GSE reform could happen sooner than expected

by MPA30 Mar 2015

U.S. Representative Marsha Blackburn (R-Tenn.) has introduced legislation that would establish a secondary reserve fund for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Blackburn proposed in the bill that revenues generated from the GSEs would be placed in a reserve fund to cover possible losses of the GSEs until Congress can reach a resolution on GSE reform.

In 2008, Fannie and Freddie were put into government conservancy after teetering on the brink of insolvency. A $197.5 billion cash infusion from the U.S. Treasury saved both financial giants.

Under the terms of the bailout by the U.S. Treasury, the GSEs are required to send their profits to the government and cannot build their capital buffer which causes many to believe that this is putting the profitability of the GSEs in jeopardy because legally they are not allowed to accumulate a financial cushion that absorbs future losses.

Fannie and Freddie must pay a dividend to the Treasury each quarter equal to the excess of their net worth over an applicable capital reserve amount. That capital buffer is currently $1.8 billion and is required to be reduced by $600 million per year until it reaches zero by 2018. Should the GSEs' losses exceed their capital buffer, they would require another draw on Treasury, according to the white paper titled “The Continued Profitability of Fannie Mae and Freddie Mac is Not Assured” released earlier this month.

The bill proposed by Blackburn would potentially end illegal acts being committed by the U.S. Tresury to sweep away capital from the housing finance system for deficit reduction. The bill is titled “Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act of 2015”.

“As top federal government officials have finally started to acknowledge, the undercapitalization of Fannie and Freddie threatens to put taxpayers on the hook for another bailout,” said Investors Unite Director Tim Pagliara. “This could have been avoided had the GSEs been allowed to keep their profits, as intended under the Housing and Economic Recovery Act. We urge Congress to move quickly to pass this legislation.”

Click here to read the bill.



Is TILA-RESPA a good or bad thing long term?