Scotsman Guide 3/24/17 – Groups renew pitch for GSE buffers

Groups renew pitch for GSE buffers

March 24, 2017

Two small-lender trade groups and a half dozen other special-interest groups have once again urged the regulator of Fannie Mae and Freddie Mac to allow the government-sponsored enterprises to rebuild their capital buffers.

In a letter to the Federal Housing Finance Agency (FHFA) this week, the Community Mortgage Lenders of American (CMLA) and the Community Home Lenders Association (CHLA), along with six other advocacy groups, said the regulator should end the profit sweeps, allowing the GSEs to build up a buffer in the event of quarterly losses.

On Wednesday, quoting unnamed Congressional staffers, Reuters reported that major reforms to Fannie and Freddie likely won’t make it on the calendar this year, but that it was possible this would shift “the new administration’s immediate focus to allowing the mortgage financing institutions’ to rebuild depleted capital.”

CMLA Executive Director Glen Corso and CHLA Executive Director Scott Olson told Scotsman Guide News that the letter’s timing, which was dated and sent one day after the Reuters report, was coincidental. The same alliance has sent letters before to FHFA Director Mel Watt. This most recent letter was sent ahead of the GSEs March dividend payment to the U.S. Treasury.

“Regardless of whether and how quickly Congress acts, our groups have consistently made the point that a buffer is needed because of the arbitrary sweep agreement that sweeps profits and is driving the GSEs’ net worth to zero,” Olson said.

New warnings

If Fannie and Freddie are forced to take draws on the U.S. Treasury, the letter said, it could cause “precipitous legislative action on both the affordable-housing mission of the enterprises and equitable access to the secondary-mortgage market by small lenders.”

The letter also noted that FHFA Director Mel Watt warned more than year ago that the declining buffers posed “the most serious risk and the one that has the most potential for escalating in the future.” Watt also highlighted in the same speech risks to the GSEs from their near decade-long conservatorship.

The letter also alluded to a recent Fitch Ratings report, which indicated that the GSEs would have to take a significant one-time draw on the Treasury if Congress reduces corporate taxes. The letter also said allowing the GSEs to have a buffer would be consistent with President Donald Trump’s policy to pursue regulatory reform that prevents taxpayer bailouts.

The U.S. Treasury sweeps up all the GSEs profits and has been winding down Fannie and Freddie’s reserves. In January 2018, the buffer is scheduled to be reduced to zero. Future draws are highly likely because the GSE regularly have quarterly-earnings volatility.

The government continues to backstop the mortgage-backed securities issued by the GSEs and has made billions available to Fannie and Freddie that could be drawn upon in the event of losses, however.

Other groups signing the letter included the NAACP, Corporation for Enterprise Development (CFED), The Leadership Conference on Civil and Human Rights (LCCR), League of United Latin American Citizens (LULAC), Leading Builders of America and the National Community Reinvestment Coalition (NCRC).

CHLA in the News