The acting head of the Federal Housing Finance Agency (FHFA) told congress yesterday that three key players in the housing market should be exempted from the Obama Administration's proposed Financial Crisis Responsibility Fee.
Acting Director Edward J. DeMarco told members of the Senate Finance Committee that applying the fee to the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, would effectively rob Peter to pay Paul. Requiring the Federal Home Loan Banks (FHLBs), to participate could materially affect their operation at a time when they are providing critical benefits to their members.
The Responsibility Fee was proposed in January in response to a requirement of the Emergency Economic Stabilization Act of 2008 that the President put forward a plan "that recoups from the financial industry an amount equal to the shortfall (created by the Troubled Assets Relief Program (TARP) in order to ensure that TARP does not add to the deficit or national debt." The fee is designed to raise sufficient revenue to offset the budget costs of TARP, and, by levying a fee on the liabilities of the largest financial firms, to provide a deterrent against excessive leverage. The fee would be applied to the largest banks, thrifts, holding companies, brokers and securities dealers that were eligible for TARP funds and would not applied to firms with consolidated assets of less than $50 billion. The fee is designed to be in place for up to ten 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 deter excessive leveraging, an article in MND in January, speculated that another hidden agenda of the administration might be to drain out excessive reserves from the largest banks; in other words, a way to start fighting inflation before it becomes a bigger problem.
DeMarco told the senators that it was never the Administration's intention to apply the fee to Freddie Mac and Fannie Mae, the two corporations that have been in government receivership since September, 2008. Between them the two have received $110 billion in financial support from the Treasury, not through TARP but through Senior Preferred Stock Purchase Agreements (PSPAs). This week each announced their intention to request additional assistance, a total of $19 billion for the two.
According to the Acting Director, the PSPAs have worked as intended, helping to restore investor confidence in the housing market and allowing both home buyers and those needing to refinance to continue to obtain credit. The two GSEs guaranteed three-quarters of the mortgages originated in 2009.
Citing the fragile financial condition of the GSEs, DeMarco said they should not be subject to the fee. First, they already have an obligation to pay a ten percent dividend to Treasury on draws made under the PSPAs and that obligation exceeds $1 billion each year for each company. These are dividends that are effectively paid by further draws on the Treasury. "So," he said, "we are already moving money from one government account to another." The second issue is the requirement under the Housing and Economic Recovery Act of 2008 that each of the GSEs contribute 4.2 basis points of the principal balance of new business purchases to support the Housing Trust Fund. Because of the financial condition of the Enterprises, FHFA has suspended these contributions. If made, they too would have been funded entirely by Treasury draws. Given their current financial condition and the ongoing support of Treasury, DeMarco said, "subjecting the Enterprises to the fee would not increase revenue to the Federal government."
DeMarco again stressed that operating in conservatorship cannot be long-term solution for the Enterprises that and their future roles, responsibilities, form, and structure are part of a national discussion. As decisions are made about these issues, "it may be appropriate to consider subjecting these institutions to a Financial Crisis Responsibility Fee just as part of the debate will undoubtedly touch on repayment of taxpayer funds used to provide financial support to the Enterprises," but at this point it is premature to subject the Enterprises to such a fee.
DeMarco also spoke to the inappropriateness of applying the fee to FHLBanks. As a member-owned cooperative, the Banks are owned by two groups - those banks that would themselves be subject to the fee and those that would not. Consequently, he said, assessing the fee on FHLBs would result in some combination of further increasing the fee that would be assessed on large institutions and imposing the fee on small ones that were, because of their size, explicitly exempted from the administration's proposal.
In a speech last month to directors of the 12 Federal Home Loan Banks, DeMarco had chided several of the banks for their recent focus on investments that would allow them to pay dividends to members rather than emphasizing the other benefits they could offer them, saying "If a member considers dividends to be the principal benefit of FHLBank membership, the member should ask itself why it has joined the System in the first place." He urged the directors to demonstrate the other benefits of system membership such as:
- access to funds for advances;
- the availability of other financial management products;
- correspondent banking services
- access to the Affordable Housing Program and community investment programs; and
- access to mortgage purchase programs.
DeMarco told the senators yesterday that, in addition to the fairness issue of assessing the fee, there are also questions of how such a fee would affect the banks including equity within the system, the availability of system funding the weak financial state of several member banks. If advances are included in the fee assessment base for other financial institutions, the operation and structure of some FHLBs could be materially affected which could reduce funding to affordable housing programs.