EC How The Fannie Mae, Freddie Mac Conservatorship Has Undermined The Resolution Process

By William Isaac and Senator Bob Kerrey

Preface

Seven years after the crisis that rocked the global financial system, we are still rebuilding and redesigning its structure and rules – and probably will be for years to come. As policymakers engage in this process, laws enacted to address the crisis must be faithfully executed or formally amended.

Otherwise, the government would introduce uncertainty into a marketplace that can ill afford it. Regrettably, uncertainty is precisely what is occurring with regard to the mortgage banking giants commonly known as Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

In the summer of 2008, the world’s largest secondary financial market was unraveling. Given the size and systemic significance of Fannie Mae and Freddie Mac in the mortgage finance market, the Treasury Department intervened, based on authority granted to it by Congress in its passage of the Housing and Economic Recovery Act (HERA). Treasury invested $187 billion in senior preferred stock in Fannie Mae and Freddie Mac, carrying a ten percent dividend. As part of the deal, the government also effectively acquired ownership of 79 percent of the GSEs’ common stock. As structured, these terms avoided a complete government takeover of the GSEs and protected taxpayers from future bailouts. The government was right to insist on tough terms given its indispensable role in restoring stability into the marketplace.

However, given its critical role, the government has a uniquely important obligation to abide by the terms of deals that it makes. That is why the government’s actions in recent years are troubling. As this paper will detail, beginning in 2012 the government unilaterally changed the terms of HERA and began to sweep all of the GSE’s profits into the general fund. Rather than “conserving and preserving” the GSEs’ assets for their eventual restoration to a “safe and solvent” condition, as the HERA stipulates, the ongoing confiscation of 100% of the GSEs’ profits does just the opposite.

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Moon Kil Woong 1 year ago Contributor's comment

The main problem is not sweeping funds one way or another. The main problem is that the organization requires taxpayers to guarantee the loans and is not built to be solvent but to be used as a political tool to offer loans at too low a rate and to people who can't afford it to support overextended housing prices. Or better put, it socializes the housing market since no one can compete with them and they increased not decreased their size.

One should not talk about the profit end, one should talk about the mass losses that will soon result yet again.