Representative Michael Capuano (D-MA) introduced H.R. 1036, the “Let the GSEs Pay Us Back Act” on February 24. The bill would alter the current arrangement between Fannie Mae and Freddie Mac and the U.S. Treasury to allow the two companies to repay the money they received from the Treasury during the financial crisis. Mr. Capuano introduced the same bill in the previous Congress.
H.R. 1036 adds another element to the current debate about the future of Fannie Mae and Freddie Mac and the role of the federal government in housing finance. Senator Johnny Isakson (R-GA) introduced S. 495, the “Mortgage Finance Act,” also in late February (See Memo, 3/2). Other bills are expected in the coming weeks.
Under the Preferred Stock Purchase Agreement between Treasury and Federal Housing Finance Agency (FHFA), acting as conservator of Fannie and Freddie, all of their profits are “swept” into the Treasury as dividends paid to the taxpayers. They are not considered payment on the combined $188 billion that Fannie and Freddie received from Treasury during the financial crisis. That debt still exists. However, the dividend payments now have far exceeded $188 billion, totaling a combined $219 billion through September 30, 2014.
The bill requires a new agreement that will modify the Preferred Stock Purchase Agreement to allow payments that Fannie and Freddie make to Treasury to count towards paying down their debt. Any GSE Senior Preferred Stock purchased by the Treasury would no longer accrue dividends, as is current practice. The amounts of federal funds the GSEs received prior to the modification would be treated as a loan made by the Treasury to a GSE that would have to be repaid, and current dividend payments would be treated as payments of principal and interest under the loan. Fannie and Freddie would be able to keep profits above the repaid amount, allowing them to recapitalize.
When introducing the bill, Rep. Capuano stated, “[F]ees paid by middle-class homeowners to the GSEs are turned over to Treasury to pay down [the GSE’s] debt... Not counting the GSEs’ payments towards the principal they owe represents outrageous usury on homeowners. If any other creditor refused to reduce the balance of a paying consumer, we would never tolerate it. AIG, GM and others were given the opportunity to pay back their debt from the financial crisis — and the U.S. has profited from these loans. Fannie and Freddie, and by extension homeowners, should have the same chance.”
The Leadership Conference on Civil and Human Rights and the National Council of La Raza also have advocated for recapitalizing the GSEs. After housing finance reform legislation collapsed in the last Congress, the two organizations sent a letter to FHFA Director Mel Watt urging him to begin to wind down the conservatorship and allow Fannie and Freddie to build up capital again.
However, the Administration has signaled its opposition to allowing the GSEs recapitalize. In a speech on March 5, Michael Stegman, a senior advisor to Treasury Secretary Jack Lew, stated, “Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support through the [Preferred Stock Purchase Agreements] exposes taxpayers to great risk and is irresponsible. As we have said repeatedly, the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.”
Advocates for the National Housing Trust Fund (NHTF) and the Capital Magnet Fund (CMF) are monitoring all legislative and regulatory activities related to Fannie Mae and Freddie Mac in order to protect the current NHTF and CMF funding and to assure that the two programs are treated favorably in any housing finance reform that advances in the 114th Congress.
H.R. 1036 has been referred to the House Committee on Financial Services.
Text of the bill can be found here: https://www.congress.gov/114/bills/hr1036/BILLS-114hr1036ih.pdf.
Text of Mr. Stegman’s speech is at http://www.treasury.gov/press-center/press-releases/Pages/jl9987.aspx.
The LCCHR and NCLR letter to FHFA is at http://www.civilrights.org/advocacy/letters/2014/FHFA-GSEs.html.