Efforts to reform the government-sponsored enterprises (GSEs) Fannie Mae and
Freddie Mac and the U.S. housing-finance system will get a new look on Capitol Hill with the incoming Trump administration and Republican-dominated Congress. Tim Pagliara, founder of GSE shareholder-advocacy group Investors Unite spoke with Scotsman Guide News about where shareholders stand on the issue of GSE reform and its prospects under the Trump administration. Pagliara is a Tennessee-based investor
as well as chairman and chief executive officer of the investment company CapWealth
Do you think that Fannie and Freddie can be quickly reformed
and released as private companies as Treasury secretary-designate Steve Mnuchin
told Fox News in November?
Well, absolutely. First, I think, HERA [the Housing and Economic Recovery Act of 2008] was
really a GSE reform bill in and of itself. It allowed for the GSEs to be put
into conservatorship under the Federal Housing Finance Agency (FHFA), and FHFA
has done a really good job in reforming these entities. As Mnuchin identified,
the biggest risk that they have right now is
a lack of capital. This has been caused by the continuation of the net-worth
sweeps [where all quarterly profits are distributed
to the U.S. Treasury]. Under the statute, [FHFA
is] required as conservator of the companies to return them to a safe
and sound condition.
Privatization can mean many things.
In what form do you think the GSEs can emerge from the conservatorship?
It can go any number of
ways. The proponents of the sweep want to characterize investors as having a
particular agenda as it relates to Fannie and Freddie. In my experience with
Investors Unite, that is not the case. All that we have ever advocated for is
that we want our rights to be respected in whatever scenario plays out.
Shareholders should be treated according to the law, just like shareholders in
any publicly traded company. There are a lot of different paths that could
emerge under the term of "privatization" that would uphold shareholder
Where do you think Republicans in Congress and the Trump administration stand on this?
It was refreshing to see Treasury Secretary-nominee Mnuchin
take such an aggressive stance on resolving the GSE issue. It has been eight
years, and it is time for that. If there has been one thing that everyone has
agreed upon with regard to the GSEs over the last several years is that the
status quo is untenable. So, it is encouraging to see that we might finally get
some movement. Ultimately, I think it is difficult to know how this
administration will want to proceed. As we have discussed, there are a lot of
viable paths toward privatization and the details are going to be hammered out
by the legislators and the policymakers over the next several months. Again,
our main concern is that, with whatever plan
is formulated, that shareholder rights are
respected in accordance with the law. In the immediate term, it is in
everybody’s best interest for the GSEs to build capital.
There are varying estimates of how much capital Fannie and Freddie would need to emerge as private entities, but it will be a
lot. How do you think that obstacle will be overcome?
The first thing they need to do is end the net worth sweeps.
It has always been dubious from a legal and constitutional standpoint. Now, it
is actively and unnecessarily endangering taxpayers. The GSEs have paid back
over $70 billion more than what they were loaned by the government. So, it was
It all comes down to respecting the rule of law. Virtually
any discussion about privatization where you are trying to attract new
capital, that is going to be real important to [potential investors]
because they are not going to put new capital in, unless the rule of law is
The timing of this is very interesting because we’ve got two
cases [in the federal courts challenging the legality of the profit sweeps] right now
that are ripe. They could be decided and released any day — the Court of
Appeals case from the D.C. [District of Columbia] Circuit and the U.S. Court of Claims case. Those
could really be a big jump-start to these issues.
Switching gears a bit, are Fannie and Freddie shareholders
skeptical of the GSEs ongoing efforts to transfer risk to the private sector?
First off, I don’t think they are afraid of risk-sharing
models. All financial institutions utilize techniques to manage risk in the
course of their business. What we are afraid of is the type of risk-sharing
models that they have forced on Fannie and Freddie. I did a conference call
with the former chief financial officer of Fannie Mae, Tim Howard, and he broke
all these things down. Essentially, what they have done so far with this
mandated risk sharing is a bad political gamble for both the borrowers and the
So, the risk-sharing effort should
be abandoned then?
Current practices should, absolutely. That being said, it is
a nuanced question. Risk sharing is something that every business looks at,
risk management. I just think the path that they are going down now is hurting
borrowers. It serves no
real-risk management purpose for Fannie and Freddie.
Do you think GSE reform will get done within the next
two years during this
window of a unified federal government?
I don’t know when it will happen or what timeline, but I
believe that this administration will be more focused on an equitable
application of the rule of law. That is what we have been focused on, and that
is what we are excited about. Like I said earlier, there are a lot of