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Banking trade groups oppose piecemeal changes to GSEs

Five powerful trade associations urged Fannie Mae and Freddie Mac’s regulator on Wednesday not to make piecemeal changes to the government-sponsored enterprises (GSEs) prior to Congress undertaking comprehensive reforms.

In a letter to Federal Housing Finance Agency (FHFA) Director Mel Watt, the Mortgage Bankers Association, the American Bankers Association, the National Association of Realtors, the National Association of Home Builders and the National Housing Conference said comprehensive reform was needed to fix “the structural flaws that led to the breakdown of the housing-finance system.”

Although the groups do not speak out against recent calls by some progressive and small-lender trade groups that want the government to end the GSE profit sweeps and to rebuild the their capital reserves, they did argue against any changes to the preferred-stock purchase agreements between the GSEs and the U.S. Treasury. Those pacts, in essence, provide that Treasury's stock holdings are senior to all other preferred or common stock issued by the GSEs.

Under the current arrangement, all of the GSEs revenues are swept up by the Treasury and their capital buffers are scheduled to be wound down to zero by the start of 2018. Fannie and Freddie, in turn, are able to draw on lines of credit extended by the government in the event of losses.

The letter said these agreements “provide an adequate backstop” until reforms are completed by Congress.

The letter also said that the reforms should be designed to create a sustainable system of housing finance and  benefit consumers, rather than simply benefit “the balance sheets of private companies” — a reference to the hedge funds that bought Fannie and Freddie stock cheap during the downturn and, according to recent media reports, are now aggressively pushing to have Fannie and Freddie recapitalized and released from conservatorship.

“Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners,” the letter said. “Policymakers need to continue to focus on the paramount objective of fixing the structural flaws that led to the breakdown of the housing-finance system — the only outcome that will protect taxpayers, preserve access to credit and ensure a stable housing-finance system.”

In recent months, groups have been applying more pressure on the FHFA to end the profit sweeps. In February, Watt warned that Fannie and Freddie would most likely have to take draws on the Treasury, a move that has been previously characterized in the media as a taxpayer-funded “bailout,” which is unpopular politically. He said investors could lose confidence in the GSE-issued mortgage-backed securities should they be forced to take draws. Fannie Mae’s Chief Executive Officer Tim Mayopoulos also recently called the current structure “unsustainable.”

Numerous groups, including progressives and conservatives, Fannie and Freddie stock investors and some banking trade groups have urged Watt to withhold dividend payments to the Treasury, and allow the GSEs to rebuild capital. These groups have different visions of the ultimate role of the GSEs, but generally want to see Fannie and Freddie recapitalized and released from the eight-year conservatorship after reforms.

Last month, the Community Mortgage Lenders of American (CMLA) and the Community Home Lenders Association joined seven progressive groups in urging Watt to allow the GSEs to rebuild their buffers. The groups argue Watt has the power to accomplish this unilaterally.

"Fannie Mae and Freddie Mac are being run on a slender and quickly vanishing amount of capital,” CMLA Executive Director Glen Corso said on Wednesday. “Homebuyers, as well as all of us in the mortgage finance industry, face a threat.”


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