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Th e M Rep o RT | 61 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET The laTesT Former Fdic chairman criticizes lack of gse reform With Fannie and Freddie profits directed to the Treasury, taxpayers are on the hook for any future losses at the two mortgage giants. F ormer FDIC Chairman William Isaac released a sharp critique of the federal government's 2012 decision to sweep all of Fannie Mae and Freddie Mac's profits into the Treasury. On an Investors Unite conference call last month, Isaac said while the government used Fannie and Freddie to stabilize housing finance in the midst of the 2008 financial crisis, the government's current actions could cause another, potentially worse, crisis. Isaac said the lack of urgency by regulators and policymakers in resolving the status of Fannie and Freddie and driving their capital to a variety of government bud- getary needs is a major issue. "They are not toys for the government to play with," he said on the call. Beyond there being "no ex- cuse" for the length of time the GSEs have been in limbo, Isaac said the government changing the terms of the deal it put into place in 2008 threatens the na- tion's financial system. "It's not good policy. It doesn't settle the market," he said. "I'm always looking at the next crisis, and I don't want to make the next crisis worse because of the actions taken during the current crisis." In 2002, Fannie Mae had about $30 billion in equity. By 2007, that number increased significantly, but today its equity has dropped to single-digit numbers. Once the conservatorship ends, those reserves will need to be replaced for the companies to be able to operate effectively. For now, that money is going into the U.S. Treasury general fund, where it is hard to tell where that money is being spent. Host of the conference call, Tim Pagliara, said this was "blatantly irresponsible." He noted that at the time of the financial crisis, the GSEs were nearly 100 times leveraged and now they are 700 times leveraged with almost $5 trillion in liabilities. Isaac commended Rep. Marsha Blackburn (R-Tennessee) for legis- lation she introduced recently that would place Fannie and Freddie into escrow until reforms were made. In a piece he wrote for the Wall Street Journal, Isaac criti- cized the lack of reform for the GSEs and said the public should be concerned about the state of Fannie and Freddie. "By denying Fannie and Freddie the ability to accumulate capital, the government is putting taxpayers on the hook for any future losses they may incur. The Obama Treasury is ignor- ing the threat. A senior Treasury official, Michael Stegman, told a Goldman Sachs conference earlier this month that recapitalizing Fannie and Freddie would come at taxpayer 'expense,'" he said. "The only logical reading of this analysis is that a dollar going to rebuilding capital is one less dollar going into the Treasury's general fund. Mr. Stegman has it back- ward—The risk of another mas- sive taxpayer bailout arising from undercapitalization is precisely why Treasury must end the net- worth sweep and allow Fannie and Freddie to emerge from the limbo of conservatorship." Isaac noted on the call that he supported the government's "tough terms" when it effectively acquired ownership of 79 percent of the GSEs' common stock. As structured, these terms avoided a complete government takeover of the GSEs and protected taxpay- ers from future bailouts, but now, amid the Third Amendment sweep and inaction on the GSEs, it is the government that is not living up to the terms of the deal. And this sets a dangerous prec- edent, he warned. "We're losing sight of the rule of law, and the financial system won't work without that," he said. Bill Seeks to Create Fannie, Freddie escrow Account Instead of dIrectIng all gse profIts to the treasury, the bIll would create a secondary reserve to protect taxpayers agaInst future losses and fund the future housIng fInance system. a U.S. congresswoman introduced a bill to establish a secondary reserve fund for Fannie Mae and Freddie Mac. The bill, introduced by Rep. Marsha Blackburn (R-Tennessee), seeks to "amend the Federal housing enterprises Financial Safety and Soundness Act of 1992 to establish a secondary reserve fund for a housing enterprise under conservatorship to protect taxpayers against loss in the event of a housing downturn, and for other purposes." The secondary reserve could also be referred to as an escrow account, where funds are held until a resolution is created on GSe reform. The bill would establish a secondary reserve by inserting the new language into the existing statutes. "Any secondary reserve established under this Act for an enterprise shall not be considered capital, a capital reserve, or otherwise an asset of the enterprise, other than as part of a capital restoration plan for the enterprise approved under section 1369C, during the pendency of a conservatorship for the enterprise," the bill said. The government for several years has sponsored Fannie and Freddie. Since they were put under conservatorship after the housing crisis, the Federal housing Finance Agency (FhFA) has been able to use the GSes to modify millions of mortgages. When the GSes became profitable, the FhFA enacted a third amendment to its Senior preferred Stock purchase Agreement, which assigned all of the GSes' net worth gains to deficit reduction. This made Fannie and Freddie repay taxpayers with interest, and the companies are operating with thin capital levels. William Isaac

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