White Paper | FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac, Solvency Now ‘Mathematically Impossible’
“The Enterprises currently owe Treasury $183 billion, and are required to pay 10% dividends on Treasury’s outstanding investment. Merely paying the 10% annual dividend (i.e., $18.3 billion, presently) would not reduce Treasury’s outstanding investment. Moreover, the Enterprises have had to borrow from Treasury at least part of their dividend payments to Treasury, thus increasing the value of their outstanding debt.”
FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac
As the Enterprises’ regulator and conservator, FHFA has considerable discretion in defining its role and choosing its actions. FHFA’s role as conservator has evolved over time. At the outset of the conservatorships, FHFA forbade the Enterprises from engaging in certain activities and retained approval authority over others. Soon thereafter, FHFA delegated day-to-day operational decision-making to the Enterprises’ directors and managers. Debate as to the proper parameters of the Agency’s role as a conservator arose and continues. FHFA-OIG believes that FHFA needs to assume a more active role, and, thus, as discussed in Appendix A, FHFA-OIG’s reports consistently have revealed two trends:
(1) the Agency, in its role as a conservator, does not independently test and validate Enterprise decision-making; and
(2) the Agency, in its role as a regulator, is not proactive in its oversight and enforcement. In addition, FHFA may not have enough examiners to meet its oversight responsibilities.
Additionally, FHFA faces significant challenges in managing the conservatorships of the Enterprises. These challenges include:
(1) attempting to advance the Enterprises’ business interests while assisting distressed homeowners; and
(2) simultaneously serving as both the Enterprises’ conservator and regulator.
As if these challenges were not daunting enough, the uncertain future of the Enterprises overshadows all aspects of FHFA’s regulatory and conservatorship efforts. Although FHFA recently published a strategic plan for the next phase of the conservatorships (that focuses on building infrastructure for a private secondary mortgage market), the best method for resolving the Enterprises is dependent on many variables outside of FHFA’s control. These variables include the health of housing finance markets, and debate about what the nation’s mortgage finance system should look like. These variables are important to the American taxpayer, who has been financially supporting – and likely will continue to support – the Enterprises. Meanwhile, the practical issues of how FHFA should best manage the conservatorships need careful attention and oversight.
Full report below…