Friday, September 04, 2015 1:07:53 PM
By Paul Muolo
pmuolo@imfpubs.com
If you think Congress is going to pass a Fannie Mae/Freddie Mac reform bill in the next two years, you’re dreaming. No matter how you analyze the situation, the political climate in Washington is so toxic that there’s little politicians from the both sides of the aisle can agree on unless it’s a dire emergency like the U.S. defaulting on a debt payment. For now, the GSEs are “safe” as long as they keep earning money, which looks like a given, even though they keep giving away the upside via risk-sharing deals. But there is a wild card here and it comes in 2018 when the allowable capital cushion at the two falls to zero. Fannie/Freddie watchers we’ve spoken to fear that a large hedging loss caused by a sharp swing in rates could eventually result in a net loss, which means Treasury would need to plug the net worth hole with cash – money that comes from taxpayers…
And when that day comes, you can bet that members of both parties will take to the floor of the House and Senate, criticizing each other for not doing something sooner. Of course, there is a way to avoid the zero capital cushion dilemma. Congress can pass legislation to allow the GSEs to build capital or Federal Housing Finance Agency Director Mel Watt can do the same by teaming up with Treasury Secretary Jacob Lew to do it administratively. But will it happen?...
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