Several hedge funds that own common and preferred shares of the two government-sponsored enterprises have sued the government, which is currently sweeping most of Fannie and Freddie’s profits into the U.S. Treasury. They claim the government has violated their rights as shareholders and they deserve to be compensated.
“Ultimately, it up to the courts to decide how strong their claims are,” Donovan said during a briefing hosted by Politico.
But he warned that adverse court rulings against the government could make reform more difficult.
“If we don’t get something done this year,” Donovan said, “we could end up in a place where reform is much harder to get to.”
The HUD secretary expects the Senate Banking Committee will produce a “strong bipartisan bill” in the next few weeks and stressed that a bill could still pass this year.
The hedge fund issue is “one of a series of factors that makes me more optimistic about passing legislation this year,” Donovan said.
David Stevens, the president and chief executive of the Mortgage Bankers Association, is also hoping the Senate Banking Committee will mark up a GSE reform bill soon.
“We need to keep this moving,” Stevens said in an interview.
Stevens is concerned the legislation will lose momentum if it fails to move forward before the mid-term elections in November.
Donovan said the new housing finance system loans must be backed up with an “explicit government guaranty.”
American Banker reported Thursday that Senate Banking Committee leaders are close to unveiling details of their reform bill. It is likely to be based partly on legislation introduced last summer by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. The Corker-Warner bill would require to take a first-loss position of up to 10% on all mortgage-backed securities.
Industry representatives have complained 10% is too high and it will discourage securitization.
Donovan noted that that are ways to “bridge” the issue by not being too rigid in the way private capital can be used reduce risks to taxpayers.
He noted the GSEs have been testing risk-sharing securitizations that rely on private investors to cover a portion of the loan losses.
Bonnie Sinnock contributed to this article