Rep. Jeb Hensarling, R-Texas, chair of the House Financial Services Committee and lead architect of the Protecting American Taxpayers and Homeowners (PATH) Act, a Republican-backed housing finance reform bill, says reports claiming that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are ‘repaying’ taxpayers for the largest bailout in American history are completely ‘false.’
‘Fannie and Freddie have not 'repaid' taxpayers one thin dime,’ Hensarling says in a statement on his congressional website. ‘Reports to the contrary are pure Washington spin. Legally, they can't pay back taxpayers because their nearly $200 billion bailout was a draw from the Treasury, not a loan.’
‘â�¦ the truth is Fannie and Freddie cost the taxpayers a whole lot more than the amount of their bailout,’ he adds. ‘Their failed business model was at the epicenter of the financial crisis – a crisis that threw millions of Americans out of work and ruined people's lives. Fannie and Freddie can never make amends for the catastrophic damage their failed business model caused our economy – a failed model that is still alive today and must be terminated. Any positive cash flow Fannie and Freddie are experiencing is due to the government-sanctioned monopoly they retain over the market.’
As explained in a Wall Street Journal (WSJ) report, Fannie and Freddie cannot ‘repay’ taxpayers because there is no mechanism for them to do so. The dividends the GSEs' have been paying to the Treasury for the past five years have been in the form senior preferred shares of their stock – all the government is doing is holding those shares, which the taxpayers now own – but the GSEs' have no way of repurchasing their stock.
‘The agreement doesn't provide any mechanism for Fannie and Freddie to buy back the government's senior preferred shares, which now total $188 billion,’ the WSJ's Nick Timiraos wrote in the report published Wednesday. ‘If it sounds like Fannie and Freddie are making interest payments on a loan that can't ever be repaid, that's because they are. So any discussion of 'repayment' needs this disclaimer: Even once Fannie and Freddie have paid $188 billion in dividends, they'll still owe $188 billion.’
Hensarling's statements came immediately after Fannie and Freddie reported that they had nearly paid their taxpayer obligations in full. Both of the GSEs on Thursday reported strong third-quarter earnings, with Freddie announcing that it had nearly finished reimbursing taxpayers for its bailout and Fannie reporting that it was within $2 billion of repaying what it had received.
Fannie reported net income of $8.7 billion for the third quarter, about quadruple what it earned in the third quarter of 2012. Freddie said it earned $30.5 billion, as a $6.5 billion operating profit was combined with a $24 billion tax benefit.
Freddie said it would finish reimbursing the government for its $71.3 billion bailout by year's end, including a $30 billion payment it will make by December. In fact, the total of its ‘payments’ will exceed the amount it received from the Treasury by $9 million.
Fannie said it would pay $8.6 billion before the year's end, leaving it about $2 billion short of completely repaying the $116.1 billion bailout it received.
The PATH Act, which was approved by the House Financial Services Committee in July, proposes to wind down the GSEs within five years, replacing them with a securitization platform. In addition it would significantly reduce the scope of the Federal Housing Administration and almost completely privatize the housing finance industry.
Hensarling's bill is being viewed as an alternative to the more popular Housing Finance Reform and Taxpayer Protection Act of 2013, introduced by Sens. Bob Corker, R-Tenn., Mark Warner, D-Va., and six other members of the Senate Banking, Housing and Urban Affairs Committee. That bill would transition the GSEs out of government conservatorship while, at the same time, protecting taxpayers during the transition process. President Obama has already expressed his support for the bipartisan legislation, which would replace the GSEs with a government guarantor that would act as a backstop in the event of another downturn.
To read Rep. Hensarling's full statement, click here.