Reforming Fannie and Freddie – Without Congress

Smith Finance Expert Proposes Steps, Rationale to Undo Federal Takeover of Twin Mortgage Giants

WASHINGTON, D.C. – Oct. 3, 2014 - The Federal Housing Finance Agency (FHFA) can use existing powers to reverse the government's control of Fannie Mae and Freddie Mac – without a gridlocked Congress, said Cliff Rossi, professor of the practice in finance at the University of Maryland's Robert H. Smith School of Business and executive-in-residence at the school's Center for Financial Policy.

Rossi, who has held senior risk management positions at Freddie Mac and Fannie Mae, laid out steps to such reform in a forum today on Capitol Hill – with Congress in fall recess.  He drew from his new white paper titled “Forging a Path out of Conservatorship for Fannie Mae and Freddie Mac." The process would involve: 

• Developing a recapitalization plan that complies with FHFA capital buffers for the agencies
• Developing a set of stringent risk-based capital requirements to be phased in over a specified period of time
• Terminating the sweep of Fannie and Freddie profits to the U.S. Treasury
• Establishing strict executive compensation requirements imposed by the FHFA
• Accelerating the wind-down of both government sponsored enterprises’ (GSEs) retained portfolios

The steps would undo a federal takeover during the 2008 housing crisis that was announced as a temporary measure to mitigate the collapse of both agencies until they regained stronger footing. Following the housing market's gradual recovery, the Obama Administration has proposed winding down Fannie and Freddie as part of a broader reform of the mortgage finance system.

Rossi said such action is overdue.

"The demise of Fannie and Freddie in 2008 by entering conservatorship represented one of the darkest days in the history of the US housing finance system," he said. "Weak regulatory oversight, low capital standards, a poor underwriting environment and large retained portfolios ultimately brought these companies to their knees financially. In the wake of this crisis it virtually wiped out private capital investment in the mortgage secondary market." 

Fannie and Freddie purchase mortgages from lenders, then repackage loans as mortgage-backed securities for investors.  Designed to increase mortgage-lending capacity, the process encompasses $5 trillion in mortgages – representing nearly half of all U.S. home loans.

"Today, U.S. taxpayers remain liable for losses generated by Fannie and Freddie," Rossi said. "And, each year that goes by is another year of contingent liability for the government." 

A long-term solution from Congress is ideal, but not realistic, he added. 

"A legislative solution is virtually impossible given previous attempts by Congress for a balanced proposal, as well as the sheer complexity of redesigning a new secondary market," he said. "The diffusion of interests is so broad and the implications from any reform is so little understood, the only pragmatic solution is to devise a GSE exit plan from conservatorship." 

Rossi also was intimately involved in TARP and stress test activities as Managing Director and Chief Risk Officer for Citigroup’s Consumer Lending Group, and he was Chief Credit Officer at Washington Mutual and at Countrywide. He started his career during the thrift crisis at the U.S. Treasury’s Office of Domestic Finance and later at the Office of Thrift Supervision working on key policy issues affecting depositories.

His Capitol Hill appearance was part of a forum organized by Investors Unite, a coalition of private investors calling for an end to government conservatorship of GSEs.