One of the top Republicans in Congress lays the blame for Fannie Mae and Freddie Mac needing money from the government for the first time since 2012 not on the Republican tax plan’s reduction of the corporate tax rate, but rather, squarely at the feet of Federal Housing Finance Agency Director Mel Watt.
In a letter sent late this week to Watt, House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, said that Watt could have avoided the need for a Treasury draw by suspending the government-sponsored enterprises’ payments to the Housing Trust Fund and the Capital Magnet Fund, but chose not to.
And Hensarling wants to know why.
Earlier this week, Fannie and Freddie reported their fourth quarter earnings, which indicated that the GSEs would need approximately $4 billion total from the Treasury to eliminate budget deficits caused by the new tax law reducing the corporate tax rate from 35% to 21% (explained in more detail here).
But, as Hensarling notes, Watt sent letters to both Fannie and Freddie earlier this month, ordering each GSE to make its payments to the Housing Trust Fund and the Capital Magnet Fund as scheduled, even though all parties involved knew that the Republican tax plan would likely trigger a draw for both Fannie and Freddie.
“While the enactment of the Tax Cuts and Jobs Act of 2017 requires Freddie Mac to re-measure its net deferred tax asset using the new law’s lower corporate tax rate which will trigger a one-time charge through the provision for federal income taxes and will likely require a draw under the Senior Preferred Stock Purchase Agreement, I do not consider this one-time event to relate to any financial instability on the part of the Enterprise either now or in the future,” Watt wrote in the Feb. 7, 2018 letter to Freddie Mac.
Despite acknowledging that Freddie (and Fannie) would likely need draws from the Treasury, Watt directed the GSEs to make the payments to the Housing Trust Fund and the Capital Magnet Fund, citing the amount of profit that each GSE has sent to the Treasury in the last several years.
In December 2014, Watt ordered the GSEs to begin contributing to the Housing Trust Fund and the Capital Magnet Fund again. Contributions to the funds, which aim to provide support to states to build, preserve and ultimately increase the supply of affordable housing for extremely low- and very low-income families, were suspended in 2008.
As Watt notes in his letters, each of the GSEs has “consistently generated profits” since he ordered them to restart the affordable housing contributions, with Fannie declaring dividends of $31.9 billion and Freddie declaring dividends of $21.4 billion in the period between December 2014 and the enactment of the Tax Cuts and Jobs Act late last year.
And under the terms of 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 that they are profitable.
According to Watt, combining those dividends, which were sent to the Treasury under the terms of the PSPAs, and the expected positive effect of the lower corporate tax rates on the GSEs’ bottom lines going forward, meant that the GSEs could afford to make the affordable housing contributions, even if it meant taking a draw.
But, in Hensarling’s view, Watt’s decision is flawed and wrong, and he wants to know why Watt made it.
“The even more troubling aspect of the GSEs financial crisis is FHFA Director Mel Watt’s continued insistence to siphon taxpayer dollars to prop up payments to the Housing Trust Fund that the GSEs cannot afford to make,” Hensarling said in a statement after Fannie reported its fourth quarter earnings.
“If the GSEs don’t have the money to pay their own bills, they should not be making optional payments to outside entities. That was an essential part of Director Watt’s 2014 unilateral decision to force Fannie and Freddie to make Housing Trust Fund payments,” Hensarling continued. “Director Watt personally guaranteed these rules in his 2015 congressional testimony: ‘If we ever have a draw on the Treasury, that would automatically stop the funding of the Housing Trust Fund.’ I call on Director Watt to do his duty, stand by his word, and immediately suspend these payments.”
Hensarling went a step further in his letter to Watt, pressing the FHFA director for more details on his decision.
“The requirement to continue making payments to the Funds despite their PSPA draw from Treasury directly contradicts both your 2014 supervisory guidance issued to the GSEs outlined when FHFA reinstated payments to the Funds, as well as your own Congressional testimony before the Financial Services Committee,” Hensarling writes in the letter to Watt.
“Given your 2015 remarks to Members of this Committee and the letter of the 2014 supervisory guidance you developed to justify the discretionary policy changes you imposed through your office, your refusal this month to automatically stop GSEs payments to the Funds as FHFA stated would occur following a GSE draw of new taxpayer funds is unjustifiable,” Hensarling continued.
“Congress must have the confidence that it can rely upon the credibility of the regulators it empowers to faithfully execute their authority and provide accurate written and verbal assurances of their decisions,” Hensarling added. “Otherwise, Congress cannot perform appropriate oversight of those regulators to protect the interest of taxpayers.”
To that end, Hensarling demands that Watt provide his reasoning for allowing the GSE contribution to the funds.
“I demand you provide a detailed written explanation by Friday, February 23, 2018, of how your decision to require continued GSE payments to the Funds despite the need for a new draw on Treasury funds does not directly contradict your previous written and verbal guidance from 2014 and 2015, and how the FHFA intends to limit your ability to exercise your discretion in the future so that it can establish a consistent policy on this subject that provides both clear and reliable guidance to Congress and the GSEs,” Hensarling concluded.
As stated in letter, Hensarling wants answers from Watt within one week.