REFinBlog

Editor: David Reiss
Cornell Law School

December 11, 2014

Fannie and Freddie Begin a New Stage

By David Reiss

The Federal Housing Finance Agency has ordered Fannie and Freddie to begin making contributions to the Housing Trust Fund and to the Capital Magnet Fund.  These two funds were created pursuant to the Housing and Economic Recovery Act of 2008, the same statute that authorized placing the two companies in conservatorship. In 2008, FHFA Acting Director DeMarco suspended payments into the two funds because the two companies were being bailed out by the federal government. Now that the two companies are on firmer financial footing, the FHFA has lifted the suspension. The suspension will go back into effect for a company if it has to make a draw from Treasury under the Senior Preferred Stock Purchase Agreement, that is if the company does not have enough excess monies to make the payments into the two funds from its own income.

This action is not so surprising, given Watt’s past statements. It does, however, have some interesting implications. In terms of the GSE shareholder litigation, these allocations reduce the enterprises’ capital by a not insignificant amount; if shareholders were to win one of their lawsuits, monies placed in these two funds would be unavailable to them. In terms of housing finance reform, this action signals that the companies have moved beyond their crisis stage into a more stable one. It also emphasizes that the FHFA can take big steps on its own when it comes to housing finance reform, notwithstanding Congressional gridlock. All in all, it feels like the beginning of a new stage in the lives of the two companies.

The FHFA has issued an Interim Final Rule and Request for Comments relating to the payments into the two funds. The rule “implements a statutory prohibition against the Enterprises passing the cost of such allocations through to the originators of loans they purchase or securitize.” (1) Comments are due 30 days after the interim final rule is published in the Federal Register.

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