taking action on “compressive” GSE reform.
“In fact, we believe they provide an important transition, making it easer for Congress to ultimately act,” the groups write. “We stand ready and able to work with your Administration to help in the creation of a plan that will safely transition the GSEs and empower those currently locked out of the market to become homeowners.”
The groups become the latest to join the push for recapitalizing Fannie and Freddie.
Last week, the National Community Reinvestment Coalition, the National Association for the Advancement of Colored People, and the League of United Latin American Citizens also wrote a letter urging the Obama administration to reconsider its position on recapitalizing Fannie and Freddie.