With Congress poised to begin marking up legislation to reform mortgage giants Fannie Mae and Freddie Mac by the end of the month, more and more Fannie and Freddie investors have learned exactly what that means for their pensions and personal investments. And what are those investors being told? That Fannie and Freddie are going away and stock held by firefighters, police, school teachers, community banks, pensioners and individual investors will amount to nothing more than worthless paper.
The Federal government used $187.5 billion taxpayer dollars to keep the Government Sponsored Enterprises (GSEs) afloat and placed them into conservatorship at the height of the financial crisis in 2008. The government held to its original conservatorship agreement until August 2012 when it arbitrarily decided to change the rules in midstream with an amendment that diverted 100 percent of Fannie and Freddie¹s profits to the Treasury¹s coffers, effectively wiping out private investors. Some of the investors who had their dividend swept away were invested in the GSEs years before the conservatorship took effect; some people had invested around the outset of the conservatorship and some had invested a few years after.
How does their bill treat shareholders? First, it permanently writes into law the Treasury Department¹s move to forever seize the profits of Fannie and Freddie. And second, it wipes out FHFA¹s legal duties as a conservator to all other entities besides the Treasury Department. Put another way, individual shareholders, retirees, police and fire pensioners, and others will be left without a pennyŠthe government gets it all.
Senators Corker and Crapo have both said that their legislation ³leaves the investor issue to the courts², but that claim defies credibility. Their legislation puts Congress¹ thumb firmly on the scales of justice and on the side of the Obama Administration taking money it wasn¹t entitled to. Last week, Treasury Secretary Jack LewJack LewHatch asks Treasury for memo that decreases transparency of tax rules Ryan fights to win GOP majority on Puerto Rico Overnight Finance: Puerto Rico pressure builds; Big tariff vote Wednesday MORE explained the federal government¹s taking by saying ³I doubt a lot of people [the taxpayer] would feel they have been made whole.² But Mr. Lew ought to check his math: the federal government put in $187 billion, and so far has received $205 billion back plus 80 percent of any upside of a recapitalization. The Treasury Department has made out much better in their support of Fannie and Freddie than they did with the auto bailouts. But regardless of losses or profits, the government has to live by the terms of its contracts the same way private parties do.
Moreover, the very premise of this legislation, that Fannie and Freddie need to be wiped out, may be politically convenient but it ignores the realities of how the nation¹s mortgage market is capitalized, and how affordable housing becomes a reality for the middle class. Handing over the housing finance market and the guarantee business to the too-big-to-fail banks, wiping out the community banking system and obliterating Fannie and Freddie investors won¹t encourage private capital to show up for mortgages..
I know this; as a professional money manager, I allocate capital for a living. If private investors can¹t rely on the rule of law in the mortgage market, they¹ll re-allocate capital to fund auto loans, credit card debt, or even apartments. Capital follows the rule of law.
America¹s mortgage market is a $10 trillion industry that needs private capital. Without it, mortgages will become harder to obtain for ordinary Americans; mortgage fees will increase, creating substantial burdens for homeowners; and the 30-year mortgage may become a thing of the past.
Ask an investor and they will tell you: The marketplace functions based upon rules and certainty. Arbitrarily changing the rules in the middle of the game is destructive to investor confidence, and it¹s un-American. We can only hope that Washington will listen to investors in its bid to reform Fannie and Freddie the right way.
Pagliara is chairman and CEO of CapWealth Advisors and the founder of Investors Unite (www.investorsunite.org), a coalition of private investors committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac.