WASHINGTON—Fannie Mae and Freddie Mac will have "little or no ability to absorb losses" as the government-sponsored enterprises' (GSEs) capital buffers decline to zero as of Jan. 1, according to the director of the Federal Housing Finance Agency.
In a letter to NAFCU and the Independent Community Bankers of America (ICBA), Watt said the "FHFA is concerned that in the absence of a sufficient buffer, normal operating events, such as interest rate volatility and the accounting treatment of derivatives used to hedge against interest rate risk, could dramatically increase the probability of additional draws by the Enterprises on taxpayer backing," Watt wrote.
Watt’s letter was in response to an earlier letter the two trade groups had sent to the FHFA.
The GSEs were placed into conservatorship following the 2008 financial crisis. As part of an agreement between the Treasury Department and the FHFA, the GSEs are required to send all of their profits to the Treasury.
Although the FHFA is working with the Treasury Department to address this concern, Watt noted that comprehensive legislation is needed for housing finance reform as "it is the role of Congress to determine the future of housing finance reform, and any steps FHFA might take regarding the capital buffer should not be misperceived as either an effort to promote recapitalization and release of the Enterprises from conservatorship or as interference with the work of Congress."
NAFCU said it will continue working with Watt and the FHFA, Congress and other stakeholders to pass comprehensive housing finance reform. In any housing finance reform measures put forth, NAFCU said it will seek to ensure credit unions maintain access to the secondary mortgage market and receive fair pricing based on loan quality, not quantity.