Key Senate Banking Committee Member Questions Treasury on Fannie and Freddie
Senator Bob Corker, a key member of the Banking Committee, has asked Treasury to explain its recent decision to remove the $200 billion per enterprise cap on government-sponsored enterprises Fannie Mae and Freddie Mac, which, in effect, provides a blank check for the amount of credit that will be made available to the two mortgage giants. In a letter to Treasury, Sen. Corker expressed concern about the lack of transparency around this arrangement and asked Treasury to respond to a series of questions about the action. In particular, Sen. Corker asked Treasury to cite the legal authority for these actions. He also queried if Treasury’s action effectively nationalized the two GSEs. Senator Corker is working with Senator Mark Warner to craft the systemic risk and resolution authority provisions of the Senate’s financial regulatory reform legislation.
On December 24, 2009, Treasury announced amendments to the Preferred Stock Purchase Agreements it has with Fannie Mae and Freddie Mac. The amendments removed the $200 billion per enterprise cap. Since the 2008 decision to place the entities into conservatorship and take a 79.9% preferred stock position in the companies in lieu of 80%, noted the Senator, a move he said was purposefully intended to not have to show the liabilities of these two companies on the balance sheet of the U.S. Treasury, the implied guarantee has been made effectively explicit.
The dollar amounts, when looked at in total that are guaranteed in some form or fashion by Treasury, are in the trillions of dollars, he said, yet this liability will not appear on the balance sheet of the US government. He strongly believes that the liabilities of these two firms should be reflected on the Treasury’s balance sheet.
The Senator requested an explanation of the steps taken prior to the December 24 action to guarantee that shareholders and other debt holders are not unfairly benefiting from this largesse. He asked for details on what has been done to guarantee that Treasury will recoup all of its investment prior to any shareholder or other debt holder returns
Senator Corker also asked for the delinquency rates on the loans Fannie and Freddie have guaranteed or hold in portfolio. In addition, he would like to receive copies of any written reports and summaries of oral reports that Treasury has received from Fannie or Freddie as to anticipated losses in the future. The Banking Committee Member asks to what degree have Fannie and Freddie been directed to make subprime or other nonprime loans in order to stabilize housing prices.
Finally, in its financial regulatory reform proposal, the Administration said that Treasury would be engaging in an initiative to determine the future role of the government-sponsored enterprises and recommendations would be forthcoming in the President’s February FY 2011 Budget release. In light of Treasury’s determination to provide continued capital support to Fannie Mae and Freddie Mac, the Senator asked Treasury to reaffirm its commitment to releasing those recommendations along with the FY 2011 Budget release.
The Housing and Economic Recovery Act of 2008 created an independent and unified regulator of Fannie and Freddie, the Federal Housing Finance Agency (FHFA), with broad powers analogous to federal banking regulators, and with a free hand to set appropriate capital standards, and a clear and credible process sanctioned by Congress for placing a GSE in receivership.
When FHFA placed Fannie Mae and Freddie Mac into conservatorship in September of 2008, Treasury established Preferred Stock Purchase Agreements to ensure that each firm maintained a positive net worth. The Treasury amendments allows the cap on the funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, explained Treasury in its announcement, the remaining commitment will be fully available to be drawn per the terms of the agreements.
According to Treasury, neither firm is near the $200 billion per institution limit established under the agreements. Total funding provided under these agreements through the third quarter has been $51 billion to Freddie Mac and $60 billion to Fannie Mae. Treasury emphasized that the amendments demonstrate its commitment to support these firms as they continue to play a vital role in the housing market during the crisis.
The Preferred Stock Purchase Agreements also cap the size of the retained mortgage portfolios and require that the portfolios are reduced over time. Treasury is also amending the agreements to provide Fannie Mae and Freddie Mac with some additional flexibility to meet the requirement to reduce their portfolios. The portfolio reduction requirement for 2010 and after will be applied to the maximum allowable size of the portfolios, or $900 billion per institution, rather than the actual size of the portfolio at the end of 2009.
Treasury remains committed to the principle of reducing the retained portfolios. To meet this goal, Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary to meet the required targets. FHFA will continue to monitor and oversee the retained portfolio activities in a manner consistent with the FHFA's responsibility as conservator and the requirements of the Preferred Stock Purchase Agreements.
Treasury made two additional changes to the agreements. Treasury will delay setting the Periodic Commitment Fee by one year to December 31, 2010. Treasury will also make technical changes to the definitions of mortgage assets and indebtedness to make compliance with the covenants of the agreements less burdensome and more transparent in light of impending accounting changes.
.