Treasury stealing from Fannie and Freddie shareholders

As voices across the ideological spectrum have come to recognize the need for serious reform of our housing finance system with a greater role for private capital, the nation’s top housing regulator made an unfortunate revelation.  A revelation which points to the difficult path for serious housing reform.  Mel Watt, newly installed Federal Housing Finance Agency (FHFA) director and top regulator of mortgage giants Fannie Mae and Freddie Mac, says that reforming the unfair housing finance system and protecting property rights is not part of his job description.

 “My responsibility in the conservatorship is not to the shareholders, really.  So I don’t lay awake at night worrying about what’s fair to the shareholders,” Watt said in a recent interview on C-SPAN’s “Newsmakers”.

Secretary Watt's unfortunate, and somewhat shocking, statements betray an arrogance on the administration's part that is not helpful in the effort to effectively - and equitably - reform Fannie Mae and Freddie Mac so the public can feel confident going forward.  After the financial disaster our country experienced in 2008, Watt ought to lay awake every night concerned with shareholders, investors, taxpayers and all Americans who have a stake in ensuring such a collapse never happens again. 

When the housing market collapsed and government bailed out Fannie and Freddie, the system needed private investors and many took a risk to put capital into the two entities, hoping they would see a profit.  The investors were told they were still entitled to their share of future profits. Once the companies became profitable again in 2012, the government changed the terms of the conservatorship to a “net worth sweep,” making Fannie and Freddie turn over all profits each quarter to the Treasury Department. The new agreement leaves shareholders out in the cold and gives all profits over to the government.  These actions by the Treasury Department are a theft of private property, taking the gains of investors who risked their money with the stroke of a pen in order to pad the U.S. Treasury.

By changing the rules in the middle of the game and taking away the property rights of shareholders in this way, the government is also discouraging private investment in the housing market, which is key to its success.  How would we expect private capital to enter the housing market when there is obviously no protection of property rights and investor rights?  Such a precedent will discourage investment in the sector and the lack of certainty and property protection may even reverberate into other industries.  The 30 year mortgage and the stability and vibrancy of our housing finance system depend on private capital.  That should keep Mr. Watt up at night. 

In Congress, reform of Fannie and Freddie is faring no better.  The Senate reform effort sponsored by Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) that recently passed the Banking Committee is not the solution to these problems. Across the political spectrum, people have come to realize that this bill is not a true reform as it does not protect property rights and it actually keeps in place the mechanisms that could lead to another financial collapse.

There is a bipartisan consensus on how to wind down Fannie Mae and Freddie Mac, while protecting property rights and shareholders and limiting the role of government in the housing marketplace. This bill is not that solution.  Rather than rush through bad legislation, Congress needs to take a step back and take its time to address all the concerns that have been raised in order to achieve a real reform that helps homeowners, investors and the economy.  We cannot afford to get this wrong.

Congress and officials like Director Watt need to take this issue seriously and decide if they are going to be part of the solution or part of the problem.  The FHFA needs a leader who will step up and take responsibility to fix the flaws in our housing system, not one who is comfortable with its failures.  We need legislators and regulators who understand the vital role that investors, shareholders, taxpayers and consumers all play in the health and vitality of our housing finance system. Fortunately there are Democrats and Republicans who take this effort more seriously, and bipartisan consensus for meaningful reform will hopefully carry the day in the long run.  Then, we can all sleep better at night.

Blackwell, a director of the Coalition for Mortgage Security, is a former undersecretary at the U.S. Department of Housing and Urban Development, a former Ohio state treasurer, and former mayor of Cincinnati.