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Executive Summary

Fannie Mae and Freddie Mac (collectively, the Enterprises) returned to profitability in 2012 after successive years of losses. Their improved financial performance is encouraging; however, their continued profitability is not assured. The mortgage industry is complex, cyclical, and sensitive to changes in economic conditions, mortgage rates, house prices, and other factors. The Enterprises have acknowledged in their public disclosures that adverse market and other changes could lead to additional losses and that their financial results are subject to significant variability from period to period.

Notwithstanding the Enterprises’ recent positive financial results, they face many challenges. For example:

  • The Enterprises must reduce the size of their retained investment portfolios over the next few years pursuant to the terms of agreements with the U.S. Department of Treasury (Treasury) and additional limits from FHFA. Declines in the size of these portfolios will reduce portfolio earnings over the long-term. These portfolios have been the Enterprises’ largest source of earnings in the past.
  • Core earnings from the Enterprises’ business segments—single-family guarantee, multifamily, and investments—comprised only 40% of net income in 2013. Sixty percent of the Enterprises’ net income came from non-recurring tax-related items and large settlements of legal actions and business disputes, which are not sustainable sources of revenue. Core earnings comprised 55% of net income in 2014.
  • The Enterprises are unable to accumulate a financial cushion to absorb future losses. Pursuant to the terms of agreements with Treasury, the Enterprises are required to pay Treasury each quarter a dividend equal to the excess of their net worth over an applicable capital reserve amount. The applicable capital reserve amount decreases to zero by January 1, 2018.
  • Stress test results released by the Federal Housing Finance Agency (FHFA) in April 2014 indicate that the Enterprises, under the worst scenario—a scenario generally akin to the recent financial crisis—would require additional Treasury draws of either $84.4 billion or $190 billion, depending on the treatment of deferred tax assets, through the end of the stress test period, which is the fourth quarter of 2015.
  • Absent Congressional action, or a change in FHFA’s current strategy, the conservatorship will go on indefinitely. The Enterprises’ future status is beyond their control. At present, it appears that Congressional action will be needed to define what role, if any, the Enterprises play in the housing finance system.

Fannie Mae reports that it expects to remain profitable for the foreseeable future; however, it acknowledges that a decrease in home prices or changes in interest rates, combined with provisions of their agreements with Treasury that require the reduction of their retained asset portfolios, could lead to losses. Thus, if these losses result in an Enterprise reporting a negative net worth, that Enterprise would be obligated to draw on Treasury’s funding commitment.

[This Executive Summary is quite clear and truthful about the negative effect of the Treasury and FHFA agreement, commonly referred as PSPA that require the reduction of GSEs retained asset portfolios coupled with the requirement of paying Treasury a quarter so-called “Dividends” equal to excess of their Net Worth which obviously could lead to future losses.]

It is clear and obvious that the Treasury and FHFA agreement “PSPA” coupled with the 3rd Amendment is basically an economic housing finance time bomb implosion placing taxpayers at huge risk with a date of January 1, 2018 if not earlier. With the restriction and required quarterly payments written in the PSPA, there is no doubt that a future “Bailout will be required”.  In short, while the PSPA exist and enforced, taxpayers cannot avoid bailing out the GSEs.

The Solution

Time is of the essence!  The best way to avoid any future bailout and the only way to execute a fair, safe and sound reform while preserving and conserving the GSEs are to release the GSEs immediately and use previous payment toward the repurchase of the Senior Preferred while voiding the warrants, return all excess payment to start the GSEs to recapitalization, relist the GSEs, and finally, allow them to issue a secondary offering to raise capital”   

History Reminder

FDR got it right in 1938 under the new Deal. The New Deal produced a political realignment, making the Democratic Party the majority (as well as the party that held the White House for seven out of nine Presidential terms from 1933 to 1969).