Fannie Mae and Freddie Mac were are the center of the financial crisis in 2008 and laded into conservatorship. The government-sponsored enterprises were made wards of the state and a new regulator was in place to oversee their business until they returned to solvency and could stand alone.
According to a CNBC report, early a decade later, many of the issues that caused their problems have been resolved but other issues have arisen that have them on the edge of requiring another taxpayer bailout. According to Mel Watt, director of the Federal Housing Finance Agency, which has oversight over the enterprises, told the Senate Banking Committee that reform is “urgently” needed.
“These conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform.”
Part of the problem stems from a 2012 amendment to the earlier agreement. It directed the companies to send their quarterly profits to the U.S. Treasury and progressively reduce capital buffers down to zero by 2018. This zero-capital target was a self-created ultimatum. No capital leaves them little margin for error. All it takes is one bad earnings period — whether from credit losses or accounting vagaries — to send Fannie or Freddie back to the government for another bailout. Congressional testimony from their regulator revealed recently that the precarious position is starting to put lawmakers on edge. The highly controversial and complex elements of housing finance will force lawmakers to take a cautious approach, according to Sam Whitfield, the Consumer Bankers Association’s head of congressional affairs.
“There are so many questions out there. Being expeditious about this and getting it done quickly is not necessarily in the best interest of consumers.”
David Stevens, chief executive of the Washington-based Mortgage Bankers Association explained recently that Watt could face political backlash if he takes independent action to protect the capital buffer.
“Our greatest worry is, it’s tantamount to creating panic at a time that’s not needed.”
Stevens also has expressed concern about the current political climate. Republicans control the White House and Congress. However, Watt is a former Democratic congressman and Obama administration nominee. Stevens wonders if Watt could be overestimating his ability to take bold action.
“I worry that any action from him right now could be viewed as naïve, and not reflect the reality that his party is not in control — that he’s a carryover from the previous administration.”
However, the fate of the GSEs will rest with lawmakers. Bob Ryan, a top deputy to Watt, said the director believes the fate of Fannie and Freddie must be determined by lawmakers rather than through administrative actions that are within the agency’s powers.
“You have to start with the director’s unequivocal statement that housing-finance reform is the purview of Congress. An administrative solution to housing-finance reform to take the enterprises out of conservatorship would be inconsistent with that.”