Federal spending bill makes recapitalization of Fannie, Freddie far less likely

Omnibus bill prohibits Administrative recap and release for two years

In recent weeks, calls to end the government’s conservatorship of Fannie Mae and Freddie Mac, and allow the government-sponsored enterprises to be recapitalized have grown louder.

Opinions from housing industry insiders, observers, interested parties, and others have varied on the path to true GSE reform, but the hope that the “recap and release” of Fannie and Freddie may be coming soon just took a rather significant body blow.

According to multiple media reports, the House of Representatives reached an agreement late Tuesday evening on a fiscal 2016 federal appropriations bill, also called an omnibus bill.

The bad news for those hoping for “recap and release” is that included in that bill is a provision that prohibits the Administration – be it the Obama Administration or the next President’s Administration – from selling off its stake in Fannie and Freddie without the approval of Congress, for at least two years.

The provision was taken from the “Jumpstart GSE Reform Act,” put forth earlier this year by Sen. Bob Corker, R-Tenn, and Sen. Mark Warner, D-Va. Corker and Warner’s proposal included a provision that explicitly prohibited the sale, transfer, liquidation, relinquishment, or divestment of the Treasury’s senior preferred stock holdings in the GSEs.

The provision in the omnibus appropriations bill didn’t go quite that far, but according to Corker’s office, the bill, if passed, would help to spur “substantive and structural housing finance reform” and prevent the “misguided” effort to recap and release Fannie and Freddie.

In a statement, Corker’s office said that the omnibus bill also includes a portion that states that GSE reform efforts should come from Congress.

According to Corker’s office, a portion of the omnibus bill states that it is the “sense” of Congress that it “should pass and the President should sign into law legislation determining the future of Fannie Mae and Freddie Mac, and that notwithstanding the expiration of subsection (b), the Secretary (of the Treasury) should not sell, transfer, relinquish, liquidate, divest, or otherwise dispose of any outstanding shares of senior preferred stock acquired pursuant to the Senior Preferred Stock Purchase Agreement until such legislation is enacted.”

In a statement, Corker said that recapitalizing Fannie and Freddie in their current form is not a feasible option.

“Passage of this provision makes it clear that Congress – who created mortgage giants Fannie Mae and Freddie Mac in the first place – should ensure we do not return to the failed model of private gains and public losses that once forced taxpayers to write a $188 billion bailout check,” Corker said.

“Recapitalizing and releasing these behemoth entities as they now exist is not in our nation’s interest,” he added.

“Today, we are putting to bed that misguided idea, but there is more work to be done,” Corker continued. “Fortunately, a lot of the heavy lifting has taken place, and it is time for Congress to finally finish its job. Protecting taxpayers and ensuring we have a dynamic housing finance system that works for Americans will remain near the top of my to-do list, and I look forward to working with my colleagues toward that end.”

Likewise, Warner stated his approval of the GSE provision in the omnibus bill.

“The inclusion of our ‘Jumpstart GSE’ provision demonstrates the unmistakable intent of Congress that the Secretary of Treasury shall not re-IPO or otherwise divest the taxpayers' investment in Fannie and Freddie without full debate and clear direction from the peoples' elected representatives,” Warner said. “Homeownership is a fundamental part of the American Dream, and we remain committed to revamping the housing finance system to ensure affordable access while protecting taxpayers so they are never again on the hook for a bailout.”

While Corker and Warner’s reactions were predictably positive, reactions from the housing industry were diverse.

In a statement, David Stevens, the CEO and president of the Mortgage Bankers Association, said that the MBA is pleased with the inclusion of the GSE provision in the omnibus bill.

“MBA applauds the bipartisan agreement to include specific portions of the GSE Jumpstart Reform Act within the spending bill,” Stevens said.

“This provision protects the GSEs from potential immediate disruption that could result from a new administration in 2017, regardless of which party wins the White House,” Stevens continued. “It also reinforces the desire by many policymakers, supported by most housing stakeholders, to enact structural GSE reform before Fannie Mae and Freddie Mac can be released from conservatorship.”

On the other hand, Scott Olson, the executive director of the Community Home Lenders Association, said that the CHLA is “disappointed” by the House bill.

“While the Community Home Lenders Association is disappointed that Congress has adopted so-called Jump Start language that will hamstring progress on GSE reform, we renew our call for an amendment to the Profit Sweep Agreement, so that the GSEs can build up reserves from their own profits,” Olson said.

“We also call on the FHFA use its authority as conservator to develop a GSE recapitalization plan, to present to Congress,” Olson continued. “Amending the Sweep Agreement is a critically needed step to avoid a contrived bailout under the one-sided nature of that Agreement – and thus avoid reductions in consumer access to mortgage credit.  It would also eliminate incentives in the Sweep Agreement for GSEs to contract credit, resulting from their existing – and dwindling small reserve levels."

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