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Lawmakers Revisit Concern Over Potential Repeat of GSE Bailout

GSE, Fannie Mae, Freddie Mac News, Mortgage FinanceIt has been more than seven years since Fannie Mae and Freddie Mac required a combined $187.5 billion taxpayer-funded bailout and were taken into conservatorship by the Federal Housing Finance Administration (FHFA).

The conservatorships of the GSEs continue to this day, remaining a contentious issue. They returned to profitability in 2012, but since then all their profits have been swept into Treasury (the Net Worth Sweep) and those profits have sharply declined in the last two years.

In April 2015, lawmakers raised concerns that the GSEs might need another bailout following a Dodd-Frank Stress Test that showed the GSEs would need a $157.3 billion bailout under hypothetical adverse economic conditions such as a 10 percent unemployment rate, a 4.5 percent decline in GDP growth, and a significant drop in long-term interest rates while short-term rates remain near zero. Also, the FHFA Inspector General issued a report last April warning that the profitability of the GSEs might not continue even though it is likely that the conservatorships will.

Recently, lawmakers have raised concerns that another bailout might be necessary due to the GSEs’ zero capital requirement. Fannie Mae and Freddie Mac each have a capital buffer of $1.8 billion, but it is required to be reduced by $600 million per year until it reaches zero by 2018. Should the GSEs' losses exceed their capital buffer, they would require a draw from Treasury. U.S. Reps. Stephen Lee Fincher (R-Tennessee) and Mick Mulvaney (R-South Carolina) wrote a letter this week to Treasury Secretary Jack Lew and FHFA Director Mel Watt asking the regulators to consider what effect the zero capital requirement will have on the economy and the potential risk it poses to taxpayers and the financial system. The lawmakers asked Lew and Watt what steps their respective Agencies can take in the near term to “rectify the situation.” They requested a reply by March 1.

Fincher and Mulvaney noted that Fannie Mae and Freddie Mac have more than $5 trillion in securities outstanding yet are being required to deplete their capital reserves. Since the GSEs insure four out of every five mortgages in the United States, the taxpayers will be the ones that have to pay the cost if the financial system experiences a sudden shock or downturn.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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