Financial Times: Fannie and Freddie Plan Gets Washington Attention

The Financial Times ran an article pointing out that the debate on housing reform and the government sponsored enterprises (GSEs) is heating up in Washington, D.C. The article points to Bruce Berkowitz’s Fairholme Funds’ proposal to invest capital in the GSEs as an indication that private capital may have some interest and may still see some value in the GSEs.

Senator Corker claimed that the hedge fund’s proposal lent support to the bill he is advancing in the Senate to eliminate the GSEs. But the Corker-Warner does not adequately deal with Fannie and Freddie’s shareholders, and leaves too many questions. Ralph Nader urged other Fannie and Freddie shareholders to come together and lobby their representatives in Congress. Nader said they are being ignored and “ripped off” by Congress.

The timeframe and structure of the Corker-Warner proposal was a major concern voiced by\many of the witnesses who provided testimony at the hearing before the Senate Committee on Banking, Housing and Urban Affairs. Jim Millstein said that “you can’t just flip a switch” after the five year phase-in period and predict that private capital will appear on command. To read the full Financial Times article, click here.

Fannie and Freddie Shareholders – The Forgotten, Used and Abused, Silenced Constituency

Statement By Ralph Nader
Friday, November 22, 2013

Since the 2008 bailout of Fannie Mae and Freddie Mac, and the beginning of their conservatorship, the stockholders of these two companies, of which I am one, have been stripped of their basic rights as shareholders.

Prior to the financial crisis, shareholders of these government sponsored enterprises (GSEs) had legal rights to challenge management decisions through the courts and through proxy battles, or by offering shareholder resolutions. On September 7, 2008, when the U.S. Treasury and the Federal Housing Finance Agency (FHFA) established a conservatorship for Fannie Mae and Freddie Mac, common shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled.

The legal mandate of the conservatorship is to “conserve and preserve the assets” of the companies taken into conservatorship and “restore them to safe and sound condition.” But neither goal is being advanced by the FHFA. And FHFA, under Ed DeMarco, has acted as a “closet liquidator” of the GSEs, effectively acting to wind down the companies. This explicitly contradicts the legal mandate of the conservatorship. Fannie and Freddie – and their shareholders – are being treated unfairly.

The federal government – the Treasury, FHFA, and Congress – exploited and ignored the GSEs’ shareholders with zombie stock, and stuck them in financial limbo. The GSEs were required to pay above-market 10 percent dividends on Treasury’s investment, while many of the Wall Street banks that were bailed out with TARP money were required to pay dividends half of that rate. The shareholders of their bailed out banks were preserved and given a chance to recover.

The FHFA ordered the Fannie and Freddie boards and executives to suspend communications with shareholders and abolish annual shareholder meetings. And finally, adding insult to injury, in 2010 the FHFA arbitrarily directed Fannie and Freddie to initiate the delisting of their common and preferred stock from the NYSE. This further degraded shareholder value and chased away many institutional investors.

In 2012, as Fannie Mae and Freddie Mac were returning to profitability despite financial and operating restrictions on their activities, the U.S. Treasury changed the terms of its investment in the GSEs to its own benefit. The Treasury replaced the already well-above-market 10 percent dividends that the GSEs were paying to a “sweep” of all of the profits of the companies.

In times when the GSEs were facing mounting losses, the 10 percent dividends were burdening the GSEs with debt, forcing them to borrow from Treasury in order to turn around and pay that borrowed money right back to Treasury, thus compounding their debt and inflating future dividend payments. However, now that the GSEs have returned to profitability, this arrangement has the potential to do great harm. The GSEs are now sending nearly all of their earnings to Treasury, can’t rebuild their capital, and their shareholders remain in a limbo where they are neither eliminated nor given an opportunity to recover. If the enterprises were doing well enough to pay the government a 10 % return on the senior preferred stock, why couldn’t they also pay dividends on the common stock and junior preferred stock?

Regardless of the outcome of deliberations on the structure of the GSEs, Fannie and Freddie shareholders deserve a chance to recover some of the value of their stock. The federal government provided funds to help stabilize AIG and Citigroup, both of whom had investors who were allowed to benefit from the recovery of these companies. It should be no different when it comes to the GSEs’ shareholders, who, in addition, are useful to the U.S. Treasury.

