Magazine article American Banker

No Sense in Keeping the GSEs Undercapitalized

Magazine article American Banker

No Sense in Keeping the GSEs Undercapitalized

Article excerpt

Byline: Paulina McGrath

The government's unreasonable approach toward Fannie Mae and Freddie Mac has resulted in an undesirable combination: the GSEs charge record-high guarantee fees and hold alarmingly low levels of capital.

These high fees are effectively pricing many otherwise-creditworthy borrowers out of the market. That is in direct contradiction with the GSEs' original mission: to boost homeownership by creating greater liquidity in the secondary market.

Higher guarantee fees could make sense if the objective was to permit the GSEs to rebuild their capital in order to make the possibility of another federal bailout remote. Once capital levels were restored, guarantee fees could be reduced.

However, the vast majority of the fee revenue is being passed onto the U.S. Treasury, leaving current GSE capital levels far too low to address the risk of even a moderate downturn. This irrational situation has been created by the terms of the $188 billion government bailout of the GSEs. The current Treasury-negotiated deal requires the GSEs to remit 100% of profits to the Treasury, which precludes the agencies from building capital. To date, the Treasury has been more than repaid for the bailout, while the GSEs continue to remit all profits.

Collectively, Fannie Mae and Freddie Mac have normalized annual net earnings of approximately $20 to $25 billion, based on year-to-date 2014 earnings. They are on track to be the most lucrative of all 2008 Treasury interventions in the financial sector. Nevertheless, Treasury continues to collect quarterly profits at levels never imagined under the initial bailout deal.

But what is the point of having the GSEs generate large profits if this does not make the GSEs more financially stable, thereby enhancing the safety and soundness of the mortgage marketplace? The relatively new financial viability of the GSEs seems to be benefitting the U. …

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