Mortgage giants headed for crisis

Mortgage giants headed for crisis
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Housing industry experts are sounding the alarm over the increasingly dire financial situation of the federal mortgage giants Fannie Mae and Freddie Mac.

The government-controlled enterprises are hurtling toward a severe capital crunch that will leave no buffer for absorbing future losses, experts say, potentially putting taxpayers on the hook for another bailout.

But nearly eight years after the Federal Housing Finance Agency (FHFA) took control of Fannie and Freddie, Congress has yet to pass a plan that would wind them down, reduce the government’s mortgage footprint and create a new housing finance framework. 

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“I actually believe it’s really incumbent on Congress to take this up as an issue, thoughtfully, while we have time,” David Stevens, head of the Mortgage Bankers Association (MBA), told The Hill.

Stevens called the situation “a terrible predicament” because Fannie and Freddie “are completely critical to our housing system.”

Jim Tobin, chief lobbyist with the National Association of Home Builders, blamed the lack of action on reform for the sluggish recovery in the housing market. 

“Congress has to resolve this; housing finance can’t remain in limbo,” Tobin said. 

The government took over Fannie and Freddie in 2008 to keep them from collapsing under the weight of bad mortgage debt. 

The two entities have drawn a total of $187.5 billion from the Treasury Department and have repaid $241 billion in dividends, though those payments don’t count toward their debt.

Despite the vocal warnings from industry groups, Congress is unlikely to move on housing finance legislation until after a new president takes office in 2017.

“So we’re just trying to bring facts to the table — let people dispute the facts if they want — and try to promote a dialogue that can take place in the next administration, because it has to take place,” Stevens said. 

“It’s a huge unfinished piece of business,” he said. 

Tobin called 2017 “the best bet” for housing finance reform, but advocates are already laying the groundwork for action.

The homebuilders are talking to top lawmakers on Capitol Hill about a way forward, including House Financial Services Committee Chairman Jeb Hensarling (R-Texas).

“We believe there is a deal out there,” Tobin said. “And we’re urging lawmakers to make it a top priority. It remains the single biggest issue left unresolved from the financial crisis, and Congress must act.”

Fannie and Freddie hold $5 trillion in mortgage guarantees on their books but face shrinking earnings and a zero-capital predicament — a situation Stevens called “unheard of.”

Each firm’s capital is being reduced from $1.2 billion this year to $600 million next year and then to $0 in 2018, 10 years after the financial crisis. 

“The fact is right now we can debate the past, it doesn’t really matter. We’re in a scenario where they don’t have any money; they’re not earning enough to really build capital, and the contract still winds them down in a couple of years,” Stevens said. 

“Once their capital goes to zero, there will be no cushion between the GSEs [government-sponsored enterprises] and the need for additional draws on the remaining Treasury commitment, roughly $250 billion,” said Michael Fratantoni, the MBA’s chief economist and senior vice president of research and industry technology.

The mortgage enterprises have maintained profitability since 2012, but industry experts say they are in a precarious financial position, with earnings on a steep decline.

Stevens said he expects that one of the GSEs will need to take a draw from the Treasury Department’s credit line sometime this year — possibly as early as the first quarter, a move likely to reverberate on Capitol Hill. 

“I think they thought those kind of earnings were going to happen all the time,” Stevens said. 

“We all knew it wasn’t going to continue.”

Housing regulator Mel Watt, head of the FHFA, said in a recent speech that he has made it clear Congress needs to tackle housing finance reform. 

“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind,” he said in a Feb. 18 speech. 

As Congress ponders its next move, Watt is moving to implement a single security that would provide more uniform mortgage-backed securities between Fannie and Freddie, with the intent of creating more liquidity and private investment while lowering taxpayer exposure in the markets.

The single security would be part of a broader plan to update the securitization infrastructure for both enterprises. 

Industry groups broadly agree that it is up to Congress to get the housing finance system back on track and promote much-needed private investment. 

“Unless you know what Washington is going to do with Fannie Mae and Freddie Mac and what the future looks like … you’re not going to invest capital,” said Fowler Williams, head of Crescent Mortgage.  

Experts argue that legislation is the only solution because there is no viable way for Fannie and Freddie to rebuild capital, an idea floated last fall. The Treasury Department has said it doesn’t intend to stop the capital wind-down plan. 

Advocates of congressional action say a proposal last fall deemed “recap and release” would let Fannie and Freddie keep their profits from now on and not return them to the Treasury. 

Stevens said it would take decades for Fannie and Freddie to build sufficient capital — $200 billion to $300 billion based on a small percentage of their holdings — to reassure investors. 

“The math doesn’t produce enough earnings to rebuild capital in any reasonable time frame,” Stevens said.