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Advocacy groups renew pitch to recapitalize GSEs

A coalition of progressive activist associations and small-lender trade groups made another pitch this week to Fannie Mae and Freddie Mac’s regulator to recapitalize the government-sponsored enterprises (GSEs).

In a joint letter from 10 associations made public on Tuesday, the coalition urged Federal Housing Finance Agency (FHFA) Director Mel Watt to end the profit sweeps and allow the GSEs’ to rebuild their capital buffers.

Over the past year, an unusual alliance that includes Fannie and Freddie’s investors, some banking trade groups and advocacy groups on the left and right of the political spectrum have called for Fannie and Freddie to be recapitalized and ultimately released from conservatorship (known as recap and release). The groups have given different reasons for supporting this goal and, in some cases, have different visions of what role Fannie and Freddie will have in mortgage finance.

The first step in this process, however, would be to end the profit sweeps and allow the GSEs to develop a capital cushion. These groups say that Watt has the authority to suspend dividend payments to Treasury.

“Recently, you voiced concerns over the declining capital buffers and said there could be negative market and policy ramifications if either company is forced to 'draw' more money from Treasury – a risk that, as you said, will continue to escalate in the future,” the letter states. “We strongly agree with this assessment.”

By agreement with the federal government, Fannie and Freddie’s quarterly profits are swept up by the U.S. Treasury, and their capital reserves are scheduled to be wound down to zero by the beginning of 2018. In return, the government has extended a line a credit in event that Fannie and Freddie suffer quarterly losses and need to take a draw. In a speech earlier this year, Watt warned that the GSEs would likely need bailouts from Treasury because of volatility in their earnings. Fannie’s chief executive officer, Tim Mayopoulos, also recently called the current model unsustainable.

Signing the letter were groups such as the Community Mortgage Lenders of America (CMLA), the Community Home Lenders Association (CHLA), the NAACP and the National Community Reinvestment Coalition. The other groups included Amalgamated Bank, the Center for Responsible Lending, the Corporation for Enterprise Development (CFED), The Leadership Conference on Civil and Human Rights, the Leading Builders of America and the National Action Network.  

All of these disparate groups have previously sent Watt letters, but have generally not co-signed letters.

“The fact that these groups, small-lender trade associations and affordable-lending organizations, found common ground on this issue is the new development,” CMLA Executive Director Glen Corso said.

Some prominent mortgage- and banking-industry trade groups, notably the Mortgage Bankers Association, have not favored recap-and-release, however.  The Wall Street Journal and other publications have also reported that hedge funds that bought Fannie and Freddie stock cheap during the downturn are aggressively lobbying for recap-and-release, an outcome that would yield huge profits for their investors.

At least one trade group, the National Association of Hispanic Real Estate Professionals, indicated that they were offered financial support in return for signing on to a letter supporting recap-and-release, the Wall Street Journal reported. 


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