FHFA Acting Director Provides GSE Update

Keeping Fannie Mae and Freddie Mac under conservatorship ‘cannot be a long-term solution,’ Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), wrote in a letter to lawmakers Tuesday.

DeMarco's letter, addressed to the chairmen and ranking members of the Senate Banking Committee and the House Financial Services Committee, sought to clarify the status of the government-sponsored enterprises (GSEs), which entered conservatorship in September 2008. In the 16 months that have passed since then, Fannie Mae's losses have totaled $111 billion, while Freddie Mac's losses have grown to $63 billion.

On Monday, the Obama administration surprised the mortgage industry with its 2011 federal budget, which included only a single sentence pertaining to the GSEs. Beginning last year, administration officials repeatedly stated that the timing of the budget's release would coincide with a proposed framework for Fannie Mae and Freddie Mac going forward. The budget's lone mention of the GSEs, however, stated that the administration would continue to monitor the situation closely and provide updates on considerations for longer-term reform.

Separately, Department of Housing and Urban Development Secretary Shaun Donovan told reporters Monday that a plan will be unveiled "shortly."

Republicans have vociferously protested the Treasury Department's Dec. 24, 2009, announcement that it would uncap its financial commitment to each company – a move the Wall Street Journal dubbed the Christmas Eve Taxpayer Massacre. In early January, Sen. Bob Corker, R-Tenn., asked Treasury Secretary Tim Geithner, in a letter, to explain the reasoning behind the decision and its timing. Corker additionally questioned Fannie Mae and Freddie Mac's off-balance-sheet treatment.

One week later, seven Senate Republicans wrote to Chris Dodd, D-Conn., requesting that the Senate Banking Committee, which Dodd chairs, investigate the matter

‘Given the last minute nature of this sweeping move, the fact that relatively little notice or explanation was given and that this action seems to solidify Fannie Mae and Freddie Mac as public utilities, we think that this action merits immediate scrutiny by the Senate Committee on Banking, Housing and Urban Affairs,’ the senators wrote.

To date, Fannie Mae has drawn $59.9 billion from the Treasury, and Freddie Mac has drawn $50.7 billion.

"These calls on taxpayer funds are troubling to all of us," DeMarco wrote Tuesday. In his letter, the FHFA head outlined the operations and goals of the conservatorship, but stopped short of expanding on the GSEs' future roles, noting in three instances the "uncertainty" surrounding the companies.

"There are a variety of options available for post-conservatorship outcomes, but the only one that FHFA may implement today under existing law is to reconstitute the two companies under their current charters," he wrote.

DeMarco called the minimization of credit losses from delinquent mortgages the "central goal" of the FHFA and the GSEs.

"I have communicated to each enterprise the need for rigorous analytics in considering different forms of loss mitigation to ensure credit losses are being minimized," he wrote, adding that such analysis will guide the GSEs' participation in any potentially new efforts regarding foreclosure prevention.

"The enterprises' current and future efforts surrounding foreclosure prevention will focus on mitigating losses, which is fundamental to the FHFA's mandate to conserve assets," the letter states. "And where there is no available, lower-cost alternative to foreclosure for a particular defaulted mortgage, my expectation is that the enterprises will move to foreclose expeditiously."

DeMarco additionally reaffirmed the FHFA's commitment to shrinking the GSEs' retained portfolios. According to the GSEs' Senior Preferred Stock Purchase Agreements (or PSPA, a funding facility established by the Treasury), the GSEs are supposed to begin reducing their retained portfolios by 10% per year, beginning this year. A December 2009 amendment to the PSPA allows the GSEs' to start their reductions from their maximum allowed balances of $900 billion as of year-end 2009, rather than starting the reduction from the GSEs' year-end 2009 balances.

"This means that each enterprise may have a retained portfolio no greater than $810 billion" by the end of 2010, DeMarco explained, adding that neither company's retained portfolio currently exceeds that limit.

DeMarco also wrote that the FHFA doesn't expect Fannie Mae or Freddie Mac to be substantial buyers or sellers of mortgages, with one exception.

"As I stated in December, the increased flexibility provided with the retained portfolio amendment may be important for maintaining the enterprises' capacity to purchase delinquent mortgages out of guaranteed mortgage-backed security pools," he wrote. Given the potential volume of delinquent mortgages to be purchased out of pools, DeMarco wrote that he expects any net additions to the GSEs' retained portfolios would be related to this activity.

Furthermore, DeMarco's letter stated that he has prohibited the GSEs from engaging in new products, saying such engagement would be inconsistent with the goals of conservatorship.

"I believe the enterprises should concentrate on their existing core businesses, including minimizing credit losses," he wrote. "New products could also require new risk measuring tools, compliance procedures and additional oversight from FHFA."


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