Recently there have been calls to allow Fannie Mae and Freddie Mac (the GSEs) to suspend their future payments owed to the U.S. Treasury and allow them to rebuild capital.  These calls are reported to have been spearheaded by hedge fund speculators that scooped up GSE shares on the cheap and are now lobbying Congress and the Federal Housing Finance Agency (FHFA) to make their bet pay off.  Though they have never before demonstrated an abiding interest in housing policy, the hedge funds have managed to convince some other groups and a few policymakers to go along for the ride.

Unfortunately, recapitalizing the GSEs without first reforming the secondary mortgage market would threaten the very housing finance system that a lot of us have spent so much time trying to rebuild on a safe and sustainable foundation. Perhaps more importantly, were FHFA Director Mel Watt to act unilaterally, the political backlash from Capitol Hill could put housing at even greater risk.

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This is not a big versus small lender issue, or Wall St. versus Main St, as some would have you believe.  It’s not lenders vs. consumers, as if only one side can win.  It’s about ensuring a housing system that first and foremost gives qualified borrowers access to affordable, long-term fixed rate mortgages without allowing the more risky aspects of the pre-conservatorship GSE model to ever be reproduced.  It’s about ensuring that all lenders regardless of size or business model have equal access to this source of capital in order to serve their communities.  A thoughtful approach to secondary mortgage market reform is the only way forward. 

The arguments for recap and release without reform are deeply flawed.

The lack of a capital buffer does not create a near-term financial risk.In a recent earnings call, Freddie Mac CEO Don Layton made an important point – that that the GSEs are not currently an undercapitalization risk, due to explicit lines of credit in excess of $200 billion dollars from the US Treasury. These lines of credit eliminate any real economic risk, to either institution or to the investors in their securities, for years to come.  With this ample backstop in place, now is the most critical time to complete GSE reform, address the fundamental flaws in the system, and build a safe and sustainable housing finance system. 

Instead, the outcry for recap and release threatens to create the very crisis it purports to avoid. The limited amount of capital the GSEs could build by retaining earnings would not be nearly enough to protect them in an economic downturn.  By crying wolf, however, on the potential for a GSE failure, these groups are simply fueling fear in the key stakeholders they are trying to persuade to join their lobbying effort.   

Recap and Release Puts Recent Gains at Risk.  With the GSEs in conservatorship, FHFA has made significant progress mitigating some of the key flaws in the GSEs’ operations that distorted the market in the run-up to the crisis, including bringing parity and transparency to their pricing models, moving toward a single security and developing the common securitization platform.  Simply recapitalizing the firms and releasing them – without structural reforms – would threaten to bring back the same flawed incentive structures that contributed to the GSEs’ failure.  The continued calls for recap and release are a distraction that shifts focus away from real reform, and puts at risk much of the important work FHFA has accomplished to date.

Let’s move forward, not backwards.  The Obama Administration, including the Department of Treasury, have been clear not once, but on multiple occasions, that the only path forward out of conservatorship for the GSEs is through congressional reform. Moreover, by passing the Jumpstart GSE Reform Act last year, Congress has clearly asserted its prerogative over the long-term future of the GSEs – any release of the GSEs must come through legislation, not through administrative action. If FHFA were to take unilateral action to modify the Preferred Stock Purchase Agreements and allow the GSEs to retain capital, it would be doing so in direct defiance of both the Administration and Congress.

Short-Term Focus Undermines Need for Long Term Solutions.  We share the concerns of the affordable housing community about the lack of funding for key investments in single and multi-family housing that is accessible for low- and moderate- income families.

Stakeholders who care about a long- term, viable housing finance system that provides affordable access to credit for all qualified borrowers, need to be working together on solutions that provide for the continuous flow of capital to the US housing system.  The hedge funds promoting recap and release have initiated a cynical, expensive PR and lobbying campaign to divide and conquer us, trying to peel off certain vulnerable groups with distorted rhetoric and pie in the sky promises.    

Those with a demonstrated commitment to common sense housing policy must come together to ensure the Secondary Market is reformed and sustainable for the future.  MBA and our members – large and small -- are committed to make this happen. 


David H. Stevens is President and CEO of the Mortgage Bankers Association