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Community groups, lenders call for Fannie, Freddie to stop paying dividend to Treasury

Will Trump administration have a different answer?

Fannie Mae and Freddie Mac are scheduled to send their latest dividend payment to the Department of the Treasury later this month, but if a consortium of community groups and lenders has their way, that money will stay with the government-sponsored enterprises to help rebuild their dwindling capital base.

In a letter sent Thursday to Treasury Secretary Steven Mnuchin and Mel Watt, the director of the Federal Housing Finance Agency, a group that includes the Community Home Lenders Association, the Community Mortgage Lenders of America, and the NAACP asked the government to suspend the GSEs’ upcoming dividend payment to avoid the future need for another GSE bailout.

“We are writing to express our concerns about the declining capital buffer at the government-sponsored enterprises – Fannie Mae and Freddie Mac – and to urge the Administration to take immediate steps to shore up their capital position in order to prevent a draw on the U.S. Department of the Treasury’s commitment of taxpayer funding for any non-credit related losses,” the groups write.

The letter, from the CHLA, CMLA, and NAACP, as well as the National Community Reinvestment Coalition, the League of United Latin American Citizens, Leading Builders of America, the Corporation for Enterprise Development, and the Leadership Conference on Civil and Human Rights, calls for the FHFA to end the GSEs practice of sending their profits to the Treasury each quarter.

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 drawn down to $0 in 2018.

In the letter, the groups argue that this is dangerous for the GSEs and taxpayers alike.

“We believe that it is critical that FHFA act now, with support from the U.S. Treasury. Existing authorities under both the Housing and Economic Recovery Act of 2008 and the Senior Preferred Stock Purchase Agreements allow the agency to take the steps necessary to protect taxpayers, low- and moderate-income homebuyers and small lenders across the country,” the groups write.

“While a draw on their U.S. Treasury commitments might create a sense of political urgency on Capitol Hill around housing finance reform, we are concerned about any precipitous legislative action on both the affordable housing mission of the Enterprises and equitable access to the secondary mortgage market by small lenders,” the groups continue.

The letter is hardly the first time that these groups and others like them have called for the suspension of the GSEs’ payment to the Treasury. But each previous time, the calls fell on deaf ears in the government.

But could this time be different? Reports emerged this week that the Trump administration could be considering allowing the GSEs to rebuild capital, but considering it and actually doing it are different things.

As for the community groups, they have a bit more ammunition this time around, citing a recent executive order signed by President Donald Trump.

“Over a year ago, FHFA Director Mel Watt identified the Enterprises’ declining capital buffer as posing “the most serious risk and the one that has the most potential for escalating in the future,’” the groups write.

“He also identified the risks and challenges of the Enterprises’ protracted conservatorship. To add to those existing challenges, both the White House and Congress have indicated plans to enact a corporate tax cut,” the groups continue.

“If enacted, then tax reform would require a change in the accounting treatment of the Enterprises’ deferred tax assets and result in a loss at the Enterprises – precipitating a draw,” the groups add.

“Quite simply, a draw by the Enterprises on their U.S. Treasury commitments is avoidable, would be politically regrettable, is inconsistent with the core principles of regulation outlined in the President’s February 2nd Executive Order of the financial system to "prevent taxpayer-funded bailouts," and would unnecessarily place the availability and accessibility of mortgage credit at risk,” the groups write.

The groups close by urging the FHFA to suspend the upcoming payment from Fannie and Freddie and again asking for the GSEs to be allowed to rebuild capital.

Will they get a different answer this time? We’ll see.

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