Fannie Mae (FNMA)

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Community bankers roll out alternate GSE plan

Capitalize now, reform later

Under the ICBA’s plan, FHFA and Treasury would end the sweeps, and then FHFA would produce a recapitalization plan. Once the entities were capitalized, a process expected to take several years, Fannie and Freddie would be released from conservatorship.

The Independent Community Bankers of America (ICBA) put out their proposal this week for reforming the government-sponsored enterprises Fannie Mae and Freddie Mac.

The end system envisioned by ICBA is much like the plan released last week by the nation’s largest mortgage trade group, the Mortgage Bankers Association, but with notable exceptions.

gseICBAplanLike the MBA plan, the ICBA would turn Fannie and Freddie into regulated private utilities that would buy and securitize mortgages.

The ICBA’s plan, like the one proposed by MBA, also calls on Congress to create an insurance fund. The government would provide an explicit guarantee for the securities issued by Fannie and Freddie. The insurance fund would stand in front of that guarantee, to ensure that taxpayers don't have to bail out the entities except during a catastrophic downturn.

In addition, Fannie and Freddie would be fully capitalized companies that would continue to transfer a portion of the risk on mortgage loans to the private sector, but the companies would also absorb losses on mortgage defaults. Like the MBA plan, the newly chartered utilities would be overseen by a strong regulator and would have regulated rates of return to ensure that they didn’t take risky business moves to maximize profits.

This is where the similarities between the two plans end, however. Unlike the MBA plan that envisions a system with multiple guarantors, ICBA’s system would retain just Fannie and Freddie.

ICBA doesn’t believe that more guarantors are needed. As utilities, the companies won’t be competing aggressively against each other over price or products, said Ron Haynie, ICBA’s senior vice president of mortgage finance. He also doubted that there was enough capital in the marketplace to support multiple guarantors. Such a system would also require the government to beef up the staffing of the Federal Housing Finance Agency (FHFA) significantly.

“It would be very difficult to supervise and regulate, the more guarantors you add,” Haynie said. “Secondly, I am not real sure of the benefit they would bring to the marketplace. If you think about it, a lot of that innovation, or whatever they were looking for with multiple guarantors, could probably just be served in the private market.”

The biggest difference between the two plans, however, is that ICBA is calling on the GSE regulator, the FHFA and the U.S. Treasury, to initiate the reforms by ending the current net profit sweeps and recapitalize the GSEs. MBA’s plan depends entirely on Congress passing legislation.

By an agreement with the federal government, most of the GSEs profits are now swept up by the Treasury. Fannie and Freddie’s capital buffers have been purposely wound down, and will go to zero by 2018. The government has extended a line of credit in the event that the GSE’s net worth falls below zero in any given quarter, and they need to take a draw.

Capitalize now, reform later

Under the ICBA’s plan, FHFA and Treasury would end the sweeps, and then FHFA would produce a recapitalization plan. Once the entities were capitalized, a process expected to take several years, Fannie and Freddie would be released from conservatorship.

ICBA’s plan also calls on the FHFA to complete the common securitization platform, but delay a scheduled release of a single security until both entities were adequately capitalized.

“The most urgent need is the GSE’s lack of capital, [and] the administration can do that,” Haynie said. “FHFA and Treasury, working together, can do that. That, I think, also creates an environment, that OK, now if we want to do other things, maybe it acts as a catalyst to maybe move things along. Our view is that certainly the administrative stuff could happen sooner rather than later, but it doesn’t preclude Congress from doing the other part — creating the mortgage insurance fund for the catastrophic backstop, changing their charters, those things will have to be done through legislation.”

Unlike the MBA plan, ICBA’s plan also would require the government to address the claims of the GSE shareholders. ICBA doesn’t specify how to address these claims. Private shareholders in Fannie and Freddie, which purchased the stock at the bottom, have initiated lawsuits seeking tens of billions of dollars.