Former FHA Commissioner: Reform Before Recapitalization

A voter’s view about the GSEs and recapitalization:

I was surprised to read the comments from FHFA Acting Director Joseph Otting as articulated by Politico. If accurate, the idea of retaining capital prior to real reform is striking in its vulgarity. The Administration has yet to even lay out a plan for the future of the GSEs, and yet are openly discussing letting these two failed companies retain earnings in advance of being reformed.

First: There is no urgency. The GSEs are backed by, in excess of, $220bb in taxpayer funds as established by the 3rd amendment vis the line of credit. This is fully substantial capital for any short or medium term capital need.

Second: Any modification to the sweep would deny the taxpayer and appropriators from the sum total of that modification. As a previous CBO study opined after studying the options, it is more favorable to the USG to collect the funds than have them sit on the balance sheets of the GSEs until such time as they are no longer in conservatorship or a plan for transition is in place.

Third: At a time when the government closed primarily due to the argument over $5bb for the wall down payment, it is odd that the administration would allow recap, and the subsequent decline in needed revenue, to happen. By all appearances a move like this will only serve to bolster the shares of the two companies, as we have seen these past several days, at the expense of revenues which are sorely needed.

The appearance of decision making that could be articulated as only helping billionaire hedge funds in a very widely distributed plan, over the taxpayer especially at this time when there is no urgency or crisis would seem to be simply a nod to Wall Street investors and nothing more.

If the Acting Director’s words are accurate and if his views are those of the Treasury and White House, it would appear that the Administration seems to be focused more on recapitalization that favors the investors than reform which would protect the housing finance system, home-ownership, and the taxpayers.

Again, any effort here before reform shorts needed budget renevues, helps bolster the hedge funds, and does nothing to further stabilize housing or mortgage markets that are functioning just as well in the current environment of conservatorship.

These companies are in conservatorship because they failed. They made bad decisions that helped spiral the economy near the brink, and there is every reason to believe this would happen again unless the structure is permanently modified.

Fix the GSEs before any move here is made that would retain all the taxpayer exposure, yet reduce the revenue to the budget.

Do the hard work – don’t bail out the hedge funds at a cost to the taxpayers.

– David Stevens

David H. Stevens, CMB, is former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association 


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