As we celebrated the coming of the New Year yesterday with the countdown to midnight we knew what was coming – a ball drop, fireworks, champagne toast… and a new year!!
But with Fannie Mae and Freddie Mac we have a wind down to a seemingly undefined event that will occur at an unspecified time. Hardly something to gather your friends together for the wind down countdown…! What number do you start with…and what number do you end with…?!?
Well, $250 billion seems to be the end number. And, at Fannie, $424 billion is apparently the current number according to the FNMA November monthly report released yesterday.
$250 billion represents the maximum mortgage assets mandated in the third amendment to the senior preferred stock agreement.
“Mortgage Assets. Seller shall not own, as of any applicable date, Mortgage Assets in excess of (i) on December 31, 2012 $650 billion or (ii) on December 31 of each year thereafter, 85% of the aggregate amount of Mortgage Assets that Seller was permitted to won as of December 31 of the immediately preceding calendar year; provided that in no event shall Seller be required under this Section 5.7 to own less than $250 billion in Mortgage Assets.”
“Fannie Mae…must reduce its portfolio each year, beginning in 2010, by at least 10 percent per year (but not below $250 billion).”
“Consistent with the Senior Preferred Stock Purchase Agreements, as amended, FHFA is directing the Enterprises to submit plans for approval that reduce the retained portfolio assets to $250 billion by December 31, 2018.”
The language is the same in the Freddie Mac agreement.
The following is the history of the mortgage assets for Fannie Mae:
FNMA’s Gross Mortgage Portfolio (GMP):
August 2008 – $760 billion (the month before the illegal take-over)
December 2008 – $787 billion
December 2009 – $773 billion
December 2010 – $780 billion
December 2011 – $708 billion
December 2012 – $633 billion
December 2013 – $491 billion
November 2014 – $424 billion
FMCC Mortgage Assets:
December 2009 – $755 billion
December 2010 – $697 billion
December 2011 – $653 billion
December 2012 – $558 billion
December 2013 – $461 billion
So, is the $250 billion number the one we should celebrate once we reach it? Will Fannie and Freddie be released from Conservatorship when their mortgage portfolios reach $250 billion?
That being the case, Fan and Fred would need to have been recapitalized prior to their release. If the plan is to release the companies when they reach $250 billion in mortgage assets then the funds that Treasury received in excess of the amount distributed plus interest would need to have been set aside in a special fund established for recapitalization.
However, officially here is the Government’s position on capitalization:
“The amended senior preferred stock purchase agreement does not allow the company to build a capital reserve. Beginning in 2013, the required senior preferred stock dividends each quarter equal the amount, if any, by which the company’s net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount. The capital reserve amount is $2.4 billion for each quarter of 2014 and will be reduced by $600 million each year until it reaches zero in 2018.”
By 2018, it is expected that Fannie and Freddie’s mortgage portfolios will be reduced to their mandated capped levels of $250 billion. And their capital reserves will be at zero.
Then what? Fannie and Freddie reach their Treasury mandated level and then stop reducing their holdings. However, at that same time, projected to be 2018, both companies will have zero capitalization. The two mandates seem to be at odds with one another.
But what about all this talk of “winding down” or “winding up” and even eliminating Fannie and Freddie?
Was Conservatorship meant to just buy time for Congress to enact reform?
According to FHFA Acting Director Edward DeMarco in his first letter to Congressional Finance Committee leaders in February 2010 states, “The Enterprises’ operating in Conservatorship cannot be a long-term solution. When the Conservatorships and Treasury’s financial commitment were established in 2008, Secretary Paulson described the arrangement as a “time-out” to allow policymakers to further consider the role of the Federal government and the Enterprises in the future system of housing finance.”
So, it is clear that the original intent was for the government to seize Fannie and Freddie so that they could directly control their fate. The fate at the time appeared to point to Congress passing legislation to replace Fan and Fred with a new housing finance system. Obviously, Congress has been unable to pass legislation.
But, at the same time that both the Administration and Congress had the goal of inventing a new housing finance system while eliminating Fannie and Freddie, there existed a parallel plan to downsize both companies.
Another way to consider the forced downsizing is to compare the $250 billion mandate to $760 billion (the month prior to c-ship) FNMA portfolio, which is 33%. In other words, the US Government seized Fannie Mae in order to shrink it to 1/3 of the size of what it was prior to the take-over.
In July 2014, Treasury Secretary Jack Lew stated in an interview, “…it is appropriate for us to stay in the structure of Conservatorship that we’re in. We need to get on with financial reform; we need to have a clear plan for future that circumscribes the taxpayers’ exposure in a very limited way. And the sooner we do that, the better.”
So, though the Administration is still calling for Congress to enact housing finance reform, Secretary Lew also refers to Fan and Fred as possibly still existing in the future, but in a reduced form.
Interestingly, on the spiral wind down path, Mr. DeMarco noted in his February 2010 letter that Fannie and Freddie would be forced to purchase bad debt stating, “…FHFA remains committed to the principle of reducing the retained portfolios…FHFA does not expect the Enterprises to be substantial buyers or sellers of mortgages, with an important exception. As I stated in December, the increased flexibility provided with the retained portfolio amendment may be important for maintaining the Enterprises’ capacity to purchase delinquent mortgages out of guaranteed mortgage-backed security pools.”
But back to 2018… Why 2018, what is significant about that year? Is it just a round 10 years from the 2008 heist? Does 2018 represent the intended year for ending Conservatorship? If so, why would FHFA and Treasury not just clearly communicate this fact? Or was it that Mr. DeMarco and Mr. Geithner believed that Congress would act much sooner on reform than 10 years?
So, what if Fan and Fred were able to reduce their mortgage portfolios to $250 billion sooner than 2018…could they be released then?
It seems likely that 2018 was just a kick-the-can date that was a far-fetched timeframe not really meant as an end date. And obviously the current Administration will be long gone by then.
However, now that Fannie and Freddie have paid back all of the Treasury-infused funds and after six years of Conservatorship it is time for an updated plan from FHFA. A plan that is clear and transparent. 2015 also represents the year that is prime for a fourth amendment. The last (third) amendment was in 2012 and circumstances have changed dramatically since then.
What is apparent is that 2015 should prove to be a pivotal year for Fannie and Freddie. Several lawsuits are advancing and Republicans are set to take over both chambers, as well as the leadership positions on the House and Senate Finance Committees. Plus, it’s hard to imagine another year of inaction from the Administration regarding the Sweep and Conservatorship.
Here’s to the New Year! Free Fan and Fred in ’15!