WASHINGTON — The Community Home Lenders Association is urging the incoming Trump administration to help recapitalize Fannie Mae and Freddie Mac by stopping, at least temporarily, the quarterly profit sweeps that go into the U.S. Treasury.
Treasury’s 2012 “sweep agreement with Fannie and Freddie has been a failure,” wrote Scott Olson, the executive director of the Community Home Lenders Association, in a letter sent Wednesday to President-elect Donald Trump.
He argued that the sweep has left the two government-sponsored enterprises undercapitalized and forced to borrow from Treasury if they report a significant quarterly loss.
If a GSE has to take another draw from Treasury, there are concerns it could spark a market reaction.
“We have a public policy that is literally driving them to draw on the federal Treasury,” said James Carr, a former Fannie executive who is now a professor at Wayne State University, who spoke at a housing conference last week. “That is such a wild card not just for the housing system, but for the entire financial system. Because no one has a clue what kind of response that would trigger.”
Olson argues that Federal Housing Finance Agency Director Mel Watt has the authority to withhold dividend payments from U.S. Treasury to build a small capital cushion – possibly $3 billion to $10 billion — so they won’t be forced to take a draw from Treasury.
Freddie is slated to pay a $2.3 billion dividend to the U.S. Treasury by the end of December, while Fannie is expected to pay a $3 billion dividend.
“The Obama administration has been adamant against amending the sweep agreement,” Olson said in an interview Thursday. “We are hoping the Trump administration will take a different position.”
Fannie and Freddie will be reporting their fourth quarter financial results in early February. The GSEs are expected to make their following dividend payments to Treasury in late March — when Trump will be in the White House.
The last time a GSE reported a loss was in the third quarter of 2015, when Freddie lost $475 million, mainly due to hedging losses. But it still had $1.3 billion total equity, and did not make a draw on Treasury.
Overall, Freddie has paid $101.4 billion in dividends to Treasury since placed into conservatorship in 2008. It received $71.3 billion in Treasury draws from 2008 through 2012.
Fannie has received $116 billion in draws and paid $154.4 billion in dividends to Treasury.
Under the Treasury sweep agreement, Fannie and Freddie are projected to deplete their capital reserves in 2018. Fannie and Freddie currently have capital reserves of $1.2 billion each. It will drop to $600 million in 2017 and zero beginning January 1, 2018.
In February, Watt raised concerns about Treasury’s sweep agreement and the impact it could have on investor market confidence.
“Future draws that chip away at the backing available by the Treasury Department could undermine confidence in the housing finance market,” Watt said in a speech at a Bipartisan Housing Commission event. “A significant reduction could cause investors to view this backing as insufficient. It’s unclear where investors would draw that line, but certainly before these funds were drawn down in full.”
The CHLA’s request comes at a time when Treasury Secretary-designate Steven Mnuchin has said he would like to end government control of Fannie and Freddie and return them to the private sector.
Yet that could trigger opposition from Republicans, who have favored winding down the GSEs and eliminating any government role in the housing market.
“The lack of agreement about whether or not the U.S. government wants to stand behind in some form or a significant part of the mortgage market in order to keep liquidity flowing is probably a principal issue on which there is a profound debate within the Republican Party,” said Sarah Rosen Wartell, president of the Urban Institute, at the housing event.