Both Sides of the Aisle Urging GSE Reform

Fannie Mae Freddie Mac BHJust how big of an issue is the GSEs’ dwindling capital buffer and the FHFA’s almost eight-year long conservatorship of Fannie Mae and Freddie Mac becoming?

So much of a concern that in mid-May, a coalition of 12 right-center organizations wrote a letter to Congress urging them to pass a GSE reform bill sponsored by Rep. Mick Mulvaney (R-South Carolina).

But that’s not all—it’s so much of a concern that factions on both sides of the political aisle are petitioning Congress for change. Late last week, a group of 32 Democratic members of the U.S. House of Representatives wrote a letter to FHFA Director Mel Watt and Treasury Secretary Jack Lew asking them to reassess the Preferred Stock Purchase Agreement (PSPA) policy that requires the GSEs’ capital buffer to be reduced to zero by January 1, 2018.

The group of Democratic lawmakers, led by Rep. Michael Capuano (D-Massachusetts), cited the now infamous speech Watt made at the Bipartisan Policy Center back in February in which he said there were risks that were “certain to escalate” the longer the GSEs remain in conservatorship of the FHFA. The main risk, Watt said in his speech, is the required reduction of the GSEs’ capital buffer to zero by the end of next year.

In their letter, the Democratic lawmakers pointed out that the FHFA Director is required by law to see that the GSEs have adequate capital and that they are operated in a manner that does not pose a risk to taxpayers.

“Fortunately, the Housing and Economic Recovery Act (HERA) of 2008 provides a solution to this problem by requiring the FHFA Director to ensure that the GSEs are adequately capitalized.”

32 Democratic Members of Congress

“Fortunately, the Housing and Economic Recovery Act (HERA) of 2008 provides a solution to this problem by requiring the FHFA Director to ensure that the GSEs are adequately capitalized,” the lawmakers wrote. “HERA includes a number of provisions expressing Congress’ intent that the GSEs be operated in a safe and sound manner.”

The Democratic lawmakers stated that Congress’ lack of legislation post-HERA and the fact that Fannie Mae and Freddie Mac remain in conservatorship of the FHFA nearly eight years later does not justify an agreement between FHFA and Treasury to ignore the HERA’s mandate.

The subject of GSE reform has long been a hotly contested one among lawmakers and the housing industry, but discussions have taken on a new intensity since Watt’s speech at the Bipartisan Policy Center nearly four months ago. In the midst of immediate uproar over Watt’s speech, Treasury released a statement a week later saying that the GSEs would not be recapitalized and released from conservatorship. The Urban Institute has published a series of white papers written by housing experts and analysts on housing policy reform as part of its Housing Finance Reform Incubator.

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