[1]The Community Home Lenders Association (CHLA [2]) has written a letter [3] to U.S. Department of Treasury [4] Secretary Jack Lew requesting that a portion of Fannie Mae [5] and Freddie Mac [6] profits be set aside for later use by small-and mid-sized lenders.
CHLA asked for the funds contributed by the GSEs under the FHFA/Treasury Preferred Stock Purchase Agreement to be placed in a Capitalization Reserve Account, "for later use as needed for capitalization of a cash window for smaller mortgage lenders under housing finance reform."
The step of setting aside a portion of GSE profits for capitalization of a cash window would achieve the goal of reducing taxpayer risk through risk sharing while preserving full small lender access, according to the letter. CHLA first addressed the subject last year in a letter to FHFA last July.
The letter CHLA wrote to Lew, dated April 9, cited bipartisan legislation approved by the Senate Banking Committee (S. 1217). Section 315 of the bill authorized the creation of a Small Lender Mutual in order to meet the cash window needs of small- and medium-sized loan originators.
"Debate on Congressional reform of the Enterprises established that there are a significant number of mortgage lenders that believe that it is critical under any housing reform to have a fully capitalized cash window, capable of fully meeting all the market needs of ALL small and mid-sized lenders on fully competitive rates and terms. These lenders have a legitimate question in asking where the funds to capitalize a cash window will come from – if not from Enterprise profits that are otherwise now just going to Treasury."
GSE profits have been the subject of several lawsuits by investors in the last two years. All GSE profits since 2012 have been swept into Treasury, a practice investors say is unconstitutional and leaves shareholders shortchanged. Fannie Mae and Freddie Mac required a combined $188 billion bailout in 2008, after which they were taken into conservatorship by FHFA.
The subject of the FHFA's conservatorship of Fannie Mae and Freddie Mac remains a hot one and a much debated one in the housing industry. One of the reasons for concerns among stakeholders is that GSE profits fell from a combined $135 billion in 2013 down to $22 billion in 2014, and Fannie Mae and Freddie Mac cannot legally accumulate a financial cushion to absorb future losses – they must pay a dividend to Treasury each quarter equal to the excess of their net worth over an applicable capital reserve amount. That capital buffer is currently $1.8 billion and 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 another draw on Treasury.
"Regardless of the ultimate resolution, we grow increasingly concerned that one of the most obvious sources of capitalization for such a Cash Window – payments under the PSPA – continue without any action to set aside a portion of these payments in reserve for this purpose," CHLA wrote in the letter to Lew. "To date, the Enterprises have repaid the Treasury advance plus tens of billions of dollars more – but none of those funds will be available in the future for this critical purpose, without a change like the one we recommend."
A copy of the letter was also sent to FHFA Director Mel Watt.