Scotsman Guide 5/11/17 – Watt says FHFA could withhold GSE dividends

Watt: FHFA could withhold GSE dividends

May 11, 2017

In testimony Thursday, Federal Housing Finance Agency (FHFA) Mel Watt strongly hinted that the regulator would begin withholding Fannie Mae and Freddie Mac’s dividend payments to taxpayers to lessen the chance that the government-sponsored enterprises will need to take future draws on the U.S. Treasury.

Watt warned members of the U.S. Senate Banking Committee that the GSEs dwindling reserves have put them in a precarious position of needing bailouts that could erode investor confidence in their securities and dry up the flow of money needed by lenders to make home mortgages.

He cautioned that any moves by the FHFA to avoid Treasury draws shouldn’t be misunderstood as interference in housing finance reform or a move to recapitalize the GSEs in preparation of releasing them from the conservatorship.

Members of the U.S. Senate Banking committee have asked Watt by letter to take no steps to change the GSEs’ agreement with the government, known as the Third Amendment Sweep, which sends nearly all of their quarterly profits to the Treasury coffers.

During Thursday’s testimony, he called the decade-long conservatorship “unsustainable” and said that it was the job of Congress, not the FHFA, to reform the GSEs.

Should the FHFA withhold the dividend payments, it would be done “solely to avoid a draw during conservatorship.”

“Like any business, the enterprises need some kind of buffer to shield against short-term operating losses,” Watt said in his prepared statement.

“In fact, it is especially irresponsible for the enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed-dollar commitment the Treasury Department has made to support the enterprises.”

Fannie and Freddie are scheduled to pay a combined dividend of $5 billion in June to the Treasury. In a speech before the Bipartisan Policy Center in February 2016, Watt raised similar warnings about the buffers, but has so far held off on ending the profit sweeps despite calls by Fannie and Freddie’s shareholders and several special interest groups.

The GSEs capital buffers have been purposely wound down to $600 million, and will go to zero in 2018. The government has extended an additional $258.1 billion combined in credit that could be drawn on in the event of losses.

After June’s scheduled dividend payment, Fannie Mae and Freddie Mac will have sent $162.7 billion and $108.2 billion, respectively, to the government’s coffers, which is $83.5 billion more combined than they received in bailouts after the 2008 financial crisis.

Watt’s comments were hailed by small-lender groups the Community Home Lenders Association and Community Mortgage Lenders of America, which have urged the FHFA several times to suspend the profit sweeps. These groups says that bailouts will generate bad press for the GSEs, and could prompt Congress to kill off the enterprises.

“Director Watt made it clear in his oral comments that FHFA has the authority to act on its own to prevent this, and CHLA continues its urgent call to take such action soon,” CHLA Executive Director Scott Olson said. 

 

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