Mortgaging the future

11 May 2017 By Gina Chon Follow @GinaChon

Regulator Mel Watt wants the housing-finance firms to rebuild their capital buffers to avoid fresh bailout risk. It’s a temporary band-aid while the administration ponders the firms’ legal status. Yet Trump’s Treasury should seize the idea as the basis for more-lasting reform.

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Mel Watt, director of the Federal Housing Finance Agency, said on May 11 that housing-finance firms Fannie Mae and Freddie Mac need a capital buffer to shield them from short-term losses, which could erode investor confidence. He made his comments during a Senate Banking Committee hearing on the housing-finance system. Fannie and Freddie were taken over by the U.S. government during the 2008 financial crisis and received a $187.5 billion bailout.

In 2012, the Treasury Department amended the bailout agreement to require Fannie and Freddie to hand over all their profit to the Treasury. The agreement reduced their capital buffers to $600 million at the start of this year and will cut them to zero in 2018.

On May 5, Fannie Mae said it would send its 2017 first-quarter net income of $2.8 billion to Treasury, bringing its total payments to the government to $162.7 billion. Freddie Mac reported first-quarter net income of $2.2 billion, which will bring its total payments to $108.2 billion.

The entities still have a $258 billion government credit line that they can tap in case of losses. Watt said the FHFA, as the regulator of Fannie and Freddie, would consider options that would help them avoid having to draw on that fund, including retaining earnings. Ideally, he said he would work with the Treasury Department to reach that goal but the FHFA would act on its own if there was no other choice.

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