The Honorable Joseph Otting
Federal Housing Finance Agency
400 7th St. SW
Washington, D.C. 20219
Dear Comptroller Otting,
We, the undersigned organizations, representing taxpayer interests and free market principles, write to offer our perspective on administrative reform for the two Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. It has been reported that you are preparing steps to move the GSEs out of conservatorship. We commend you for your willingness to address this challenging and controversial issue. To that end, we strongly believe that any plan moving in this direction – whether it provides for so-called “Recap and Release” or some other option – should ensure they do not revert to the same activities that caused the financial distress in which they became mired.
As you are aware, taxpayers face significant exposure to the $5.1 trillion in mortgage obligations held by the GSEs. Since conservatorship began more than a decade ago, Fannie Mae and Freddie Mac have borrowed more than $190 billion from taxpayers to stay afloat and now back nearly 90 percent of all U.S. mortgages, about 50 percent more than at the peak of the financial crisis. Taxpayers were promised conservatorship would be a short-term measure to keep the GSEs solvent while Congress and the Administration worked to reform the housing finance system. Unfortunately, more than 10 years since the financial crisis, Congress has failed to enact comprehensive reform legislation.
Congressional inaction has understandably spurred calls for administrative intervention, but without strong safeguards, such administrative action could ultimately backfire and leave taxpayers vulnerable to another mortgage meltdown. As you have noted, the path out of conservatorship depends upon the GSEs’ ability to institutionalize robust capital cushions. We would strongly echo that sentiment, especially since a hasty release from conservatorship would simply permit the privately-operated GSEs to engage in the same excessive risk-taking activities that existed prior to the financial crisis -- all with the unique benefit of a now explicit government guarantee.
There are a number of reforms you and your staff could implement administratively to put the GSEs on a more stable financial footing as Congress contemplates its own reform options:
● Suspend Pilot Programs. Fannie Mae and Freddie Mac have each engaged in pilot programs that are supposed to be prohibited in their charters. These pilot programs, such as IMAGIN or EPMI, represent a continued blurring of the “bright line” separation between primary market and secondary market activities. Engaging in these activities requires taxpayers to shoulder a greater burden of risk and expands the government’s presence in the mortgage marketplace.
● Improve Transparency. Aside from developing many pilot projects without comment periods for stakeholders and taxpayers to offer valuable input, other operations, such as the setting of guarantee fees and the Conservator Capital Framework, have been conducted largely behind closed doors. The reasoning and modeling behind these decisions should be disclosed.
● End the Net Worth Sweep. The Obama administration’s so-called “net worth sweep” has put the GSEs in a precarious position, leaving taxpayers exposed to further bailouts. The GSEs have paid nearly $300 billion to the treasury since 2008, thus leaving them with fewer resources to combat a possible downturn in the housing market. Building capital at the GSEs should be a key component of any reform plan.
● Carefully Limit “Mission Creep.” Conducting an inventory of GSE activities outside their charters is important regardless of the direction reform takes. Aside from IMAGIN and EPMI, the GSEs have forayed into the Single Family Rental market and extended credit to non-banks for mortgage servicing operations, all of which are services already being provided by the private sector. Whether Fannie and Freddie are to be entirely “released” or taken in another direction, care must be taken not to afford them competitive advantages or allow them to take on exotic ventures that imperil taxpayers.
We sincerely appreciate your time and consideration of our views. As you continue to plot the path forward toward a more free-market housing system that protects taxpayers, we hope these recommendations will aid in your efforts.
Please do not hesitate to reach out to either of our organizations if we can be of any assistance or guidance.
Pete Sepp, President
National Taxpayers Union
Tom Schatz, President
Council for Citizens Against Government Waste