This post is Part 2 of 2 and picks up from yesterday’s post “Edward DeMarco: “Treasury cannot be repaid under any foreseeable scenarios.””
These two posts are exploring some of the history of the Conservatorship. A forthcoming post will consider what the future may unfold regarding Conservatorship.
Recall that FHFA Acting Director Edward DeMarco sent a plan to Congress in February 2012:
A Strategic Plan for Enterprise Conservatorships: The Next Chapter in a Story that Needs an Ending
As noted yesterday, Mr. DeMarco asserted to Congress in his Strategic Plan “…it is clear that the draws the companies have taken from the Treasury are so large they cannot be repaid under any foreseeable scenarios.”
However, while making that bizarre, baseless claim he also stated “…FHFA has filed 18 separate lawsuits in connection with alleged securities law violations in private-label mortgage-backed securities purchased by the Enterprises.”
How could Mr. DeMarco at the time claim that the Enterprises could never repay “the draws from Treasury” when FHFA had 18 outstanding lawsuits with an unknown amount of damages to be collected? We now know the bank settlements were in the billions of dollars, which Mr. DeMarco would have foreseen!
It is clear that Mr. DeMarco, acting as Conservator, never intended to repay “the draws from Treasury.” He entered into the Net Profit Sweep Agreement just six months after his February 2012 report to Congress. The Sweep made it impossible for the Enterprises to repay “the draws.”
“The strategic goals and performance objectives set forth here provide an outline for the next chapter of conservatorship, one that focuses in earnest on building a secondary mortgage market infrastructure that will live beyond the Enterprises themselves.
This plan does not anticipate Fannie Mae and Freddie Mac continuing as they existed before conservatorship. And though the Enterprises may well cease to exist at some point in the future…an orderly transition to a new structure is needed.
This next chapter will also see a gradual reduction in the Enterprises’ dominant position in holding mortgage credit risk as private capital is encouraged back into that role.
Today, this business line is already on a gradual wind-down path. The Treasury support agreements require the Enterprises to shrink their retained mortgage portfolios at a rate of 10 percent per year.”
So, the plan was to not repay Treasury and to have the government seize Fannie and Freddie so that they could reverse-engineer their securities platforms in an effort to build a better mousetrap for themselves vis-à-vis today’s Common Securities Platform.
The Strategic Plan did offer a glimmer of hope for the Enterprises. Even though Mr. DeMarco frequently refers to Fannie and Freddie “ceasing to exist,” the Plan alludes to diminished and weakened Enterprises where they would lose their “dominant position” in the market.
Further, the plan notes “multifamily lending has played an important role in how the Enterprises have fulfilled past affordable housing mandates…
In conservatorship, the Enterprises have seen their market share grow in the multifamily sector but they do not dominate that market as they do in single-family.
…contracting the Enterprises’ multifamily market footprint should be approached differently from single-family, and it may be accomplished using a much different and more direct method. To evaluate how to accomplish the second strategic goal in the multifamily business, each Enterprise will undertake a market analysis of the viability of its multifamily operations without government guarantees. This will require market reviews of their respective business models and the likely viability of those models operating on a stand-alone basis after attracting private capital and adjusting pricing, if needed, to attract and retain that capital.”
So, the intent of the government take-over of the private companies of Fannie Mae and Freddie Mac was intended to make them less competitive in the single-family mortgage business while allowing Big Banks to dominate on this playing field.
The problem is that the shareholders of Fannie and Freddie did not get to vote on this vitally important issue.
The secondary goal was to seize the companies’ back office systems and to have the Enterprises design and pay for the new securitization platform that will be turned into a “public utility.”
The problem is that the shareholders of Fannie and Freddie were not compensated when their assets were seized Gestapo-style, nor will the shareholders likely be compensated for the creation of Common Securitization Solutions, LLC, which Fannie and Freddie are funding.
I’ll conclude this review of Conservatorship through the nearsighted eyes of Mr. DeMarco à la Mr. Magoo… We all do wish to see Mr. DeMarco again in the very near future at a court proceeding, Congressional inquiry, grand jury, special prosecutor, etc. etc.
In a future post, I will review the likely direction Conservatorship is heading under FHFA Director Melvin Watt who is nearing celebration of one year in the role. Godspeed Mr. Watt!