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GSEs dwindling reserves drawing Congressional scrutiny

A  regulator’s warning has sparked interest in allowing Fannie Mae and Freddie Mac to rebuild their capital reserves to avoid potential taxpayer bailouts.

Sen. Richard Shelby, R-Alabama, who chairs the Senate banking committee, last week directed Congressional Budget Office staff to prepare a report on the implications of permitting the government-sponsored enterprises (GSEs) to retain some earnings now being swept up entirely by the U.S. Treasury.

During a speech in February, Federal Housing Finance Agency (FHFA) Director Mel Watt called the eight-year conservatorship "unprecedented" and warned that diminishing capital reserves put Fannie and Freddie at risk of requiring draws on the Treasury, which could undermine investor confidence in the housing finance market.

The government took control of Fannie and Freddie in the midst of the financial crisis in 2008, and the GSEs have generally been profitable after an initial bailout of $187.5 billion.  Fannie and Freddie’s quarterly earnings go to the U.S. Treasury, and GSEs’ reserves are scheduled to be wound down to zero by Jan. 1, 2018.

Shelby wrote that Watt’s speech has prompted some in the mortgage industry to call for an end to the profit sweeps, while others have argued that such a move would revive the GSEs without limiting taxpayer exposure to the trillion-dollar industry and “could potentially reduce incentives for Congress to enact statutory reforms.”

Shelby posed four questions about the federal government’s obligations to Fannie and Freddie, and the implications for the federal budget and debt should the GSEs be allowed to retain earnings.

He also asked about the risk to taxpayers, and whether increasing the capital reserves of the GSEs would affect their operations or the mortgage markets.

House Democrats also are circulating a letter this month that says Fannie and Freddie and the overall housing market have been put at risk because the GSEs lack adequate capital buffers. The letter says a 2008 federal law, the Housing and Economic Recovery Act (HERA), gives Watt the authority and the duty to ensure the GSEs have adequate capital. That letter also noted that the draw down on the GSE reserves has hampered affordable-housing goals and hurt people in underserved markets.  

The mortgage industry is split on the future of Fannie and Freddie, but the issue of allowing the GSEs to build buffers to weather quarterly earnings volatility has a broader base of support, said Scott Olson, executive director of the Community Home Lenders Association.

“I think there is a strong argument that something needs to be done soon, and I am hopeful that something will be done in the near future,” Olson said. “Hard to handicap it, but I am hopeful.”  


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