CMLA calls on FHFA, Treasury to recapitalize Fannie and Freddie

Trey Garrison

February 23, 2015

The Community Mortgage Lenders of America renewed its call for U.S. Treasury Secretary Jack Lew and Federal Housing Finance Agency Director Mel Watt to take immediate action to recapitalize/cure the under-capitalization of both Fannie Mae and Freddie Mac.

The CMLA in December of last year – as the GSEs were reporting record profits – called for immediate action that would allow them to retain some of those profits to build a reasonable risk capital base.

Now, as profits plummet for both Fannie Mae and Freddie Mac – due in large part, to losses on derivatives – that call gains prophetic urgency.

The GSE capital levels, already minimal, will hit zero within just the next few years. Low or zero capital, coupled with declining earnings, could require yet another federal bailout. Fannie’s CEO Tim Mayopoulos, for example, said the “fact that we don’t have a significant amount of capital increases the likelihood” that Fannie will need additional capital from Treasury at some point.

The GSE capital depletion is a direct outcome of the repayment terms embedded in the Preferred Stock Purchase Agreements between the GSEs and the U.S. Treasury. That agreement requires the GSEs to remit 100% of profits, which precludes building capital.

CMLA Chair Paulina McGrath said “this precarious balance in earnings, derivative and market risks versus capital is an irrational approach to preserving the housing market. The Treasury agreement generates cash flow into the Federal coffers but this could prove to be at the expense of lenders and homebuyers alike.”

After Freddie Mac makes its next dividend payment, the GSE will have returned $91.8 billion to Treasury versus draws of $72.3 billion, resulting in an account surplus of $19.5 billion.

Both GSEs have recorded 12 consecutive profitable quarters while, at the same time, each is approaching zero capital levels. That leaves the GSEs – and in turn, the taxpayers – at risk from market or overall economic declines as well as continued losses from GSE derivatives.

The CMLA is repeating its call for Treasury to take immediate corrective action to cure the undercapitalization of the GSEs.

“There is neither a need nor a rational reason to wait on Congress to act, particularly since GSE reform legislation is far from certain,” McGrath said.

http://www.housingwire.com/articles/33020-cmla-calls-on-fhfa-treasury-to-recapitalize-fannie-and-freddie?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire

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