Earlier this month, Federal Housing Finance Agency Director Mel Watt told members of the House Finance Services Committee that Fannie Mae and Freddie Mac need to be allowed to hold some capital, because operating with no capital buffer is “especially irresponsible” to both the health of the companies and the American taxpayers alike.
“Like any business, the Enterprises need some kind of buffer to shield against short-term operating losses,” Watt said in his testimony. “In fact, it is especially irresponsible for the Enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed dollar commitment the Treasury Department has made to support the Enterprises.”
Part of the government’s conservatorship agreement with Fannie and Freddie stipulates that the government-sponsored enterprises’ capital buffer is to fall to zero on Jan. 1, 2018, meaning that any loss the GSEs experience in any subsequent quarter would require additional taxpayer support – i.e. another bailout.
With that deadline fast approaching, two groups that have previously spoken out about allowing the GSEs to retain capital are speaking out again.
In a letter sent Thursday to Watt, the National Association of Federally-Insured Credit Unions and the Independent Community Bankers of America ask Watt and the FHFA to “do everything within its authority to ensure the GSEs maintain a capital buffer” to address any potential losses and avoid a bailout.
“NAFCU and ICBA both agree, however, that internal reforms are not enough and that the time has come for Congress to act on comprehensive housing finance reform to create a more healthy and sustainable secondary market,” the groups write in the letter to Watt. “We believe this process begins with allowing the GSEs to rebuild their capital buffers.”
And in the letter to Watt, the groups reiterate that call and commend Watt on his apparent support of the idea.
“Allowing the GSEs to rebuild their capital buffers to avoid another draw of taxpayer support would maintain investor confidence, which is essential to the safety and soundness of the secondary market, and prevent any further market disruptions,” the groups write. “This would ensure the GSEs can continue to provide liquidity to credit unions, community banks and other lenders to support a vibrant housing finance system.”
The groups say that it is “essential” to allow the GSEs to maintain at least a “modest” capital buffer – enough to cover one quarter’s worth of losses – because of the negative effects that another Treasury draw would have on the housing finance system as a whole.
“Such an occurrence would not only erode investor confidence but would also taint the public’s perception of the housing finance system and the secondary market, putting the future of the housing finance system at risk,” the groups write. “This self- inflicted outcome must be avoided.”
To this point, Watt has given no definitive indication that the GSEs will be allowed to retain capital, but time (and money) is running out.