Small lenders urge FHFA to let Fannie and Freddie rebuild capital

WASHINGTON — Days after the Federal Housing Finance Agency proposed a risk-based capital regime for Fannie Mae and Freddie Mac, industry groups representing smaller lenders called on the agency to take more immediate steps to release the two government-sponsored enterprises from conservatorship.

In a letter this week, the trade associations, along with civil rights groups, urged FHFA Director Mel Watt to "direct Fannie and Freddie to develop capital restoration plans" and to suspend the companies' profit sweeps into the government.

The organizations applauded the proposal FHFA released last week to establish minimum capital requirements, but said the "development of capital restoration plans and suspending the net-worth sweep are crucial first steps to rebuilding capital buffers." That would speed up the process of releasing the GSEs from government control as safe and reformed institutions, they said.

Mel Watt
Representative Mel Watt, a Democrat from North Carolina and U.S. President Barack Obama's nominee as director of the Federal Housing Finance Agency (FHFA), waits to start a Senate Banking Committee nominations hearing in Washington, D.C., U.S., on Thursday, June 27, 2013. Watt faced lawmakers skeptical of his knowledge of housing finance issues today at a Senate Banking Committee hearing on his nomination to oversee mortgage giants Fannie Mae and Freddie Mac. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Mel Watt
Andrew Harrer/Bloomberg

"These first steps help protect the taxpayers and help enable the GSEs to fulfill their statutory mandate of facilitating the financing of affordable housing for low- and moderate-income families while maintaining a strong financial condition," the letter said. The groups included the Community Mortgage Lenders of America, Independent Community Bankers of America, Community Home Lenders Association, National Community Reinvestment Coalition and the NAACP.

A congressional overhaul of the housing finance system does not appear to be on the legislative agenda anytime soon, but the groups wrote that recapitalization plans could inform Congress’ understanding of GSE reform.

"The mere development of such recapitalization plans does not in any way interfere with the prerogatives of Congress to adopt GSE reform legislation," they wrote.

Although Watt is unlikely to move forward with capital restoration plans, observers say such steps to build the GSEs' capital buffer could be embraced by a new Trump-appointed head of the FHFA. (Watt, an Obama appointee, is set to step down in January.)

"To us, having Fannie and Freddie lay out plans for how they could exit conservatorship would be consistent with the desire of Treasury Secretary Steve Mnuchin to end the conservatorships as soon as possible," Jaret Seiberg, a policy analyst for Cowen Washington Research Group, wrote in a research note.

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GSE reform GSEs Capital Housing finance reform Affordable housing Mel Watt ICBA
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