Conservatorship hurts the American housing market


In the days immediately following the 2008 financial crisis that shook the foundations of our nation’s housing market, the federal government moved quickly to provide a stabilizing hand until the markets settled. But due to unprecedented Congressional gridlock, combined with a lack of leadership in the administration on housing policy, that government hand has now become a fist that prevents the housing market — 18 percent of the U.S. economy — from truly recovering.

The issue is that Fannie Mae and Freddie Mac, which insure millions of mortgages, were placed in conservatorship to strengthen and stabilize confidence in the U.S. financial system and specifically the housing market. Assumptions about the health of these entities turned out to be overly pessimistic.

The loans provided to Fannie and Freddie to keep them afloat in the immediate aftermath of the financial crisis were repaid in less than three years — and then some. On its initial loan of $116.1 million, Fannie Mae has repaid to the U.S. Treasury $130.5; on its initial loan of $71.3 million, Freddie Mac has repaid $88.2 million.

There is growing consensus among industry experts and lawmakers alike that the conservatorship of Fannie and Freddie must end. For instance, Sens. Tim Johnson and Elizabeth Warren, who were on opposite sides of legislative reform efforts, have both said the conservatorship was never meant to be a long-term solution, and an exit plan for the companies must be developed.

There is a simple way out: As director of the Federal Housing Finance Agency (FHFA), Mel Watt, who will be in Miami this week to speak about affordable housing, has the authority to end the conservatorship. FHFA must take the lead on ending the conservatorship in order to complete restoration of these critical financial institutions that provide safety and soundness to the housing market.

We can all agree that elements of housing finance need to change, but what is the best way to reform Fannie and Freddie (also known as the GSE’s) so they emerge strong and capable of ensuring the American Dream of homeownership?

First and foremost, the rule of law must be obeyed. After placing the GSEs into conservatorship, the government later levied a net worth sweep of the entities, which froze any payment to existing shareholders of the company and instead directed all profits to the Treasury just as the GSEs became profitable. This was a reckless decision that strips capital from the housing industry on a quarterly basis and instead directs the GSEs’ resources to general Treasury funds.

This has significantly masked out of control federal spending and created the impression that our deficits are improving. This net worth sweep in effect is robbing Peter to pay Paul. This has had destabilizing impact on the housing market.

As long as the legal rights of Fannie and Freddie shareholder are denied, the viability of the companies once they emerge from the conservatorship remains in doubt. Investing in the market carries risk — a risk that all investors acknowledge — but investors expect the government to follow the rule of law. Capital follows the rule of law. Without private shareholder investment, Fannie and Freddie would be nothing more than another government agency subject to the whims of politicians and bureaucrats.

A number of lawmakers and bureaucrats want to see Fannie and Freddie shut down and a new entity built up to take their place. But such a drastic action would be like selling a Corvette to a scrapyard simply because the fender is a little dented. Fannie and Freddie are in need of reform, yes, but they do not deserve to be junked. The leading legislative proposals that came out of the last session of Congress were not solutions but rather half-baked ideas founded on a number of inaccurate assumptions that would actually hasten a weakening of the housing market.

I and countless others hope that the new Congress will take a different approach to reforming Fannie and Freddie — one that will protect investors’ rights and that understands that the foundations of the companies are strong; they simply need to be able to retain profits to rebuild capital so they stand on their own as any other regulated entity in our financial system. As the founder of a group that represents individual shareholders, I encourage FHFA Director Watt to end the conservatorship.

Tim Pagliara is chairman and CEO of CapWealth Advisors and the founder of Investors Unite.