Fannie-Freddie Profit Sweep Defended by Key Treasury Adviser

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The government sweep of profits from Fannie Mae and Freddie Mac was defended by the top Treasury Department housing official, who called again for Congress to replace the U.S.-owned mortgage-finance giants.

Michael Stegman, a senior adviser at Treasury, used his speech Thursday at a Goldman Sachs housing-finance conference in New York to respond to shareholders who have sued to stop the sweep and called for the companies to be allowed to build capital and be freed from U.S. conservatorship.

“Simply returning these entities to the way they were before is not practical nor is it a realistic consideration,” Stegman said.

Concerns about whether Fannie Mae and Freddie Mac may need more taxpayer support have mounted as their profits and capital cushions have shrunk in recent quarters. Stegman said taxpayers would face costs either by allowing them to recapitialize or with new draws from the Treasury. The companies, which have been under U.S. control since they were seized in 2008, got $187.5 billion in bailout funds before they became profitable again.

The financial arrangement that allows the companies to draw on Treasury funds if they require capital is “necessary to protect financial stability and to ensure the continued flow of mortgage credit,” Stegman said.

The agreement requires Fannie Mae and Freddie Mac to gradually reduce their financial cushions until 2018, when they won’t be allowed to hold any capital. Together, they’ve sent the Treasury about $40 billion more than they got in aid.

Provide Liquidity

Fannie Mae and Freddie Mac provide liquidity to the housing market by packaging mortgages into guaranteed bonds. Outside of that core business, they each also have retained asset portfolios of about $400 billion each that they’re under regulatory orders to wind down to $250 billion.

Because volatility in those portfolios could cause the companies to require more taxpayer aid, they should accelerate sales of illiquid assets, Stegman said, calling for more bulk auctions of delinquent loans. Freddie Mac has so far sold about $1 billion in defaulted debt, while Fannie Mae has yet to initiate such sales.

Stegman called for the government-sponsored enterprises to increase transfers of credit risk on new loans to private investors and to explore the step for older loans. They also should open the new securitization platform they’re building to private-label bond issuers, he said.

‘Responsible Pace’

In a separate appearance at the Goldman Sachs conference, Federal Housing Finance Agency Director Melvin L. Watt said his agency, which oversees Fannie Mae and Freddie Mac, operates independently of Treasury in managing their conservatorship.

“We move at a pace we think is a responsible pace,” Watt told reporters. “We evaluate things very carefully.”

In his comments, Stegman said Congress must step in to change the housing-finance system, because regulators can’t do it on their own.

“Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support” exposes taxpayers to risk and “is irresponsible,” he said.