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GSE dividend jumpstarts debate on reforms

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will make a total of nearly $10 billion in dividend payments to the U.S. Treasury on schedule this week even as their federal regulator has been under pressure to let the housing-finance giants keep the money as a first step in reforming them.

The Federal Housing Finance Agency (FHFA) reported this week that Fannie and Freddie will make their fourth quarter dividend payments to the U.S. Treasury as planned. Several special-interest advocacy groups, along with two small-lender trade associations, have urged the regulator to suspend the payment and let them hold on to their profits as a way to rebuild capital.

GSErefoThe approaching deadline on the dividend payments has led to a flurry of jockeying this month among groups with opposing views on GSE reforms. The lobbying is also coming at a time when the U.S. Senate banking committee has been taking input on GSE reform from industry stakeholders through a series of informal panels.

There are two issues at hand here. The overarching issue involves the future of Fannie and Freddie, and comprehensive reforms that could potentially change the way that nearly half of all home mortgages are financed. These changes would need to be taken up by Congress.  

The more immediate issue, however, involves the GSEs’ short-term prospects, given their declining capital buffers and the agreement with the government that requires Fannie and Freddie to pay out nearly all of their quarterly profits to the U.S. Treasury. In this regard, the FHFA and Treasury can make changes on their own without Congressional approval.

Fannie and Freddie’s capital buffers have been purposely wound down to $600 million this year, and are scheduled to go to zero in 2018. Both the GSEs can draw on billions of dollars pledged by the Treasury if their net worth falls into negative territory. 

FHFA Director Mel Watt and other analysts have said that it is likely that the GSEs will have to take a draw next year as their quarterly earnings have been volatile. These so-called taxpayer bailouts are unpopular, however. Groups that want to see Fannie and Freddie survive are worried that the backlash will result in hasty reforms that kill off the agencies.

Two sides of the debate 

On Wednesday, nonbank trade group the Community Home Lenders Association (CHLA), sent the FHFA a letter urging the regulator to end the profit sweeps and to develop a plan to recapitalize the GSEs. CHLA will testify along with other small-lender groups at a scheduled panel of the Senate banking committee on Friday.

“CHLA is not saying that they should recapitalize in the absence of the administration and Congress,” Executive Director Scott Olson told Scotsman Guide News. “I don’t see how a small buffer like what we are calling for, which is probably like $8 or $10 billion each, I don’t see any way in which that would interfere or create problems for the House or Senate acting on comprehensive legislation.”

On the other side of this debate are groups like the industry’s largest trade group, the Mortgage Bankers Association (MBA), that want to keep the current agreement in place while Congress tackles reforms.  

“Given that momentum for GSE reform is starting to build on Capitol Hill, now would be exactly the wrong time for the regulator to independently recapitalize the GSEs, a move that would clearly antagonize policymakers, potentially resulting in a detrimental outcome,” said MBA President David Stevens. 

“The future of Fannie and Freddie should be determined by Congress,” Stevens continued. “That is the only way to reach a solution that does what’s best for Americans’ housing needs and taxpayers.”

Citing unnamed congressional staffers, Reuters reported this month that comprehensive GSE reform is not expected to make it on the calendar this year. The Republican-majority Congress and Trump administration will next turn to overhauling the tax code and immigration issues after the failed effort to repeal Obamacare. 

Earlier this week, a bipartisan group of senators on the Senate Banking Committee urged the FHFA not to alter the government’s agreement with the GSEs, saying it would undercut their efforts to jumpstart reforms in Congress.


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