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58 | TH E M R EP O RT 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 Delving into Fannie Mae, Freddie Mac Earnings Cries for GSE reform resound following Freddie Mac's report of Q1 losses. T he Federal Hous- ing Finance Agency (FHFA)'s conservator- ship of Fannie Mae and Freddie Mac, which will reach its eight-year anniversary in September, was only meant to be temporary. The Obama administration does not believe GSE reform is an urgent issue. Last year, key of - ficials such as Treasury Secretary Jack Lew and Treasury Counselor Antonio Weiss publicly stated the GSEs will not be recapitalized and released from conservatorship while Obama is president. The financial results for Q1 2016 released by both Freddie Mac and Fannie Mae in May, particularly for Freddie Mac, have resulted in even more questions as to whether or not the current GSE model is sustainable—whether the GSEs can continue to be profit - able under the conservatorship or whether taxpayers will be forced to fund another bailout. Freddie Mac reported a $354 million loss for Q1, its second quarterly loss in the last three quarters (a $475 million loss was reported for Q 3 2015). Fannie Mae was profitable for Q1 at $1.1 billion, but it was less than half of the previous quarter's profit. "From a sustainability stand - point, it could be sustained as a conservative enterprise for quite some time, but I don't think it's sustainable because you're going to eventually continue to have litigation from real shareholders saying, 'What it the world is go - ing on? It's in conservatorship, not receivership,'" said Steve Williams, Principal with Cornerstone Advisors. "That's occurring right now. Even the money moving to Treasury is still in litigation with shareholders. But more impor - tantly, I think it's not sustainable because having the two GSEs, essentially your mortgage market standard-bearers, in this kind of limbo could ultimately constrain the health of the economy in terms of the housing market and housing finance." In response to Freddie Mac's Q1 earnings release, noted Washington Post political colum - nist George Will wrote a piece titled "Treasury's Fannie and Freddie Rip-Off" in which he described the "misadventures" of Fannie Mae and Freddie Mac and characterized the GSEs' current situation as a "maddeningly com - plex story" that "illustrates the toll the administrative state takes on the rule of law." "In September 2008, the govern - ment rescued them with $187.5 billion and placed them in conser- vatorship, which is supposed to be temporary and rehabilitative," Will wrote. "A conserved entity should be returned to normal business in private ownership." Several industry trade groups have joined the chorus of calls this week for GSE reform. The Community Home Lenders Association (CHLA) released the following statement following the news of the Freddie Mac Q1 loss: "The Community Home Lenders Association is renewing its call, made in a February letter to Director Watt, to have FHFA let the GSEs build a capital buffer, in order to avert a Treasury advance. Today's news that Freddie Mac is reporting a modest quarterly loss only serves to heighten the importance of FHFA taking this step as soon as possible." Likewise, Independent Community Bankers of America (ICBA) stated after Freddie Mac's Q1 financial results were reported, "This net loss will not trigger a draw from the U.S. Treasury as Freddie Mac's and Fannie Mae's capital buffer bleeds away. However, it is only a matter of time until one or both of them will need a draw, putting the housing market and taxpayers at risk. ICBA continues to call on Federal Housing Finance Agency Director Mel Watt and Treasury Secretary Jacob Lew to end this destructive sweep of the government-sponsored enterprises' revenues. Further, they should follow the Housing and Economic Recovery Act of 2008 and require both GSEs to develop and implement a plan to rebuild their capital buf - fers to prevent another bailout." Watt first sounded the alarm in February when he expressed con- cern in a speech at the Bipartisan Policy Center over the GSEs' lack of a capital buffer. That buffer, which is currently $1.2 billion, is required to be reduced to zero by January 1, 2018. The Watt speech immediately fueled speculation that GSE reform was imminent, but Treasury quickly put out the fire with a public statement that a recap and release was not going to happen. At that time, Treasury stated that, "Director Watt's remarks underscore the Administration's consistent posi - tion regarding the GSEs' conser- vatorship: The best long-term [the GSEs' current situation is a] "Maddeningly complex story that illustrates the toll the administrative state takes on the rule of law." —George Will, Washington Post political columnist