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Are New Loan Limits Already At Risk?

12.04.2017

The issue of Fannie Mae and Freddie Mac and their about-to-be-zero capital buffers has fallen off the radar in recent months, but apparently there is some movement behind the scenes.

A little background: The GSEs were put into conservatorship in 2008 after each lost substantial amounts of money as loans defaulted.  The two were given access to massive lines of credit at the Treasury Department, drew down around half of it, and have paid back more than they borrowed in the form of dividends (which have been rolling in by the billions of dollars since 2012).  The agencies had been allowed to keep some capital in reserve in case they had an unprofitable quarter--a "capital buffer."  Under a revised stock purchase agreement negotiated by the Federal Housing Finance Agency (FHFA) and Treasury, that buffer has been steadily decreasing and will reach zero at the end of this year.

The lack of a buffer to protect the GSEs in the event of a downturn in the economy or the housing markets, has been a concern both FHFA and the GSEs themselves as it would increase the likelihood one or both would again need to draw on their available Treasury credit to cover even a minor shortfall.  Guarantees from the GSEs are essential the success of the secondary market; any draws could undermine confidence in those guarantees and translate into higher mortgage interest rates.

FHFA Director Melvin Watt has asserted that he has the right to permit the GSEs to withhold a portion of their profits in order to rebuild some capital, but has not yet acted on that assertion.  Now Joe Light, writing in Bloomberg, says FHFA has been "in deep discussions with the White House over what to do with the more than $7 billion" the GSEs are due to turn over to the government at year's end.

Light, quoting anonymous White House sources, says FHFA wants Fannie and Freddie to keep $2 to $3 billion from the most recent quarter's profits while the administration wants to limit the GSEs market footprint by such steps as tightening restrictions on the size of loans they back.  Light writes that if Watt decides to exercise his stated prerogative to unilaterally withhold the total owed "it could set off another firestorm between President Donald Trump and an independent agency led by an appointee of his predecessor Barack Obama." Light is referencing the recent fight over the directorship of the Consumer Financial Protection Agency vacated by Richard Cordray.

The reported desire of the White House to tighten restrictions on loan sizes comes less than a week after Watt announced a January 1 increase in the conforming loan limit to reflect a 6.8 percent annual increase in home prices. The Housing and Economic Recovery Act (HERA) requires the FHFA Director to make such a revision annually, but it is worth remembering that earlier this year the White House reversed President Obama's reduction of FHA borrowing fees months after it was announced and weeks before it was to go into effect.

Light states that an economic downturn isn't the only potential problem with the lack of a buffer.  A reduction in the corporate tax rate, something currently under discussion as part of the Republican bill before the Senate, would result in a revaluation of some of the GSEs' assets that can offset taxes and could hit each of the GSEs with a one-time quarterly loss.

Various classes of Fannie and Freddie stock still trade publicly. Some of those stocks gained more than 10 percent as the above referenced negotiations became public yesterday.

Treasury Secretary Steven Mnuchin has stated he expects the companies to pay their dividends as required by the stock agreement.

by Jann Swanson (via www.mortgagenewsdaily.com)

 

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