- - Wednesday, November 8, 2017


Federal Housing Finance Agency (FHFA) Director Mel Watt recently made an urgent plea for Congress to decide on a long-term strategy for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, now in their 10th year of conservatorship overseen by his agency.

Capitol Hill does not seem to share Mr. Watt’s sense of urgency, however. The Fannie-Freddie conservatorship is now the longest in U.S. history. The Housing and Economic Recovery Act (HERA) that established FHFA has been misapplied or simply violated for years. An ill-conceived policy change in 2012 stripped the GSEs of their buffer capital. Legislative proposals driven more by antipathy for Fannie and Freddie than by practical policy considerations have stalled year after year. Many policymakers appear willing to kick the can down the road, operating on the flawed assumption that Fannie and Freddie’s credit to draw on Treasury funds is the same thing as real capital.

HERA, enacted amid the turmoil of the 2008 financial crisis, mandated that FHFA preserve the GSEs’ assets and restore their solvency and soundness. Just as accomplishing that mandate was within reach, in 2012 the Obama Treasury Department engineered a change that requires FHFA to send the GSEs’ quarterly revenues to Treasury. The move, known as the Net Worth Sweep, was completely at odds with HERA’s requirements. It prompted lawsuits by Fannie and Freddie’s shareholders that continue to play out in federal court and made housing finance reform all the more difficult.

In his recent remarks, Mr. Watt made a distinction between GSE reform and federal housing finance reform. The many changes FHFA has overseen have made Fannie and Freddie more stable, but Mr. Watt believes the overarching questions about rebuilding their capital and determining their future role in home lending is the purview of Congress. In essence, Mr. Watt says he’s done what he can to help get the car running, but leaving only fumes in the tank and no GPS presents a risk Congress needs to address.

Together, Fannie and Freddie back some $5 trillion in home loans — without requisite capital to cover unexpected losses. Nonetheless, there is a stubborn notion among some Washington policymakers that this doesn’t matter, since Fannie and Freddie have a $258 billion line of credit with Treasury. While HERA gives Mr. Watt wide latitude to withhold quarterly dividend payments to Treasury, he has warned that taking this step without consensus within the administration and the Hill would set off alarms in capital markets.

During a hearing last spring, Sen. Bob Corker, Tennessee Republican, dismissed this concern and prodded Mr. Watt to draw $10 million just to test the hypothesis. Treasury Secretary Steven Mnuchin has also said the credit line can cover losses that Fannie and Freddie might incur, so FHFA should keep making its quarterly payments.

Having enterprises that are too big to fail dependent on federal credit is flawed for political as well as policy reasons. That line of credit is available courtesy of the U.S. taxpayer. If Fannie and Freddie were to draw on it to cover losses, that would be characterized as a yet another taxpayer-funded bailout of the GSEs, a very unpopular proposition.

Moreover, a line of credit is not the same as capital. Having $8,000 available on your mother’s American Express card is not the same as having the cash in your pocket — even if you’ve been supporting your mother all along. Also, incentives matter: The risks should be borne by GSE stockholders, not by taxpayers as a whole. As a former director of the Office of Management and Budget, I can tell you that such creativity in federal finance is a misuse of taxpayer dollars and a violation of the public’s trust.

Thus, Mr. Watt’s concerns about market reverberations over a draw on Treasury funds are sound, in my view. It would signal that two of the largest financial enterprises in the country have no cash, only credit cards, in their wallets. So much for lessons learned from the financial crisis.

• James C. Miller III was Office and Management Budget director from 1985-88 and often consults on financial matters.

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