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Lender group calls for action on GSE reform

With the 10-year anniversary of the government’s takeover of Fannie Mae and Freddie Mac approaching this week, a nonbank trade group has renewed its call for the government-sponsored enterprises (GSEs) to begin working on capital-restoration plans that establish how each would raise the money to safely exit conservatorship.

fredmacThe Community Home Lenders Association (CHLA), which represents small nonbank lenders, urged the Federal Housing Finance Agency (FHFA) to direct the GSEs to start on recapitalization plans as soon as possible.

Some analysts believe it could take the GSEs a decade or more in conservatorship to raise the needed capital.

“We have already lost 10 years and made no progress,” CHLA Executive Director Scott Olson said during a telephone interview. “And these entities, even though they have produced $85 billion in net profit beyond repaying their original advance, they don’t have any capital. We keep putting this off, so we ought to be moving more quickly.”    

CHLA envisions an end-state system where Fannie and Freddie continue to purchase and securitize mortgages with a government guarantee, but resemble private utilities with less ability and incentive to make risky business moves.

Unlike some other trade groups, like the Mortgage Bankers Association, CHLA and its allies believe that FHFA and the Treasury department should do most of the heavy lifting in ending the conservatorship. Congress would have to make minor changes to the charters, and pass legislation that codifies reforms made during the conservatorship.  

Fannie and Freddie were both placed into the conservatorship on Sept. 6, 2008. Congress has taken a few stabs at comprehensive housing-finance reform, but these have failed to gain traction.

“We’re not saying that Congress won’t be along, but it has been 10 years and we are still in limbo,” Olson said. “Honestly, a lot of people are getting pretty discouraged about Congress having the will to pass a complicated financial bill like that.”

FHFA has already preliminarily proposed a capitalization standard that would require the GSEs to raise around $140 to $180 billion prior to being safely released from the government’s control, but a final rule could be months away. CHLA says the regulator need not wait to direct the GSEs to begin their own capital-restoration plans.

“It is likely that the final rule will wind up in that ballpark, so there is certainly enough to go on to start developing a plan,” Olson said.

“It doesn’t mean you have to start the process of recapitalization, but why isn’t it better to get a pretty good sense of how you are going to get there? It gives Congress, policymakers, everyone, a better chance to make better decisions going forward.”  

At present, Fannie and Freddie are only allowed to retain up to $3 billion each as a capital buffer, and the Treasury Department sweeps up all the profits in excess of that.

Previously CHLA has allied itself on this issue with the Community Mortgage Lenders of America (CMLA), and civil rights groups that are concerned that reforms might lead to the demise of the GSEs and the gutting of affordable-housing and rental initiatives. These include the NAACP, the National Community Reinvestment Coalition and the Leadership Conference on Civil and Human Rights. In June, the coalition sent a letter to the FHFA urging action on a capital-restoration plan. CHLA sent the latest letter on its own. 


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