‘Tis the season for legislative mischief – when ornaments get added to must-pass bills at the last minute and lawmakers, eager to get home for the holidays, look the other way. Unfortunately, Sen. Corker (R-Tenn.) was able to slip language from his “Jumpstart GSE Reform” amendment into the omnibus spending bill now on its way to the president’s desk.     

The “Jumpstart GSE Reform” was poorly named. It would actually hinder chances for reform by requiring Congress to sign off on administration efforts to end the conservatorship of Fannie Mae and Freddie Mac.  The result is that taxpayers remain at risk for footing the bill of a bailout if the undercapitalized GSEs experience a downturn. Meanwhile, the Treasury will continue to feast on the GSEs’ revenue because of the net worth sweep. As modified in the omnibus bill, the “jumpstart” language will likely have the effect of locking this bad policy in place for at least two more years. 


Of course, this ill-conceived provision could be overtaken by events. Shareholders are making slow but steady progress with lawsuits to force the government to end the illegal net worth sweep. If the Administration decided it wanted to actually recapitalize and reform the GSEs, it still controls warrants for 79.9 percent of the companies’ common stock and could devise a way around the shackles the Jumpstart bill seeks to apply to share of preferred stock. 

For more than seven years, government-sponsored companies Fannie Mae and Freddie Mac have been stuck in a limbo of conservatorship that most observers would agree has lasted much longer than Congress intended.  This not only impacts the taxpayer, but also creates uncertainty for investors and aspiring homeowners.  The administration should have long ago acted to end this uncertainty under the authority it under the law. Unfortunately, its foot dragging opened the door for this week’s move by Congress to snatch away that authority. 

Let’s take a step back.  When Congress passed the Housing and Economic Recovery Act (HERA) in 2008, which authorized the conservatorship of Fannie and Freddie when they were undercapitalized, it created a new independent federal agency, the Federal Housing Finance Agency (FHFA), and explicitly directed it to return the companies in conservatorship to safety and solvency.

Since that time, Fannie and Freddie have repaid the taxpayers all the money they were advanced and a whole lot more.  Through the latest quarter, the companies have paid back $241 billion against advances of $187 billion. In addition, they have paid billions in federal income tax ranking consistently as one of the top taxpayers in America since 2013. In 2012, the Treasury Department unilaterally changed the terms of the deal to take a quarterly 100% “net worth sweep” of the companies’ profits, preventing Fannie and Freddie from rebuilding capital against future losses, and putting taxpayers at risk of another draw. 

The net worth sweep makes it impossible for the conservator FHFA to restore the companies to safety and solvency as required under HERA, even though they are profitable.  Amazingly, rather than directing the companies to build capital like all other major financial institutions, some in Congress actually want to keep taxpayers directly in the line of fire. 

Make no mistake about it. Corker never intended to jumpstart reform. He wanted to make sure Congress could get in the way of recapitalizing Fannie and Freddie and hasten their dismantlement. He may have scored a short- term victory by sneaking his “jumpstart” language into the omnibus bill but the reckless and illegal policies dreamed up and implemented under the conservatorship will eventually be exposed. The conservatorship will end and Congress will have to get to take a serious look at GSE reform in a transparent manner.  This is a more suitable way to undertake changes to the multi-trillion home finance market than adding a provision most lawmakers have not seen to a massive bill throw together in the rush out of town for the holiday.  The regular legislative process of hearings, committee votes and floor debates will reveal the risks of doing away with Fannie and Freddie without a creating a carefully considered alternative system ready to take its place. 

Pagliara is executive director of Investors Unite, a coalition of private investors committed to the preservation of shareholder rights for those invested in the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.