January 7, 2014
Dear Director Watt,
Congratulations on your confirmation in the Senate and recent swearing in as the director of the Federal Housing Finance Agency (FHFA). This comes at an important time. While the White House and Congress are considering how to restructure the government sponsored enterprises (GSEs), your leadership as director of the FHFA will play an important role in this process.
Prior to the economic crisis, we worked for many years on a range of issues relating to the GSEs and housing policy, including producing detailed urban maps on redlining (much of this work can be found online here: http://www.public-gis.org/index.html). I am particularly interested in the plans for the future of the GSEs.
As the housing market has stabilized and begun to recover, Fannie Mae and Freddie Mac have rebounded and returned to profitability. Since the end of 2011, neither Fannie nor Freddie has had a single quarter with their net income in the red. Freddie has had 8 and Fannie has had 7 straight quarters of positive net incomes. As I am writing this letter, Fannie Mae will have paid $114 billion in dividends to Treasury compared to draws from Treasury of about $116 billion. Freddie Mac will have paid $71 billion in dividends to Treasury compared to draws of just over $71 billion.
Both GSEs are poised in the near future to have paid taxpayers back in full, plus some interest. However, due to the U.S. Treasury’s amendment in 2012 of the terms of its investment in the GSEs, all future profits of Fannie and Freddie will be paid as dividends. This prevents both GSEs from recovering and building up capital reserves. And it continues to unfairly use and abuse the GSEs’ shareholders, including me, not allowing them to share in the recovery of the GSEs as have shareholders of other bailed out companies, such as AIG and Citigroup. I have included a letter sent to the Secretary of the Treasury, Jacob J. Lew, on May 23, 2013 which addresses some of these issues in greater detail.
On top of the dividend payments from Fannie and Freddie, on Thursday of last week, the FHFA disclosed that it had recovered about $8 billion for taxpayers from settlements in 2013 with seven financial institutions that deceptively sold securities to Fannie and Freddie leading up to the financial crisis. FHFA has cases still pending against 12 other banks named in the original lawsuit.
Those of us interested in these aspects of the GSEs look forward to hearing from you about how, as director of the FHFA, you plan to address the way the GSEs will be structured to meet their statutory housing missions. How will any new structure affect the rights of the common shareholders, who were led to rely on grossly misleading assurances in 2008 by the Federal Reserve Chairman Ben Bernanke, Treasury Secretary Hank Paulson, and the GSEs’ regulator, James B. Lockhart? And what are your thoughts on the Treasury’s move to alter the terms of its investment in the GSEs in August of 2012?