Fannie, Freddie must be allowed to rebuild capital, say small banks, credit unions
WASHINGTON — Credit unions and community bankers showed a rare moment of unity on Thursday, jointly calling on the top regulator of Fannie Mae and Freddie Mac to change a policy that forces the government-sponsored enterprises to sweep their profits to the Treasury Department and instead allow them to rebuild capital.
“Internal reforms are not enough and that the time has come for Congress to act on comprehensive housing finance reform to create a more healthy and sustainable secondary market. We believe this process begins with allowing the GSEs to rebuild their capital buffers,” said a letter penned by the National Association of Federally-Insured Credit Unions and the Independent Community Bankers of America and sent to Federal Housing Finance Agency Director Mel Watt.
The Treasury Department and FHFA struck a deal in 2012 that directed Fannie and Freddie to send their profits to Treasury, gradually allowing their capital to deplete. The GSEs' capital is expected to be exhausted next year.
But Watt has begun voicing concern that allowing the GSEs to run out of capital could destabilize the mortgage market even though the enterprises have a $258 billion line of credit with Treasury. Watt has warned that if Congress doesn't act he will either strike a new deal with Treasury or potentially unilaterally alter the arrangement if pressed.
The NAFCU-ICBA letter argues that the line of credit is insufficient and allowing capital to expire "puts taxpayers and the housing market at risk in the event of another financial downturn.”
“Allowing the GSEs to rebuild their capital buffers to avoid another draw of taxpayer support would maintain investor confidence, which is essential to the safety and soundness of the secondary market, and prevent any further market disruptions,” the letter said. “It is essential that the GSEs maintain a modest capital buffer–perhaps only enough to cover losses in a single quarter–so that they are not forced to draw on the” the line of credit.
The letter comes ahead of a speech Watt will give to Mortgage Bankers Association on Monday. The MBA has staked a different position and called on Watt to continue to send the GSE profits to Treasury, fearing that allowing them to rebuild their capital risks punting on an opportunity to reform the housing finance market.