Housing Industry Groups Oppose Fannie and Freddie Capital Boost

  • Groups send letter to FHFA saying Congress should act first
  • Watt has warned that shrinking capital poses ‘serious risk’

Major housing trade groups on Wednesday sent a letter to the regulator for Fannie Mae and Freddie Mac regulator opposing a recent call by some small lenders, affordable housing advocates and congressmen for the companies to build capital in the absence of housing-finance legislation.

The letter to Federal Housing Finance Agency Director Melvin Watt was signed by the American Bankers Association, the National Association of Realtors, the National Association of Home Builders, the Mortgage Bankers Association and the National Housing Conference.

Under the current terms of their bailout agreement, Fannie Mae and Freddie Mac send nearly all of their profits to the U.S. Treasury and must wind down their capital buffers until they reach zero by 2018. That has created the prospect that one or both companies could need a future bailout from taxpayers in the event of even a small loss.

In the letter, the groups said that comprehensive reform should come through Congress and that the current bailout agreement backing the companies is adequate to provide time for that to happen.

‘Unfinished Business’

The terms of the bailout agreement do not “replace the need for a permanent solution to housing finance reform. However, they do provide an adequate backstop to allow Congress to complete the last piece of unfinished business from the financial crisis,” the letter said. “Detours from this long-term goal would be counterproductive.”

In recent weeks, other groups have sent Watt their own letters calling for the FHFA to allow Fannie Mae and Freddie Mac to retain capital to buffer against the potential need for bailouts. Though the two companies aren’t allowed to retain capital, they do have $258 billion in bailout money remaining to draw on from the Treasury if needed. Treasury officials in the past have said that the remaining credit line is sufficient to preserve mortgage market stability.

Fannie Mae and Freddie Mac don’t make mortgages. They buy them from lenders, wrap them into securities and provide guarantees to investors in the case of default.

Watt in a speech earlier this year called shrinking capital at Fannie Mae and Freddie Mac a “serious risk” that has the potential to escalate. Legislation that would have replaced Fannie Mae and Freddie Mac with a new system stalled in 2014. Few lawmakers or analysts believe that Congress is likely to take up the issue again in the near term.

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