Playing Semantic Games With Fannie and Freddie Investors, The Wall Street Journal
The government defines 'conservatorship' however it likes, with a destabilizing effect on the mortgage market.
WILLIAM M. ISAAC
July 6, 2014
For the past two years, the federal government has violated both the letter and the spirit of the law by illegally seizing the profits of Fannie Mae FNMA +0.25% and Freddie Mac. FMCC +0.77% Filings by the Obama administration in court and troubling public statements by its senior officials demonstrate a profound lack of adherence to the government's duty as conservator of these government-supported mortgage institutions and to the rule of law.
In mid-May, Mel Watt, the head of the Federal Housing Finance Agency, signaled his personal apathy toward Fannie's and Freddie's private owners, saying in an interview for C-Span, "I don't lay awake at night worrying about what's fair to the shareholders." If the government continues to denigrate and devalue shareholders, the economic consequences will be severe.
Enlarge Image
Mel Watt Reuters
A quick history lesson may be in order. In 2008 with Fannie and Freddie teetering on the brink of insolvency, Congress passed the Housing and Economic Recovery Act. It enabled the Treasury Department to shore up Fannie and Freddie with the purchase of nearly $200 billion of senior preferred stock. The law also provided a mechanism for the two enterprises to be placed into conservatorship under the Federal Housing Finance Agency. It's important to note that under the law, the FHFA could have put Fannie and Freddie into receivership. But instead it placed them into conservatorship, most likely to reassure foreign investors who owned mortgage-backed securities.
The FHFA as conservator is a fiduciary—or trustee—for the shareholders of Fannie and Freddie. Its job is to, as the law says, "conserve [the enterprises'] assets and property" for shareholders while Fannie and Freddie rebuild their capital base and eventually exit the conservatorship.
That's not what has happened. When presented with the once-unthinkable reality of Fannie and Freddie making enough money to retire the Treasury's senior preferred stock and build enough capital to meet their financial obligations without government assistance, the Obama administration moved in 2012 to confiscate all Fannie's and Freddie's profits and wind down the two mortgage giants. Investors in Fannie and Freddie have responded by suing in federal court.
A filing on May 30 by the government in the U.S. Court of Federal Claims highlights how the FHFA has created its own definition of "conservatorship" as it argues against disclosing relevant information. This information could include emails and other documents demonstrating that the government's true intent was to seize current and future Fannie and Freddie profits for itself and leave shareholders with nothing. To justify its position against granting discovery to plaintiffs, the government argues that disclosure of current and future plans for the conservatorship could be "disruptive to the housing market and to the nation's economy."
Almost laughably, the government also argues against disclosure because that could "create market perception that the Enterprises are not financially viable," and that "this would have a negative impact on sales of debt and mortgage-backed securities." Putting aside the circularity of these arguments, the real absurdity is that the government's own activities have deprived Fannie and Freddie of capital and kept them too weak to emerge from conservatorship. By taking all of the enterprises' profits, the government has left them undercapitalized and permanently unable to rebuild their capital.
I led the Federal Deposit Insurance Corp. for eight years during the banking and savings-and-loan crises of the 1980s. The FDIC is often called to act as a receiver for banks that collapse or need restructuring. It's essential in these situations to adhere to the rule of law—in this case the Housing and Economic Recovery Act—and to a process that produces predictable and orderly consequences. If this is not done, future investment in banking institutions will be deterred, to the detriment of the financial system and economy.
The opposite is happening in the handling of Fannie Mae and Freddie Mac. By defying and rewriting the terms of the conservatorship, and by keeping investors in the dark about FHFA's activities as conservator, the government is a destabilizing force, as evidenced by the dearth of private capital flowing into the mortgage market since the conservatorship began.
Given the government's dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any "reform" of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?
There can be varied opinions over which reform is best for our country or what, if any, role Fannie and Freddie will have in a future housing market. But there should be no disagreement about the law. Capital follows the rule of law, and if investors can't count on that in the U.S. and in the housing markets, they will put their money elsewhere. Les
WILLIAM M. ISAAC
July 6, 2014
For the past two years, the federal government has violated both the letter and the spirit of the law by illegally seizing the profits of Fannie Mae FNMA +0.25% and Freddie Mac. FMCC +0.77% Filings by the Obama administration in court and troubling public statements by its senior officials demonstrate a profound lack of adherence to the government's duty as conservator of these government-supported mortgage institutions and to the rule of law.
