FHFA Director: Mistake to Subject FHLBs & GSEs To Crisis Responsibility Fee

The acting head of the Federal Housing Finance Agency (FHFA)rntold congress yesterday that three key players in the housing market should bernexempted from the Obama Administration's proposed Financial CrisisrnResponsibility Fee.

Acting Director Edward J. DeMarco told members of the SenaternFinance Committee that applying the fee to the two government sponsoredrnenterprises (GSEs) Fannie Mae and Freddie Mac, would effectively rob Peter to payrnPaul.  Requiring the Federal Home LoanrnBanks (FHLBs), to participate could materially affect their operation at arntime when they are providing critical benefits to their members.

The Responsibility Fee was proposed in January in response torna requirement of the Emergency Economic Stabilization Act of 2008 that thernPresident put forward a plan “that recoups from the financial industry anrnamount equal to the shortfall (created by the Troubled Assets Relief Programrn(TARP) in order to ensure that TARP does not add to the deficit or nationalrndebt.”  The fee is designed to raisernsufficient revenue to offset the budget costs of TARP, and, by levying a fee onrnthe liabilities of the largest financial firms, to provide a deterrent againstrnexcessive leverage.  The fee would bernapplied to the largest banks, thrifts, holding companies, brokers andrnsecurities dealers that were eligible for TARP funds and would not applied tornfirms with consolidated assets of less than $50 billion.  The fee is designed to be in place for up tornten years and to generate up to $117 billion for the U.S. Treasury.

While the stated intention of the fee is to repay the Treasury and deterrnexcessive leveraging, an article in MND in January, speculated that another hidden agenda of the administration might be to drainrnout excessive reserves from the largest banks; in other words, a way to start fighting inflation before itrnbecomes a bigger problem.

DeMarco told the senators that it was never the Administration'srnintention to apply the fee to Freddie Mac and Fannie Mae, the two corporationsrnthat have been in government receivership since September, 2008.  Between them the two have received $110rnbillion in financial support from the Treasury, not through TARP but throughrnSenior Preferred Stock Purchase Agreements (PSPAs).  This week each announced their intention tornrequest additional assistance, a total of $19 billion for the two.

According to the Acting Director, the PSPAs have worked asrnintended, helping to restore investor confidence in the housing market andrnallowing both home buyers and those needing to refinance to continue to obtainrncredit.  The two GSEs guaranteedrnthree-quarters of the mortgages originated in 2009.

Citing the fragile financial condition of the GSEs, DeMarcornsaid they should not be subject to the fee. rnFirst, they already have an obligation to pay a ten percent dividend tornTreasury on draws made under the PSPAs and that obligation exceeds $1 billionrneach year for each company.  These are dividendsrnthat are effectively paid by further draws on the Treasury.  “So,” he said, “we are alreadyrnmoving money from one government account to another.”  The second issue is the requirement under thernHousing and Economic Recovery Act of 2008 that each of the GSEs contribute 4.2rnbasis points of the principal balance of new business purchases to support thernHousing Trust Fund.  Because of the financialrncondition of the Enterprises, FHFA has suspended these contributions.  If made, they too would have been fundedrnentirely by Treasury draws.  Given theirrncurrent financial condition and the ongoing support of Treasury, DeMarco said,rn”subjecting the Enterprises to the fee would not increase revenue to thernFederal government.”

DeMarco again stressed that operating in conservatorshiprncannot be long-term solution for the Enterprises that and their future roles,rnresponsibilities, form, and structure are part of a national discussion.  As decisions are made about these issues, “itrnmay be appropriate to consider subjecting these institutions to a FinancialrnCrisis Responsibility Fee just as part of the debate will undoubtedly touch onrnrepayment of taxpayer funds used to provide financial support to thernEnterprises,” but at this point it is premature to subject the Enterprisesrnto such a fee. 

DeMarco also spoke to the inappropriateness of applying thernfee to FHLBanks.  As a member-ownedrncooperative, the Banks are owned by two groups – those banks that wouldrnthemselves be subject to the fee and those that would not.  Consequently, he said, assessing the fee onrnFHLBs would result in some combination of further increasing the fee thatrnwould be assessed on large institutions and imposing the fee on small ones thatrnwere, because of their size, explicitly exempted from the administration'srnproposal. 

In a speech last month to directors of the 12 Federal HomernLoan Banks, DeMarco had chided several of the banks for their recent focus onrninvestments that would allow them to pay dividends to members rather than emphasizingrnthe other benefits they could offer them, saying “If a member considersrndividends to be the principal benefit of FHLBank membership, the member shouldrnask itself why it has joined the System in the first place.”  He urged the directors to demonstrate thernother benefits of system membership such as:

• access to funds for advances;
• the availability of other financial managementrnproducts;
• correspondent banking services
• access to the Affordable Housing Program andrncommunity investment programs; and
• access to mortgage purchase programs.

DeMarco told the senators yesterday that, in addition to thernfairness issue of assessing the fee, there are also questions of how such a feernwould affect the banks including equity within the system, the availability ofrnsystem funding the weak financial state of several member banks.  If advances are included in the feernassessment base for other financial institutions, the operation and structurernof some FHLBs could be materially affected which could reduce funding to affordable housing programs. 

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