Two years ago yesterday, bureaucrats at the U.S. Treasury made a sudden and arbitrary decision that wiped-out tens of thousands of private shareholders who invested in Fannie Mae and Freddie Mac. These shareholders include retirees and public pension funds such as those that protect state employees and school teachers. Known as a ³Third Amendment² sweep, there are countless Monday-morning quarterbacks who could debate whether or not it was appropriate to do this. At the time, our economy was struggling through a financial crisis, and efforts to stabilize the housing market were of the utmost importance.
But in the two years since that high-stakes sweep took effect, Fannie Mae and Freddie Mac have not only repaid the taxpayers the $187.5 billion loan that aided them during the crisis, the two government-sponsored enterprises have become wildly profitable. Unfortunately, the profits continue to go to the general Treasury fund and the shareholders who chose to invest in those two companies are still waiting for their payment.
With legislative efforts in a holding pattern, there is still hope for an administrative solution. Federal Housing Finance Agency Director Mel Watt has an opportunity to end this sweep, which would go a long way to restoring investor confidence and further stabilizing the housing market. Congress, also, could encourage support for FHFA efforts to put a halt to this harmful executive action. Fannie Mae and Freddie Mac work best when they are able to freely go about their mission to assure the necessary liquidity in the housing market for accessible and affordable financing for prospective homeowners without a government leash constraining them.
In the aftermath of the 2008 crisis, the U.S. Treasury put the two companies into conservatorship to provide them a guardian until such time that they could stand on their own economic feet again.Unlike the automotive companies that Congress bailed out a few years ago, Fannie and Freddie were required to pay back the full amount of their taxpayer loan. The terms of the conservatorship called for Fannie and Freddie each to issue the Treasury $1 billion of senior preferred stock with a 10 percent coupon in exchange for future support and capital investments of up to $100 billion.
On Aug. 7, 2012, with Congress in recess and few in Washington paying attention, Treasury quietly decided to change the 10 percent coupon to 100 percent. Every cent in profit made by Fannie and Freddie since that decision took effect has gone back to the government without regard for the investors who answered a call to invest in a government-sponsored enterprise. Aside from this stunning violation of the rule of law, this action broke faith with investors in a way that sets a terrible precedent for the GSEs and private investment.
Director Watt inherited this situation. He has long championed affordable housing, especially among underserved populations who, while being creditworthy, do not seek out home ownership as much as they could. The long-term viability of Fannie Mae and Freddie Mac are integral to increasing opportunities for home ownership.
Fannie and Freddie investors are only asking for what it is legally and contractually owed to them. The longer Treasury refuses to uphold its end of the conservatorship agreement, the less willing investors will be to participate in the GSEs. That would create a dire situation the likes of which would relegate the 2008 crisis to a historical footnote.
Sadly, Congress has proven itself incapable of getting its hands around GSE reforms in the short term, despite the fact that Fannie and Freddie back a stunning 90 percent of U.S. mortgages. Since lawmakers are more focused on politics than sound policy, the only remedy is for Director Watt to use the statutory authority vested in his office to end the conservatorship, thereby upholding promises to all stakeholders and sustaining Fannie and Freddie for the long-term health of our nation¹s housing market.
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.