The government's unreasonable approach toward Fannie Mae and Freddie Mac has resulted in an undesirable combination: the GSEs charge record-high guarantee fees and hold alarmingly low levels of capital.
These high fees are effectively pricing many otherwise-creditworthy borrowers out of the market. That is in direct contradiction with the GSEs' original mission: to boost homeownership by creating greater liquidity in the secondary market.
Higher guarantee fees could make sense if the objective was to permit the GSEs to rebuild their capital in order to make the possibility of another federal bailout remote. Once capital levels were restored, guarantee fees could be reduced.
However, the vast majority of the fee revenue is being passed onto the U.S. Treasury, leaving current GSE capital levels far too low to address the risk of even a moderate downturn. This irrational situation has been created by the terms of the $188 billion government bailout of the GSEs. The current Treasury-negotiated deal requires the GSEs to remit 100% of profits to the Treasury, which precludes the agencies from building capital. To date, the Treasury has been more than repaid for the bailout, while the GSEs continue to remit all profits.
Collectively, Fannie Mae and Freddie Mac have normalized annual net earnings of approximately $20 to $25 billion, based on year-to-date 2014 earnings. They are on track to be the most lucrative of all 2008 Treasury interventions in the financial sector. Nevertheless, Treasury continues to collect quarterly profits at levels never imagined under the initial bailout deal.
But what is the point of having the GSEs generate large profits if this does not make the GSEs more financially stable, thereby enhancing the safety and soundness of the mortgage marketplace? The relatively new financial viability of the GSEs seems to be benefitting the U.S. Treasury at the expense of low- and moderate-income borrowers who simply cannot afford the high guarantee fees.
Treasury can—and should—take immediate corrective action to cure the undercapitalization of the GSEs. The Community Mortgage Lenders of America calls on the U.S. Treasury and the Federal Housing Finance Agency to restructure the payment terms of its agreement to enable the GSEs to retain a portion of their net earnings to rebuild their capital positions. There is neither a need nor a rational reason to wait on Congress to act, particularly since GSE reform legislation is far from certain.
An alternative approach is to lower the GSE guarantee fees and remove what amounts to an unnecessary tax that is locking many moderate- and lower-income buyers out of the market. This would be less preferable, however, because the GSEs would remain undercapitalized and vulnerable to adverse financial developments, which could necessitate additional financial assistance from the U.S. Treasury.
CMLA urges the government to take a rational approach to supporting the U.S. housing market. The GSEs' financial health historically furthered homeownership rates, and there is no rationale for risking their ability to do so now.
Surely the Treasury and Congress are equally dedicated to precluding another financial crisis. The obvious structural weakness of the GSEs should never have materialized, and it is incumbent upon this Administration to take the corrective action necessary to enable full and safe capitalization of both Fannie and Freddie.
Paulina McGrath is chair of the Community Mortgage Lenders of America, a trade association for community-based lenders, as well as president and co-owner of Republic State Mortgage in Houston.