Under the conservatorship, the government received warrants to buy up to 79.9 % of GSE common stock for $0.00001 per share. To avoid putting the liabilities of the two GSEs on the government’s books, the government’s share had to remain just under 80 %. The shareholders, with zombie stock and no rights or remedies, were usefully left to own the other 20 %.

Neither piece of legislation introduced in Congress – the PATH Act (H.R. 2767) in the House, nor the Corker-Warner bill (S. 1217) in the Senate – adequately addresses how to deal with Fannie Mae and Freddie Mac shareholders moving forward. Any serious reform needs to give the GSE shareholders an opportunity to share in the recovery of value that is likely for Fannie and Freddie.

In hearings at the House and the Senate on the future of Fannie Mae and Freddie Mac, many stakeholders and individuals interested in the housing sector have been invited to share their views. Those left without a seat at the table are the shareholders, who were told for years that their investment was the safest one after U.S. Treasury bonds.

S. 1217 – Housing Finance Reform and Taxpayer Protection Act of 2013

The full text of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013, can be found here.

The Congressional Research Service summary of this legislation can be found below, and online here.


Housing Finance Reform and Taxpayer Protection Act of 2013 – Establishes the Federal Mortgage Insurance Corporation (FMIC) as an independent agency of the federal government to: (1) develop standard form credit risk-sharing mechanisms, products, structures, contracts, or other security agreements that require private market holders of a covered security insured under this Act to assume the first loss position with respect to losses incurred on such securities; (2) provide insurance on any covered security for which any private market holders have assumed the first loss position with respect to losses; (3) establish a Mortgage Insurance Fund; and (4) oversee and supervise the common securitization platform developed by a business entity announced by the Federal Housing Finance Agency (FHFA) and established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (government sponsored enterprises [GSEs]).

Authorizes the FMIC to provide insurance to any covered security regardless of whether it has satisfied credit-risk sharing requirements if unusual and exigent circumstances have created, or threatened to create, an anomalous lack of mortgage credit availability within the housing markets that could materially and severely disrupt the functioning of the housing finance system.

Amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to exempt covered securities insured by FMIC from Securities and Exchange Commission (SEC) regulation in general and from credit risk retention requirements in particular.

Directs the FMIC to develop, adopt, and publish standards for its approval of: (1) private mortgage insurers to provide private mortgage insurance on eligible mortgages; (2) servicers to administer eligible mortgages; (3) issuers to issue covered securities, including the Federal Home Loan Bank System; and (4) bond guarantors to guarantee the timely payment of principal and interest on FMIC-insured securities collateralized by eligible mortgages.

Directs the FMIC to establish an FMIC Mutual Securitization Company to: (1) develop, securitize, sell, and otherwise meet the issuing needs of credit unions, community and mid-size banks, and non-depository mortgage originators with respect to covered securities; and (2) purchase from its member participants for cash, on a single loan basis, eligible mortgage loans to securitize in a covered security.

Directs the FMIC to: (1) require that approved issuers grant to private market investors seeking to take the first loss position in a covered security access to all documents relating to eligible mortgage loans collateralizing that covered security; and (2) establish the timing, frequency, and manner in which such access and disclosures are made.

Prescribes requirements for: (1) investor immunity, (2) uniform securitization agreements, (3) a uniform mortgage database, and (4) electronic registration of eligible mortgages.

Establishes within the FMIC an Office of Underwriting, an Office of Securitization, and an Office of Federal Home Loan Bank Supervision.

Transfers to the FMIC all the powers, personnel, and property and facilities of the FHFA, which is hereby abolished.

Directs the FMIC to charge an insurance fee according to a specified formula.

Amends the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to revise requirements for allocations from the Housing Trust Fund for homeownership and rental programs.

Requires the Secretary of Housing and Urban Development (HUD) and the Secretary of the Treasury, respectively, to ensure that grant amounts allocated to covered grantees, allocated by them to eligible recipients, or allocated by recipients to individuals are used for the benefit of only lawful permanent residents and citizens of the United States in carrying out the activities of the Housing Trust Fund and the Capital Magnet Fund. Prohibits the use of such grant amounts for specified political activities.

Repeals GSE charters and prescribes requirements for the wind down of Fannie Mae and Freddie Mac.

Transfers, without cost, to the FMIC all functions, activities, infrastructure, property, platforms, or any other object or service of a GSE relating to the maintenance and operation of a GSE’s multifamily guarantee business.

Requires a General Accounting Office (GAO) report on full privatization of the secondary mortgage market.