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FHFA Director Won’t Let GSEs Run Out of Capital

The regulator and conservator of Fannie Mae and Freddie Mac is warning that the agency will not allow the pair of companies to run out of capital.

It has been nearly nine years since the two secondary mortgage lenders were forced into conservatorship by the Federal Housing Finance Agency.

L. Watt says that the regulator has responsibly balanced and met FHFA’s multiple statutory mandates to manage the GSEs’ day-to-day operations

Watt, who was sworn in as FHFA director in January 2014, made the comments Thursday before the
U.S. Senate Committee on Banking, Housing, and Urban Affairs, according to a copy of prepared testimony provided by FHFA.

But while he’s done the best he can, Watt noted that the
conservatorships are not sustainable.

“We also know that housing finance reform will involve many tough decisions and steps that go well beyond the reforms made in conservatorship,” he said. ” So I want to reaffirm my strong belief that it is the role of Congress, not FHFA, to make these tough decisions that chart the path out of conservatorship and to the future housing finance system.”

Congress will need to decide how much backing the federal government should provide and in what form. It also must determine the process for transition to a new housing finance system, what roles Fannie and Freddie should play
in the reformed system, and the regulatory and supervisory structure needed.

“I reaffirm my belief that it is the role of Congress, not FHFA, to make those housing reform decisions and I encourage Congress to do so expeditiously,” Watt added.

But until housing finance reform takes place, Watt is concerned about the
GSEs needing another taxpayer bailout since the preferred stock purchase agreements call for the two organizations’ capital buffer to fall to zero on Jan. 1, 2018.

For one thing, zero capital will not allow for a loss during any quarter. In addition, GAAP
accounting for a number of non-credit related factors in the ordinary course of business regularly results in large fluctuations in gains or losses.

Watt is concerned that without any capital buffer, investor confidence will erode — potentially stifling
liquidity in the mortgage-backed securities market and increasing the cost of mortgage credit for borrowers.

Watt warned that there is no room to risk the loss of investor confidence — especially given that FHFA
has explicit statutory obligations to ensure that Fannie and Freddie operate in a safe and sound manner and foster liquid, efficient, competitive and resilient mortgage markets.

“It would, therefore, be a serious misconception for members of this committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release,” Watt proclaimed. “FHFA’s actions would be taken solely to avoid a draw during conservatorship.”

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