The Competitive Enterprise Institute (CEI) and 14 other organizations have written an open letter to the U.S. House of Representatives and the U.S. Senate urging them to pass legislation that would provide a cushion to prevent another taxpayer bailout of Fannie Mae and Freddie Mac.
The organizations, representing "hundreds of hardworking Americans fed up with government spending and overreach," encouraged members of Congress to quickly pass H.R. 1673, known as the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act of 2015 was introduced by Rep. Marsha Blackburn (R-Tennessee) in March. This bill would create a reserve fund from the GSE profits from which Fannie Mae and Freddie Mac could draw if necessary rather than depend on the Department of Treasury (taxpayers) for another bailout similar to the $187.5 billion resuscitation they received in 2008.
Since September 2008, Fannie Mae and Freddie Mac have been in conservatorship of the Federal Housing Finance Agency (FHFA). Four years after the bailout in 2012, the GSEs became profitable again, but Treasury amended the bailout agreement (known as the "Third Amendment") and since then, virtually all GSE profits have been swept into Treasury. The sweeping of GSE profits into Treasury has prompted several lawsuits from the GSEs' largest investors, notably Fairholme Funds and Pershing Square Capital, who claim the profit sweep is in violation of the Fifth Amendment to the U.S. Constitution that prevents the taking of private property for public use without just compensation.
In the letter, the organizations referred to the profit sweep as a "scheme" that has left Fannie Mae and Freddie Mac with "almost no capital reserves to offset potential losses in the event of another downturn in the mortgage and housing markets." They also said the profit sweep "masks higher spending and creates phony short-term deficit reductions that the Obama Administration can claim credit for."
"While H.R. 1673 is a wise proposal, it highlights the need for Congress to reduce dramatically the role of government in the housing finance system."
Analyst Dick Bove from Rafferty Capital Markets said on Friday that a recent request by White House lawyers to gain access to certain documents in the Fairholme suit is an indication that the White House was unaware of what FHFA and Treasury were doing with regards to the Third Amendment. Bove said he believes the White House's actions indicate that a settlement in the Fairholme suit may be forthcoming.
While the GSEs remain in the FHFA's conservatorship seven years later, the taxpayers remain on the hook should Fannie Mae and Freddie Mac completely lose their capital. In the letter, the organizations were critical of the Dodd-Frank Act's financial reform that imposed higher capital levels for insurance companies and community banks that had nothing to do with the mortgage crisis but allows Fannie Mae and Freddie Mac to operate with almost no capital reserves.
The letter stated that H.R. 1673 creates an "insurance policy" for taxpayers, since they are a "threat" to taxpayers as long as they are under conservatorship of the FHFA.
"While H.R. 1673 is a wise proposal, it highlights the need for Congress to reduce dramatically the role of government in the housing finance system," the letter stated. "In particular, Fannie and Freddie's government support–implicit and explicit–should be phased out. Until lawmakers embrace comprehensive reform, however, they should pass the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act. And this measure must, as a first step, be part of any large appropriations or financial services bill that attempts to deal with Fannie and Freddie."
Click here to read the complete letter and view a list of the organizations that signed the letter.