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Senators: Regulator should lay off moves to free GSEs

A bipartisan group of U.S. Senators is urging the regulator of Fannie Mae and Freddie Mac to continue the wind down of the government-sponsored enterprises (GSEs) and avoid steps that might ease their release from the government’s control pending reforms by Congress.

In a letter dated July 7 to Federal Housing Finance Agency (FHFA) Director Mel Watt, the Senators said if the FHFA acted unilaterally to ease the GSEs out of conservatorship it “would perpetuate the precrisis practice of socializing losses and privatizing gains.”  

Capitol Building3The group listed several reasons why the old system was broken and put taxpayers at risk by giving government backing to Fannie and Freddie’s securities, while also giving the companies the freedom to pursue risky investments to chase yield for shareholders. Fannie and Freddie were bailed out and placed into conservatorship in 2008 in the wake of the financial crisis.  

The Senators also noted that Congress passed a measure in the omnibus bill last year that prevented the U.S. Treasury from selling its shares of Fannie and Freddie pending reform — a move to ensure that Congress had a say in the future of the GSEs.

“Over the long run, we all agree changes will be needed to the existing structure,” the letter said. “However, we firmly believe those changes should come through housing-finance reform legislation, not unilateral action by this or any future Administration.”

Signing the letter were six members of the Senate Banking, Housing & Urban Affairs Committee. The signatories included Bob Corker, R-Tennessee; Mike Crapo, R-Idaho; Dean Heller, R-Nevada; Mark Warner, D-Virginia; Jon Tester, D-Montana; and Heidi Heitkamp, D-Minnesota. 

Under the present deal with the government, the GSEs can take draws on the Treasury when their quarterly losses exceed their capital buffers. All of their profits go to the Treasury’s coffers, and the GSE’s capital reserves are scheduled to be wound down to zero by 2018.  

Although the GSEs have generally been profitable and returned more to the Treasury than the original bailout of about $187.5 billion, Watt warned in February that the GSEs would likely be forced to take future draws because of dwindling reserves, which could make investors in Fannie and Freddie’s securities nervous and potentially destabilize the market. An alliance of groups that includes progressives and conservatives has called on the FHFA to suspend dividend payments to the Treasury and to allow the GSEs to rebuild capital buffers.

Some of these organizations also have urged the FHFA to develop a recapitalization plan as a first step toward moving the GSEs out of the government’s control.

Supporters of the so-called recap and release of Fannie and Freddie also include mortgage trade groups such as the Independent Community Bankers of America (ICBA), the Community Mortgage Lenders of America (CMLA) and the Community Home Lenders Association (CHLA).

CHLA Executive Director Scott Olson said his nonbank members also agree that Congress needs to reform Fannie and Freddie prior to their release. He didn’t interpret the letter as a message to the FHFA to maintain the status quo and continue the profit sweeps.

Although the Senator’s letter doesn’t specifically oppose the idea of ending the profit sweeps, the letter does urge FHFA to continue the policy of forcing the GSEs to transfer risk on loan purchases and also to wind down their investment portfolios.

 "CHLA is pleased that the letter does not seem to oppose a modest capital buffer, nor does it prejudge whether Congress should retain the GSEs and their important securitization role for small lenders or eliminate them as the [GSE reform proposal] Johnson-Crapo bill did," Olson said. 


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