Treasury’s hold over Fannie & Freddie

David Dayen has flagged a bit of analysis which says that the Treasury Department has such a large investment in Fannie and Freddie, they could compel the GSEs to do principal reduction if they wanted to. Dayen quotes Ralph Axel of Bank of America:

The FHFA’s decision also underscores the fact that the GSEs are not government agencies; they are private companies that have been temporarily taken over by their federal regulator whose specific mandate is to conserve their assets and continue their activities. As private companies, the GSE will likely respond to economic incentives. The Treasury’s power to modify the terms of the US$19bn dollar annual dividend that Fannie and Freddie (combined) owe to the Treasury is a tool of tremendous strength that could provide one such incentive.

The Treasury has the power to lower the dividend or tie it to incentives. It can tie the dividend to principal reductions or to easier underwriting standards or reduced putback activity to stimulate refinancings and new loans. The US$19bn dwarfs the US$3.6bn savings that the FHFA found from principal forgiveness. This is not housing finance reform, but it is a way to create effective temporary stimulus without raising additional federal debt while simultaneously moving toward larger structural changes.

David goes on to note:

And the fact that they are not making these conditions tells you a lot about whether or not the objections at Treasury to DeMarco’s decisions represent something real or something convenient for the election period. Geithner may be pinning the blame for the continued problems with underwater borrowers on DeMarco to deflect criticism away from the Administration. But he’s unwilling to do anything about it. And that tells the tale.

I don’t know anyone on the left who disagrees with the idea that Fannie and Freddie should be doing widescale principal reduction. But the idea that Ed DeMarco is a master villain beyond the prolonged foreclosure crisis and the lack of principal reductions just isn’t true. There have been numerous opportunities for the Obama administration to enact principal reduction which they have repeatedly elected to not take. Likewise there are outstanding ways for them to do these policies, but again they choose not to.

This isn’t to say that DeMarco is wrong and the country wouldn’t be better off with someone who supported helping homeowners at the head of FHFA. But the same could be said of having a Treasury Secretary who did this, or a head of HUD or the SEC or the DOJ who thought banks should be prosecuted for foreclosure fraud, instead of coddled and protected. Fire DeMarco? Sure, but let’s make sure Geithner and company are moved out with him.

…Adding, in another post about the SEC and DOJ choosing not to prosecute Goldman Sachs, Dayen notes:

Incidentally, there is one bit of exposure left for Goldman on this particular batch of Fremont loans. One federal entity has sued Goldman and other banks for misrepresenting mortgage-backed securities. That would be the Federal Housing Finance Agency. That Ed DeMarco is such a scoundrel.


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