'Capital buffer' disappearing.

Author:Sichelman, Lew

NONE OF THE PRESIDENTIAL CANDIDATES HAS SEEN FIT TO ADDRESS THE ISSUE OF FURTHER HOUSING FINANCE REFORM--at least as of this writing. But a speech in February by Federal Housing Finance Agency (FHFA) Director MEL WATT sure did, and maybe it will move the candidates off dead-center.

Watt, whose agency has been the conservator for Fannie Mae and Freddie Mac for an unprecedented eight years, told the Washington, D.C.-based Bipartisan Policy Center that a "lack of capital" could once again force the two government-sponsored enterprises (GSEs) to draw money from the Treasury to remain afloat.

Noting that Fannie and Freddie are required to return current profits to the Treasury under the provisions of the Senior Preferred Stock Purchase Agreements (PSPAs), he told the meeting, "[T]he enterprises will have no capital buffer and no ability to weather quarterly losses ... without making a draw against the remaining Treasury commitments."

He added, "Future draws that chip away at the backing available by the Treasury Department under the PSPAs could undermine confidence in the housing finance market."

A little background: The FHFA suspended statutory capital classifications when Fannie Mae and Freddie Mac were placed in conservatorship, and neither one is able to build capital under the provisions of the PSPAs. The agreements require each one to pay out comprehensive income generated from business operations as dividends to the Treasury Department, and the amount of funds each GSE is allowed to retain is often referred to as their "capital buffer." The buffer is available to absorb potential losses, which reduces the need for the GSEs to draw additional funding from the Treasury Department. However, based on the terms of the PSPAs, the buffer is declining each year.


"We are now over halfway down a five-year path toward eliminating the buffer completely," Watt said, pointing out that D-Day is Jan. 1, 2018.

During his two years as FHFA director, the former North Carolina member of the House of Representatives has had little inclination to look too far forward when it comes to the GSEs' fate--at least not publicly. But "by giving this speech," he said, "I am signaling my belief that some of the challenges and risks we are managing are escalating and will continue to do so the longer the enterprises remain in conservatorship."

If the buffer goes away and the GSEs' capital dwindles to zero, it could force them to hit up the Treasury for future draws, Watt warned. And that could undermine investor confidence in the secondary market and result in a knee-jerk reaction from lawmakers acting "in haste or without the kind of forethought" the issues should be given, he said.

You'd never know it by the statement put out by the House Financial Services Committee upon the 427-0 passage of the Housing Opportunity Through Modernization Act by the full House in early February. But the measure contains some meaningful changes to the Federal Housing Administration's (FHA's) condominium loan rules.

Those improvements hardly warranted a mention in the panel's...

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