Freddie Mac’s rough first quarter will likely embolden calls for GSE reform


If you listen closely, you can hear the noise surrounding the recapitalization and release of the government-sponsored enterprises from conservatorship getting louder thanks to Freddie Mac reporting a loss Tuesday morning, its second in the last six months after four straight years of profits.

In the last year or so, calls to “recap and release” Fannie Mae and Freddie Mac have come in from every angle, including community lenders, affordable housing advocatescivil rights groups, interested observers, and financial analysts, just to name a few.

And none of that accounts for viral movement known as “#FannieGate,” which includes Fannie and Freddie shareholders, some of which sued the government, claiming that the government’s “sweep” of all of the GSEs’ profits was unnecessary and potentially illegal.

And now, all those who want to see an end to the GSE conservatorship for whatever their particular motivation is have a new card to play thanks to Freddie posting a loss of $354 million in the first quarter, regardless of how Freddie Mac CEO Donald Layton categorizes to the loss.

One of the most outspoken critics of the GSEs’ current status is Rafferty Capital Markets equity analyst Dick Bove, who said, as recently as last week that the current state of the mortgage market is unsustainable.

In November 2015, when Freddie Mac posted its first loss in four years, Bove suggested that Freddie Mac was “insolvent,” and in the wake of Tuesday’s report, Bove says that issue of Freddie Mac needing another draw from the government is not a question of if, rather, Bove writes, it is a question of when.

“Apparently, Freddie Mac believes that it will be in business for the long-term, backed by its ability to be funded by taxpayers, against their will to do so, and the purchasers of its debt accept this view,” Bove wrote Tuesday in a note to clients.

“In its media conference call it refused to answer questions as to why its hedging activities are so volatile,” Bove continued.

“It refused to indicate what is being done to get its losses under control,” Bove writes. “Apparently, management has made the decision to continue to ‘roll the dice’ expecting an increase in interest rates to avoid any major near-term draw from the Treasury.”

Bove wasn’t alone in questioning the wisdom of keeping the GSEs in their perpetual state of limbo.

Ed Brady, chairman of the National Association of Home Builders, said that action on the GSEs must be taken now to avoid the further need for taxpayer money.

“Taxpayers dodged a bullet today but the warning bell is blaring,” Brady said in a statement.

“The fact that the Treasury could have put American taxpayers on the hook to cover Freddie Mac’s first quarter losses should come as no surprise to the White House and Congress, which have abrogated their responsibilities by allowing Fannie Mae and Freddie Mac to remain in conservatorship for the past eight years,” Brady continued.

“Policymakers on the extreme left and right of the political spectrum have allied in a voting bloc of stubborn inaction,” Brady said. “Their delay is adding more uncertainty to the housing market, discouraging private investment in financial markets, making it more difficult for creditworthy borrowers to obtain home loans and impeding the housing and economic recovery.”

Brady calls on the members of Congress to take “decisive action” to overhaul the country’s housing finance system.

“Today’s earnings report should serve as an urgently needed wake-up call to policymakers,” Brady said. “Congress and the administration must end their dawdling and make it a top priority to fix our nation’s housing finance system.”

One of the members of Congress who has tried to push for GSE reform legislation, Sen. Mark Warner, D-Virginia, agreed with Brady, but in far less provocative terms.

“It has been nearly eight years since the federal government bailed out Fannie Mae and Freddie Mac,” Warner said Tuesday.

“Taxpayers ultimately injected $188 billion into the GSEs, and still remain exposed to the risks posed by these Too Big to Fail institutions,” Warner continued. “Today’s announcement of a loss from Freddie Mac is yet another reminder of why we need to reform our housing finance system now.”

In the wake of Tuesday’s news, the Community Home Lenders Association reiterated its call to allow the GSEs to rebuild capital.

“The Community Home Lenders Association is renewing its call, made in a February letter to Director Watt, to have FHFA let the GSEs build a capital buffer, in order to avert a Treasury advance,” the CHLA said in a statement. “Today’s news that Freddie Mac is reporting a modest quarterly loss only serves to heighten the importance of FHFA taking this step as soon as possible.”

But it wasn’t just lenders or other interested parties that called for reform after Tuesday’s report.

Wade Henderson, the president and CEO of The Leadership Conference on Civil and Human Rights, said Tuesday that the long-term stability of Freddie Mac, along with Fannie Mae, is “crucial” to preserving access to affordable housing for low-income communities.

“Even after Federal Housing and Finance Agency Director Mel Watt joined housing advocates and economists on both sides of the aisle in sounding the alarm, the Treasury Department has inexplicably refused to allow Fannie Mae and Freddie Mac to maintain a capital buffer against losses like the one Freddie reported today – and like every other financial institution must maintain,” Henderson said.

“We are inevitably headed toward a path of yet another taxpayer-funded bailout, which should be unthinkable eight years after the financial crisis, and which is even worse because it appears to be by design,” Henderson added.

And some of the (if not the most) vocal proponents for the end of GSE conservatorship certainly wouldn’t let an opportunity to comment on the financial performance of the GSEs get by without weighing in.

In a statement, the leader of Investors Unite, a group of Fannie and Freddie shareholders that are fighting for the release of the GSEs, said that Fannie and Freddie’s current standing is dangerous for the taxpayers.

“By stripping Fannie Mae and Freddie Mac of 100% of their profits every quarter since 2012, the Treasury Department put taxpayers on the hook for any future losses by either of the companies, and we’re now seeing this play out in real-time,” Investors Unite Executive Director Tim Pagliara said. “It’s time to reverse the sweep and to protect the taxpayers by allowing these companies to begin rebuilding capital.”

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