We write jointly as representatives of community mortgage lenders to take issue with the recent opinion piece entitled "GSE 'Recap' Experiment is Just a Sideshow."
The underlying premise of this piece — that there is no difference between a standby line of credit for the government-sponsored enterprises and their having actual equity capital — is totally inconsistent with what we commonly know about business and what we know about regulation. And it is dangerously misleading at a time when the net worth of Fannie Mae and Freddie Mac is in the process of dropping to zero within a year because of the so-called sweep agreement.
Despite the fact, documented by the Congressional Budget Office, that Fannie and Freddie have contributed $63 billion to taxpayers (on top of repaying their 2008 advance), the sweep agreement not only takes away 100% of their net profits every quarter — but takes away a portion of their remaining capital each year, reaching zero net worth in January 2018.
Claims that the GSE's lack of real capital is a "sideshow," that a line of credit is just as good as real capital, — and that this does not have consequences — is directly rebutted by the GSEs' regulator, the Federal Housing Finance Agency. In a February 2016 speech, FHFA Director Mel Watt said that the GSEs' lack of capital is their "most serious risk." He warned of real world consequences of a Treasury Department draw, including harm to investor confidence in the GSEs' mortgage-backed securities and "a legislative response adopted in haste or without the kind of forethought it should be given."
In arguing that there would be no political risk related to what will almost certainly be mischaracterized as "the second GSE bailout in nine years" the author points to the Federal Housing Administration, saying there were no repercussions to its recent financial issues. — But that gets it exactly backward — it was because FHA had tens of billions of dollars of capital to weather the storm that saved the FHA from calls to dramatically scale it back. — And even then it did not come without a price to borrowers, who experienced substantial premium hikes, some of which persist today, eight years after the crisis.
For all these reasons, our organizations have continued to call on FHFA to use its legal authority as conservator to suspend dividends for a period of time in order to allow Fannie and Freddie to build up a modest capital buffer, and thus avoid a contrived Treasury advance, with its negative consequences.
The second issue is the proper role of Fannie Mae and Freddie Mac, and whether and how to recapitalize them. Community mortgage lenders — and borrowers — have a big stake in this outcome. Eliminating the GSEs, or significantly scaling back their role, runs the risk of allowing the too-big-to-fail banks to monopolize or dominate GSE markets through their control over the secondary market and risk sharing. This is bad for community lenders — and bad for consumers, who will see a less competitive market, fewer choices, higher mortgage rates and costs and less personalized service.
The prior Congress' Senate approved a bill that would eliminate the GSEs — raising precisely these types of concerns, particularly whether community- and medium-sized lenders would continue to have fair and equal access. That bill at least promised that smaller lenders would be taken care of by an unknown entity that would be capitalized by GSE profits. Three years later, because of the sweep agreement, that promise is not being kept. Consumers and smaller lenders alike have reason to be concerned.
Thus, whether, and how, to recapitalize the GSEs is not a sideshow. It is an essential question that must be resolved in order to maintain the critical role the GSEs play in facilitating a competitive market. We don't agree with the straw man argument that calls for recapitalization mean doing so without Congressional involvement or without effecting essential reforms (a number of which have already taken place, such as risk-sharing, a strong regulator, and sound underwriting). And we take exception to the canard that anyone that advocates for recapitalization of the GSEs is a shill for GSE investors. Our organizations support a continued GSE role because the market and consumers would not be well-served by a market dominated by the largest banks.
Ultimately, we believe Congress should, and will, act on comprehensive GSE reform. How the GSEs can be recapitalized, as well as the cost and impact of doing so, are integral to that issue. It may be complicated and contentious — but the alternative is to extend indefinitely a conservatorship that has already gone on for eight years, with no real end in sight.
This is not a sideshow. It is the main event.
Glen Corso and Scott Olson are Executive Directors of the Community Mortgage Lenders of America and Community Home Lenders Association, respectively.