Government-supported firms net criticism for former Treasury secretary

Pressure is building on the Treasury Department to reduce the billions in annual dividends Fannie Mae and Freddie Mac pay the government.

The National Association of Realtors plans to weigh in against the policy with Treasury, according to sources familiar with internal discussions.

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The argument is that the 10 percent annual dividend paid by Fannie and Freddie to the government on its senior preferred stock is holding the companies back and slowing the recovery of the real estate market.

“The banks only have to pay 5 percent,” said Lucien Salvant, managing director of public affairs for the Realtors. “Why should they [Fannie and Freddie] have to pay more? It’s just going to add to their problems.”

The Realtors are the first big lobbying group to weigh in against the 10 percent “coupon,” but they may not be the last.

Another influential lobbying group with an interest in Fannie and Freddie’s economic health is the Independent Community Bankers of America (ICBA).

Community banks held billions in preferred stock in the two companies, but the value of that stock was wiped out when former Treasury Secretary Henry Paulson seized the companies and placed them in conservatorship.

In his recent book On the Brink, Paulson writes that “we had to ambush Fannie and Freddie.” ICBA is now using those words against Paulson in arguing that its members were treated unfairly.

ICBA wants the government to restore dividends to preferred shareholders. It hasn’t weighed in yet on the coupon, though an official said steps to help the companies move forward would be welcome.

“We have not [taken a position] at this point,” said Paul Merski, ICBA’s chief economist. “Anything that would restore viability and, going forward, the profitability of Fannie Mae and Freddie Mac would make sense.”

Fannie and Freddie continue to backstop most of the privately held residential mortgage loans in the country, making their success critical not only to the housing market, but to the national economy.

Congress did not include the companies in the Wall Street reform bill now in a House-Senate conference, and it’s far from certain that the issue will be addressed next year.

Both the coupon and the fight over dividends for preferred shareholders promise to be difficult issues for the Obama administration and Congress.

The Fannie-Freddie 10 percent coupon was set up when Paulson provided a $200 billion backstop that Fannie and Freddie borrowed from to secure their mortgages. Without that help, Fannie and Freddie would be unable to cover their positions.

Fannie expects to pay $7.6 billion in dividends to Treasury this year on the preferred senior stock, while Freddie has paid the government $4.3 billion.

Critics argue the payments make it more difficult for the two companies to recover, and the companies themselves have warned that the payments could delay their return to long-term profitability.

Rep. Kenny Marchant (R-Texas), a member of the House Financial Services Committee, told The Hill earlier this month that he thinks Fannie and Freddie’s payments to the government should be reduced. The involvement of the Realtors could lead to more calls.

ICBA blasted Treasury over the dividend payments earlier this year in a letter to Treasury Secretary Tim Geithner signed by the association’s president, Cameron Fine.

Fine wrote that there is “no doubt” the government’s action under Paulson was “an unjustified ‘ambush’ structured in a way that continues to have detrimental consequences on many community banks that relied on the guidance of Treasury and bank regulators and were intentionally deceived on their Fannie and Freddie holdings.” 

Fine wrote that between $15 billion and $20 billion in Fannie and Freddie preferred stock was held by the banking sector when Paulson seized the two companies in conservatorship, crushing the value of the preferred stock held by the banks.

Treasury has not yet responded to the letter, according to ICBA.

At the time, Paulson downplayed the risk of exposure from Fannie and Freddie to banks and thrifts, saying federal agencies believed that only a “limited number of smaller institutions” had holdings significant to their capital.

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“Rather than help stabilize the financial sector and boost lending, this government ‘ambush’ further hurt banks’ capital levels, weakened the banks and reduced available credit,” Fine wrote.

ICBA has urged Treasury to restore dividend payments on Fannie and Freddie preferred shares and pay injured holders the amount of suspended dividends from Sept. 7, 2008, on an estimated $20 billion in GSE preferred holdings.

It also wants the administration to remove the GSEs from conservatorship in a way that restores a reasonable value to the preferred shares, and argues this would provide new capital to banks that would spark additional lending.