Community lenders renew call to allow Fannie Mae, Freddie Mac to rebuild capital

GSEs reported combined net income of more than $5 billion in 3rd quarter

In the wake of both of the government-sponsored enterprises reporting multi-billion dollar profits in the third quarter, the Community Home Lenders Association is renewing its call to allow Freddie Mac and Fannie Mae to rebuild capital.

Earlier this week, Fannie Mae reported net income of $3.2 billion and comprehensive income of $3 billion during the third quarter.

Freddie Mac posted a net income increase to $2.3 billion in the third quarter, meaning the two GSEs will return more than $5 billion to the Department of the Treasury.

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 Treasury each quarter.

Under the terms of the PSPAs, the capital reserve of both Fannie and Freddie is to be depleted down to $0 in 2018.

Citing the GSEs strong 3rd quarter results, the CHLA says that the Federal Housing Finance Agency needs to allow the GSEs to retain capital to avoid another bailout, which a recent report suggested could be need in a “severely adverse scenario.”

That report came courtesy of the FHFA, which said earlier this year that in a “severely adverse” economic scenario, the GSEs could need as much as $125.8 billion in additional funds from the Treasury to stay afloat.

The CHLA said that the potential need for another draw from the Treasury could impact the mortgage market’s ability to lend.

“CHLA renews its call for FHFA Director Watt to allow the GSEs to retain some profits to establish a modest capital buffer, in the wake of this week's strong earnings reports by Fannie Mae and Freddie Mac and a recent Congressional Budget Office report showing the GSEs have repaid $63 billion more than their original advance,” Scott Olson, executive director of the CHLA, said this week.

“We simply should not let the Sweep Agreement, which within a year will arbitrarily strips away all their net worth, create a contrived Treasury advance, likely resulting in a mortgage contraction of credit,” Olson added.

The CHLA also noted that FHFA Director Mel Watt already called the GSEs’ lack of capital the “most serious risk” that the GSEs face.

“In February, FHFA Director Watt called the GSEs' lack of capital as their ‘most serious risk’ – warning that it could lead to a loss of investor confidence in GSE mortgage-backed securities, and could precipitate a hasty Congressional reaction,” the CHLA said. “CHLA is also concerned that a negative reaction to a Treasury advance could create pressures for a reduction in GSE access to mortgage credit.”

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