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MBA's Stevens calls out hedge funds in GSE reform debate


Mortgage Bankers Association President David Stevens said this week that Wall Street hedge funds have cynically manipulated a battery of community groups that have been calling for regulators to recapitalize government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

In a strongly worded opinion piece for The Hill on Monday, Stevens defended the existing policy of the Obama administration that has kept the GSEs in conservatorship pending reforms by Congress, allowed the U.S. Treasury to sweep up GSE profits and wound down their capital reserves. He said private investors in Fannie and Freddie have been drumming up support among various groups to recapitalize the GSEs with "a cynical, expensive PR and lobbying campaign to divide and conquer us."  

"Though they have never before demonstrated an abiding interest in housing policy, the hedge funds have managed to convince some other groups and a few policymakers to go along for the ride," Stevens wrote.

Under the current arrangement, the GSEs’ quarterly profits are sent to the U.S. Treasury, and the government extends a line of credit in the event of quarterly losses. Stevens, a former assistant secretary with the U.S. Department of Housing and Urban Development in the Obama Administration, said it would be a bad idea for Federal Housing Finance Agency (FHFA) Director Mel Watt to unilaterally decide to allow Fannie and Freddie to rebuild their capital buffers to insulate them from taking future draws on the Treasury line.

Several groups on the left and right, including most recently 32 Democrats in the U.S. House of Representatives, have called on Watt to withhold dividend payments now being swept up by Treasury, so the GSEs can rebuild their buffers. These groups have different reasons for supporting this goal, but one fear expressed by small-lender trade associations is that future draws will be characterized as taxpayer-funded "bailouts" and lead to a political backlash and knee-jerk reforms. The GSEs' buffers are scheduled to be wound down to zero by 2018.

In a February speech, Watt said future draws on the Treasury are likely because of earnings volatility, a possibility he said that could erode the confidence of the investors in the mortgage-backed securities issued by Fannie and Freddie.  

Fannie Mae Chief Executive Officer Tim Mayopoulos also told reporters during the quarterly earnings call that the current system was unsustainable.

Stevens noted, however, that Freddie Mac’s CEO, Donald Layton, said during his conference call with reporters that the government's available line of credit, which exceeds $200 billion, eliminates the risk that the GSEs are undercapitalized. 

Stevens wrote that housing reforms should be initiated with an eye toward long-term financial stability, which protects affordable-housing goals and access to reasonably priced, long-term mortgages. He also said Fannie and Freddie's regulator, the FHFA, has made progress in eliminating pricing discrimination once felt by smaller and community lenders, and by developing a platform for a single security.  

“The continued calls for recap and release are a distraction that shifts focus away from real reform and puts at risk much of the important work FHFA has accomplished to date,” Stevens said.

Stevens also said a move to withhold the dividend payments is opposed by the Obama administration and the majority of Congress, who passed legislation in the last fiscal year to encourage comprehensive housing-finance reforms. Stevens said it would put the mortgage market at a greater risk of facing a political backlash if Watt acted unilaterally to end the profit sweeps. 

Among the banking trade groups that support so-called recap and release are the Community Mortgage Lenders of America (CMLA), the Community Home Lenders Association (CHLA) and the Independent Community Bankers Association. Executive directors from the CMLA and CHLA organizations recently told Scotsman Guide News they have no ties to the hedge funds.

“CMLA suggests that MBA and its CEO get their facts straight before making allegations concerning the motivation of organizations with different views on the course of GSE reform,” CMLA Executive Director Glen Corso said. “... CMLA specifically disclaims any involvement, financial or otherwise, with hedge funds.”

Corso also said that  only large banks and Wall Street investment houses "whose objective is to control the mortgage market from top to bottom " stand to profit from "severe financial instability for the GSEs."  


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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