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Congressional Democrats join push to recapitalize Fannie Mae, Freddie Mac

32 Democrats say lack of GSE capital holds "serious consequences"

Well, now it’s officially coming in from all sides.

Over the last year, a growing chorus of community lendersaffordable housing advocatescivil rights groupsinterested observers, financial analysts, and others have called for a change in governmental policy that would enable Fannie Mae and Freddie Mac to rebuild a capital base.

Recently, a coalition of Conservative groups joined the charge, sending a letter to Congress requesting that they consider a bill to allow the government-sponsored enterprises to rebuild capital.

Now, it’s not just Conservatives pushing for the recapitalization of Fannie and Freddie, Congressional Democrats are joining the fight too.

In a letter sent this week to Mel Watt, the director of the Federal Housing Finance Agency, and Jack Lew, the secretary of the Department of the Treasury, a group of 32 Democratic members of the House of Representatives say that the GSEs dwindling capital base, which is set to completely expire in 2018, has “serious consequences” for  “underserved markets.”

In the letter, the Democrats make reference to a speech Watt recently gave at the Bipartisan Policy Center, in which he called the GSEs lack of capital the “most serious risk” facing the GSEs.

“The most serious risk and the one that has the most potential for escalating in the future is the Enterprises’ lack of capital,” Watt said in February.

Under the Preferred Stock Purchase Agreements that went into effect when the government took the GSEs into conservatorship, Fannie and Freddie send dividends to the Department of the Treasury each quarter that they are profitable.

But under the PSPAs, the GSEs are prohibited from rebuilding capital and each of the GSEs’ capital base is required to be reduced, with their capital reserves scheduled to be drawn down to $0 in 2018.

In their letter, the Democrats say that they hope Watt’s concerns lead to the reassessment of the current GSE capital structure.

The Democrats reference the oft-mentioned Housing and Economy Recovery Act of 2008 as a potential path to rebuilding Fannie and Freddie’s capital base.

“HERA includes a number of provisions expressing Congress’ intent that the GSEs be operated in a safe and sound manner. In fact, under HERA, the FHFA Director has an express duty to ensure that the GSEs maintain adequate capital,” the Democrats’ letter states.

“The fact that the GSEs are currently in conservatorship, and that Congress has not enacted further legislation post-HERA, does not justify an agreement between FHFA and the U.S. Treasury to ignore HERA’s mandate,” the letter continues.

The Democrats go on to cite the “lack of stability and strength” that stems from the GSEs dwindling capital base, which further inhibits Fannie and Freddie from fully serving all of their stated goals.

“The GSEs are the largest participants in the mortgage market today. Yet, they are unable to make the types of investments in affordable housing and underserved areas that they once did prior to conservatorship,” the Democrats’ letter states.

“While the GSEs are required to meet Annual Housing Goals, which FHFA has consistently deemed feasible, both entities have failed to meet one or more goals in the past several years, and their lending to minority homebuyers in particular is notably diminished,” the Democrats continue. “They can also no longer provide the leadership and expertise in addressing our affordable housing challenges they once did, a significant void that has not been filled by any other market participant.”

The letter, which is signed by Reps. Michael Capuano, D-MA; Gwen Moore, D-WI; Gregory Meeks, D-NY; Dan Kildee, D-MI; Rubén Hinojosa, D-TX; Patrick Murphy, D-FL; Jan Schakowsky, D-IL; James McGovern, D-MA; Al Green, D-TX; Juan Vargas, D-CA; John Conyers, D-MI; Luis Gutiérrez, D-IL; Judy Chu, D-CA; Louise Slaughter, D-NY; Charles Rangel, D-NY; José Serrano, D-NY; Alcee Hastings, D-FL; Katherine Clark, D-MA; Tony Cárdenas, D-CA; Peter Welch, D-VT; Mark Pocan, D-WI; Eleanor Holmes Norton, D-DC; Yvette Clarke, D-NY; Stephen Lynch, D-MA; Frank Pallone, D-NJ; Cedric Richmond, D-LA; Sheila Jackson Lee, D-TX; Brenda Lawrence, D-MI; Michael Honda, D-CA; Chellie Pingree, D-ME; Joseph Kennedy III, D-MA; and Donald Beyer, D-VA; closes with a plea for action.

“Requiring two institutions that are so consequential to the housing market to be buffeted from quarter to quarter is unproductive and unnecessary,” the letter concludes. “We look forward to your reassessment of this policy.”

The National Community Reinvestment Coalition celebrated the letter and its message.

“We applaud Congressman Mike Capuano for his leadership and the Representatives from across the country for bringing attention to this critical issue, and we applaud the many NCRC members and others who have worked hard to get this issue on the radar of their Members of Congress,” NCRC President and CEO John Taylor said.

“We believe this letter provides Director Mel Watt with Congressional support to take action on what he has identified as 'the most serious risk' facing the Enterprises — their lack of capital,” Taylor continued.

“For some time, NCRC has been advocating for the recapitalization of Fannie Mae and Freddie Mac. With their current paper-thin capital buffer, a complete loss of capital at Fannie and Freddie is a real danger,” Taylor added. “This would be a further detriment to the GSEs’ mission of supporting affordable housing for low- and moderate-income borrowers and securitizing loans for millions of middle class people.”

The full letter can be read here.

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