FHFA Director Defends Big Bonuses To Fannie And Freddie Execs

By Janie Amaya

Federal Housing and Finance Agency (FHFA) Acting Dirctor Edward DeMarco responded to questions from members of the Senate Banking, Housing and Urban Affairs Committee today over why the agency has paid out $13 million in bonuses to the top 10 executives at twin mortgage giants Fannie Mae and Freddie Mac.

DeMarco defended the boneses, saying FHFA must take such necessary actions to put the regulated entity in a sound and solvent condition in order for it to operate in a safe and sound manner.

“I certainly think we have an entire competitive marketplace in the financial industry that suggests that compensation is an important factor in attracting and retaining high quality talent,” DeMarco said.

On Sept. 8, 2008, FHFA took conservatorship of Fannie Mae and Freddie Mac when the housing crisis began, and has since been working to help both companies regain footing.

“In our time as conservator, we’ve had quite a number of senior executives depart both companies and it has not always been easy to fill these positions with people from the outside,” DeMarco said. He added that often times compensation and the uncertain future of the companies are cited as key reasons for candidates to turn down offers.

DeMarco said that through the Emergency Economic Stabilization Act of 2008, the FHFA must also implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the taxpayers to take advantage of available programs to minimize foreclosures helping the companies succeed.

However, with no improvement in these companies, some committee members argued that the continuing failure is Congress’ fault.  

According to top Republican Richard Shelby (R-Ala.), Fannie and Freddie have already requested an additional $14 billion for last quarter’s loses.

“If Congress had acted, taxpayers would not be subsidizing the pay of Fannie and Freddie executives,” Shelby said.

Currently, the FHFA has established a new set of standards for mortgage servicers.

“We try to simplify the process and to provide very uniform guidance to mortgage servicers on what to do the next day after a mortgage payment is missed, DeMarco said.

GOP Proposes Legislation Eliminating Fannie And Freddie

By Adrianna McGinley

Acting Director of the Federal Housing Finance Administration (FHFA) and Fannie Mae/Freddie Mac conservator Edward DeMarco told a House subcommittee Thursday that he is supportive but wary of a proposal to increase private mortgage investments.

Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, Rep. Scott Garrett (R-N.J.), proposed last week the “Private Mortgage Market Investment Act,” which would eliminate the bailed out Fannie Mae and Freddie Mac in order to encourage private secondary mortgage investments.

“By facilitating the adjudication of disagreements between investors and issuers, secondly by clarifying the rules around the first lean holders rights, and third by preventing government forced loan modifications that would negatively impact investors, investors will finally have the certainty that they need to get back into the market,” Garrett said in his opening remarks.

DeMarco agreed on the need to move mortgage investments away from government owned entities, but said there is still much that needs to be considered before legislation such as the one proposed could be enacted. Even then, he seemed hesitatant to confirm that Fannie and Freddie could be 100 percent eliminated.

“If the market has certainty that these are the rules of the road, and that these rules of the road aren’t going to be changing every three months, I believe that the private market can step in and do a great portion of what is currently being done by Fannie and Freddie.”

DeMarco acknowledged that the third year anniversary of conservatorship is approaching, but it not meant to be a long term solution, merely an opportunity to maintain a stable market while lawmakers deliberated on appropriate housing finance reform.

Rep. Barney Frank (D-Mass.) also criticized the committee for acting too slowly on housing legislation.

“This bill is premised on the situation when there is no more Fannie and Freddie, but this committee has the power to deal with that and hasn’t moved on anything in that regard.”

Geithner: Changes Coming To Fannie Mae And Freddie Mac

The two-headed mortgage lending monster known as Fannie Mae and Freddie Mac will more than likely undergo serious reforms next year, according to U.S. Treasury Secretary Tim Geithner.

The pair of GSE’s, both of which required federal bailouts in 2008 after faltering as a result of the housing collapse, are headed for certain changes when the Obama administration puts forth a plan to overhaul the industry in early 2011.

Geithner told a panel of executive lending officers on Tuesday that the administration “will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.”

“We will not support a return to the system where private gains are subsidized by taxpayer losses,” he added.

Before being placed under total government control in 2008, the twin lenders ran into trouble, stemming mainly from involvement in the subprime mortgage movement in the early 2000’s. Speculators argue that entering that market under federal directives to increase home ownership is what caused Fannie and Freddie to become vulnerable when the skyrocketing housing bubble burst around 2006.

Geithner told the panel that he and Department of Housing and Urban Development (HUD) Secretary Shaun Donovan have been presented with a wide array of options for reforming the system, from nationalization of the lending market to complete government withdrawal.

However, Geithner admitted that as of today, a solution has not yet been reached.

“It’s safe to say there’s no clear consensus yet on how best to design a new system.”

Measure To Reform Fannie And Freddie Fails

A trio of Senate Republicans failed in their quest to put an end to the days of taxpayer bailouts for Fannie Mae and Freddie Mac.

The GSE (Government Sponsored Enterprise) Bailout Elimination and Taxpayer Protection Amendment, sponsored by Sens. John McCain (R-Ariz.), Richard Shelby (R-Ala.) and Judd Gregg (R-N.H.), would have forced the government to relinquish control of the two government-backed mortgage giants within two years.

Recently, Fannie Mae, which lost $13.1 billion during the first quarter of this year, asked the government for an additional $8.4 billion to stay afloat. Similarly, Freddie Mac asked the government for $10.6 billion in funds after reporting a loss of $8 billion for the quarter. Combined, the two companies have borrowed $145 billion from the Treasury Department since the government took complete ownership of them during the heart of the nation’s financial collapse in 2008.

"We are not saying that Freddie and Fannie have to go out of business. We're saying we want them to be a business that is on a level playing field with other private sector competitors," said McCain to reporters today, hours before his amendment went down in a 56-43 vote.

Though most Republicans supported the item, it had its fair share of skeptics.

First, critics, including many Democrats in Congress, believed the measure would unwind Fannie and Freddie so quickly that it would create chaos throughout the entire housing market. House Financial Services Committee Chairman Barney Frank (D-Mass.), who has said he supports reforming the two GSE’s, called the amendment a huge gamble.

“Simply to abolish Fannie and Freddie...and not do anything to replace the functions they are now performing with a conservatorship, would be a disaster for housing, and therefore for the economy as a whole,” he said last week.

Furthermore, the liberal Center for American Progress recently referred to the legislation as “The Credit Crunch Restoration Act of 2010,” arguing that by abolishing a large chunk of the mortgage backing industry, millions of Americans would lose access to credit.

Competition Made Fannie Mae Take Risks, Says Former Executive

By Chingyu Wang-Talk Radio News Service

Former executives from mortgage lenders Fannie Mae told the Financial Crisis Inquiry Commission Friday that a highly competitive market led the company to back riskier mortgages, a move that ultimately led to the mortgage giant's collapse.

“Fannie Mae’s volume of business relative to the market continued to decrease to a level where we were concerned about losing relevance in the marketplace," Former Fannie Mae Executive Vice President Robert Levin said.

Levin added that private-label mortgage-backed securities (PLS), or mortgages that did not have government support, played a key role in influencing the company.

“Many of the new products funded by PLS had features that attracted low-income borrowers, which threatened our ability to meet our [government] mandated housing goals," Levin explained.

Fannie Mae and Freddie Mac have received $125.9 billion in government assistance to date and are expected to receive a total of $161 billion by 2019.