Senator Toomey: Government unilaterally changes rules – wipes out investors

The following post appeared yesterday on the timhoward717 blog.  Letter from Senator Pat Toomey:

Mark said: February 7, 2015 at 1:44pm

February 6, 2015

Dear Mark,

Thank you for contacting me about Fannie Mae and Freddie Mac. I appreciate hearing from you.

As you may know, Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase mortgages, pool those mortgages into mortgage-backed securities (MBSs), and then sell them to investors with a guarantee that the investor will be paid on time. With over $5 trillion on their balance sheets, the GSEs play an enormous role in today’s housing market.

In 2008 as the financial crisis erupted, the GSEs’ ability to meet their obligations came into doubt. On September 7, 2008, the federal government took control of them and extended a direct line of credit from the Department of the Treasury (Treasury). In return for supporting the GSEs, Treasury received senior preferred stock that carried a 10 percent dividend and warrants to purchase 79.9 percent of the common stock of each entity for a nominal price. The remaining 20 percent of the companies remained in the hands of private investors. From 2008 to 2011, Treasury supported the GSEs through the purchase of over $189 billion in senior preferred stock. Since 2012, the GSEs have not required further Treasury support.

On August 17, 2012, Treasury and the Federal Housing Finance Agency (FHFA) dramatically changed the terms of the original GSE support agreement in what has become known as the “Third Amendment.” Rather than receiving a 10 percent dividend on its preferred stock, Treasury would receive all GSE profits going forward. By claiming all future profits, Treasury effectively eliminated all remaining shareholder value.

While I believe that taxpayers must be fully repaid and receive a fair return on their investment, the Third Amendment unfortunately may have a chilling effect on future private investment in the housing market. If the government is willing and able to unilaterally change the rules of the game at any time, investors in Pennsylvania and across the country cannot be confident that they will not again find themselves in a situation in which the government wipes out the value of their investment. Lack of private investment could prevent us from successfully reforming the GSEs, protecting taxpayers, and encouraging affordable housing finance for all Americans. I therefore look forward to working with my Senate colleagues on both sides of the aisle on this issue.

Thank you again for your correspondence. Please do not hesitate to contact me in the future if I can be of assistance.


Pat Toomey

U.S. Senator, Pennsylvania


2 thoughts on “Senator Toomey: Government unilaterally changes rules – wipes out investors

  1. Good letter. However, someone living in Pennsylvania should follow-up and use this response letter as an attachment using the last sentence in the 2nd to last paragraph which states “I therefore look foword to working with my Senate colleagues on both sides of the aisle on this issue”.
    Then ask, “to do what specifically”. In other words, we know he opposes it but don’t know what he plans to do about it or any of the parameters his solution would include or even if he’s willing to publically say any solution must respect shareholder rights. Dont get me wrong, this represents progress, but we need to get our leaders to take the next step.


    • That’s a good point. Follow-up is key. Hopefully a Pennsylvanian will do just that… I like the letter because most in congress are non-committal and will not speak that openly about the topic. Seems to be a taboo subject, but Senator Toomey’s statement is powerful.


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