In mid-May, Mel Watt, the head of the Federal Housing Finance Agency, signaled his personal apathy toward Fannie's and Freddie's private owners, saying in an interview for C-Span, "I don't lay awake at night worrying about what's fair to the shareholders." If the government continues to denigrate and devalue shareholders, the economic consequences will be severe.
Enlarge Image
Mel Watt Reuters
A quick history lesson may be in order. In 2008 with Fannie and Freddie teetering on the brink of insolvency, Congress passed the Housing and Economic Recovery Act. It enabled the Treasury Department to shore up Fannie and Freddie with the purchase of nearly $200 billion of senior preferred stock. The law also provided a mechanism for the two enterprises to be placed into conservatorship under the Federal Housing Finance Agency. It's important to note that under the law, the FHFA could have put Fannie and Freddie into receivership. But instead it placed them into conservatorship, most likely to reassure foreign investors who owned mortgage-backed securities.
The FHFA as conservator is a fiduciary—or trustee—for the shareholders of Fannie and Freddie. Its job is to, as the law says, "conserve [the enterprises'] assets and property" for shareholders while Fannie and Freddie rebuild their capital base and eventually exit the conservatorship.
That's not what has happened. When presented with the once-unthinkable reality of Fannie and Freddie making enough money to retire the Treasury's senior preferred stock and build enough capital to meet their financial obligations without government assistance, the Obama administration moved in 2012 to confiscate all Fannie's and Freddie's profits and wind down the two mortgage giants. Investors in Fannie and Freddie have responded by suing in federal court.
A filing on May 30 by the government in the U.S. Court of Federal Claims highlights how the FHFA has created its own definition of "conservatorship" as it argues against disclosing relevant information. This information could include emails and other documents demonstrating that the government's true intent was to seize current and future Fannie and Freddie profits for itself and leave shareholders with nothing. To justify its position against granting discovery to plaintiffs, the government argues that disclosure of current and future plans for the conservatorship could be "disruptive to the housing market and to the nation's economy."
Almost laughably, the government also argues against disclosure because that could "create market perception that the Enterprises are not financially viable," and that "this would have a negative impact on sales of debt and mortgage-backed securities." Putting aside the circularity of these arguments, the real absurdity is that the government's own activities have deprived Fannie and Freddie of capital and kept them too weak to emerge from conservatorship. By taking all of the enterprises' profits, the government has left them undercapitalized and permanently unable to rebuild their capital.
I led the Federal Deposit Insurance Corp. for eight years during the banking and savings-and-loan crises of the 1980s. The FDIC is often called to act as a receiver for banks that collapse or need restructuring. It's essential in these situations to adhere to the rule of law—in this case the Housing and Economic Recovery Act—and to a process that produces predictable and orderly consequences. If this is not done, future investment in banking institutions will be deterred, to the detriment of the financial system and economy.
The opposite is happening in the handling of Fannie Mae and Freddie Mac. By defying and rewriting the terms of the conservatorship, and by keeping investors in the dark about FHFA's activities as conservator, the government is a destabilizing force, as evidenced by the dearth of private capital flowing into the mortgage market since the conservatorship began.
Given the government's dereliction in its duty to conserve value in Fannie and Freddie, an obvious question arises pertaining to any "reform" of housing lending proposed by the administration and enacted by Congress. If the administration plans to wind down Fannie and Freddie with no recourse for investors, or to nationalize them in creating a new federal housing entity, as a Senate housing reform bill would do, where will the capital come from to finance the new system? What investor would put capital into something so uncertain and so unprotected by law as Fannie and Freddie have proved to be?
There can be varied opinions over which reform is best for our country or what, if any, role Fannie and Freddie will have in a future housing market. But there should be no disagreement about the law. Capital follows the rule of law, and if investors can't count on that in the U.S. and in the housing markets, they will put their money elsewhere. Les
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