The risks associated with the government’s management of the bailed-out mortgage giants Fannie Mae and Freddie Mac are rising as time passes, the businesses’ regulator warned Thursday.
“Some of the challenges and risks we are managing are escalating, and will continue to do so the longer the enterprises remain in conservatorship,” Federal Housing Finance Agency director Mel Watt said at a speech in Washington, D.C., referring to his agency’s legal role as the conservator of Fannie and Freddie.
The biggest risk facing the two companies, Watt said, was that future losses could create tumult among investors or Congress, because Fannie and Freddie have declining capital under the government’s current management of their affairs. Fannie and Freddie would have to draw on Treasury funds in that scenario.
Under the current terms of the government’s management of Fannie and Freddie, the Treasury sweeps all of their profits, a highly controversial arrangement that has been challenged by the companies’ investors in court.
The result is that they are not able to retain earnings and build up equity, and will have no capital buffer by the start of 2018, Watt noted, leaving them unable to weather any major losses without looking to the Treasury for a bailout.
Members of both parties in Congress and the Obama White House have agreed that Fannie and Freddie should be gradually shuttered and replaced with a new system of housing finance. During the time since the government-sponsored enterprises failed in 2008 amid the subprime mortgage crisis and were taken into government custody, however, Congress has failed to move legislation that would resolve their status.
The current situation is unsustainable, Watt said, not only because of the lack of capital at the two enterprises, but also because they cannot effectively compete against each other right now and create market discipline, and because uncertainty about their future is making it harder for them to retain talent.
“Uncertainty has a price. Something needs to be done to tell the markets and the American people what to expect in the future,” Watt said of Congress’ inability to pass legislation reforming housing finance.
Watt called out Republicans and Democrats for failing to outline plans for solving the problems with Fannie and Freddie.
“While it’s not my place to meddle in political discussions, I’m also not hearing much discussion of housing finance reform in any of the presidential campaigns,” he said.
