GSE CEO Pay Cap: Is it Justifiable or Is It Unwarranted?

Earlier this week, the U.S. House of Representatives passed S. 2036 by voice vote placing a cap on the salaries of Fannie Mae and Freddie Mac CEOs right at the original amount of $600,000 per year. Many in the mortgage industry expressed both approval and disapproval of the House's decision when questioned about the vote.

S. 2036, also known as the Equity in Government Compensation Act of 2015, is co-sponsored by Sen. David Vitter (R-Louisiana) and Sen. Elizabeth Warren (D-Massachusetts), passed unanimously in the Senate in September.

The Vitter-Warren bill was modeled on H.R. 2243, which was introduced by U.S. Congressman Ed Royce (R-California) in May in response to a proposal by Mel Watt, Director of the FHFA (conservator of Fannie Mae and Freddie Mac) that could have raised their pay as high as the 25th percentile of the market, which computes to about $7.26 million per year. Royce's bill passed in the House Financial Services Committee by a 57-1 vote on July 29.

“It's outrageous and almost unbelievable that a tax-payer-funded entity uses the dollars of hard-working Americans to line the pockets of their top CEO's–to the tune of millions of dollars a year,” Vitter said Monday after the bill passed. “I am proud to have worked with Congressman Ed Royce on passing this legislation out of Congress so we can provide relief for the American taxpayers from the undue burden of financing the salaries of some of the top-ranking banking officials in the country.”

Congressman Royce also commented, "While this is a victory for taxpayers, the real battle of winding down the GSEs and ending the government's domination of the housing market remains. My ultimate goal is still comprehensive housing finance reform that brings private capital into the system to eliminate the boom-and-bust cycle that wreaked havoc on the American economy. This task takes on all the more urgency as Fannie and Freddie slip into the red and invite new taxpayer bailouts."

Mel Watt, an Obama appointee who could now be at odds with the Obama Administration if the Vitter-Warren bill gets signed by the President, said in a statement in July that the purpose of the pay raises was to "promote CEO retention, allow reliable succession planning, and ensure the continuity, efficiency and stability" at Fannie Mae and Freddie Mac.

"Fannie Mae and Freddie Mac could stand to benefit institutionally from pay raises," said Ed Delgado, President and CEO of the Five Star Institute. "The GSEs carry the weight of the mortgage industry and competitive compensation plans will enable them to be aggressive in terms of retaining intellectual capital."

"I really just don't regard it as a big issue, personally."

Donald Layton, CEO, Freddie Mac

Freddie Mac CEO Donald Layton told Wall Street Journal in an interview that he did not have a response to the House's decision to cap his pay, but he "regards this as something that is happening inside the government. I signed up for this job personally as a public service matter so the compensation wasn't the big attraction to me. I really just don't regard it as a big issue, personally."

But while compensation may not be high on Layton's list of priorities, it could present problems for his successor in the future.

"I have to make it clear that while the CEO compensation symbolically is capped, we are able to pay reasonably to attract talent in the rest of the company so my subordinate usually make more money than I do," he told the WSJ.

Snapdocs CEO Aaron King applauded Freddie Mac CEO Donald Layton for "choosing to adopt a positive perspective on the Fannie and Freddie pay cap news. Rather than focusing on the fewer dollars in his own pocket, he affirmed his commitment to serving the good of the American people–a commitment that we hope to see from every public leader."

Brian Koss, EVP of Mortgage Network Inc., stated that he "looks at the return to tax payers. I am happy as long as there is direct alignment.”

Tim Rood, Chairman of the Collingwood Group LLC, and a former Executive at Fannie Mae believes that the Fannie and Freddie CEOs "deserve a raise," as they have "demonstrated their worth, stabilizing the companies and supporting market recovery."

"I understand that my perspective on a rational move to raise their salaries to a level more equitable with those of their industry peers is not perceived by others in the same way. The optics are difficult, so it’s no surprise that this bill has bipartisan support," he added.

"The choice doesn’t have to be polarized, as the political positions suggest–allow the GSEs to accumulate capital, sunset their government charter, and spin them off as private companies or pull them into the Federal government entirely," Rood explained. "But, whatever choice is made, the details around salaries and structure of the GSEs will fall into place. In this bizarre half-human half-horse arrangement, there are no easy answers. However, what is being proposed will not help taxpayers and will not help the housing market–good politics is very often bad policy."

Editor's note: The Five Star Institute is the parent company of DS News and DSNews.com.