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Salvaging Housing Finance Reform | Commentary

Housing finance legislation has stalled in the Senate but reform is not dead yet. Secretary Jack Lew recently announced a new initiative to incentivize private capital in the housing market, yet to date, the administration has implemented housing policy that does the complete opposite.

As director of the Federal Housing Finance Agency, Melvin Watt can push forward without Congress, while complementing the administrations new goal of making sure private capital sustains the housing market.

The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last, declares the Senate Banking Committee Leaders Bipartisan Housing Finance Reform Draft. But so far, Congress has been unable to reach a broad enough consensus to make headway towards this laudable goal.

During the financial crisis of 2008, the U.S. mortgage giants Fannie Mae and Freddie Mac (highly successful in the past) joined a long list of distressed financial institutions. Even though these two companies never became insolvent, Congress passed the Housing and Economic Recovery Act of 2008 to take control over Fannie and Freddie, placing them under the FHFA.

Fannie and Freddie recovered and returned to profitability in 2012 and are currently generating cash enough cash, in fact, to more than repay the $187.5 billion in emergency funding received from the government during the downturn. But instead of fulfilling its fiduciary obligation as conservator to marshal these assets for the benefit of shareholders, the FHFA worked with the Treasury (without the approval of either Congress or of Fannie and Freddie shareholders) to enact new regulations requiring the companies to turn over 100 percent of profits they earn to the Treasury.

As one analyst recently observed, in this case the debt that was once $187.5B is now considered infinite. That is to say that with the way things currently are, it is impossible to ever pay back what they have borrowed because the Treasury said so. By sweeping 100 percent of Fannie and Freddies income, the government has left the two private companies undercapitalized despite the large amount of cash they have been generating.
Just as the FHFA worked previously without Congress, it can do so again but this time, it can help correct its path. Under HERA, Mr. Watt has the statutory authority to develop and set capital standards for Fannie and Freddie. Mr. Watt may use this authority to require the companies to begin rebuilding capital.

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