GSE Earnings Fall 90 and 60 Percent Underscores Merit of CMLA’s Call for Building GSE Capital
Washington, D.C., February 23, 2015 – The Community Mortgage Lenders of America (CMLA) today renewed its call for Treasury Secretary Jack Lew and chief GSE regulator Mel Watt to take immediate action to recapitalize/cure the under-capitalization of both Fannie Mae and Freddie Mac.
The CMLA in December of last year – as the GSEs were reporting record profits – called for immediate action that would allow them to retain some of those profits to build a reasonable risk capital base. Now, as profits plummet – due in large part, to losses on derivatives – that call gains prophetic urgency.
The GSE capital levels, already minimal, will hit zero within just the next few years. Low or zero capital, coupled with declining earnings, could require yet another Federal bailout. Fannie’s Chief Executive Officer Tim Mayopoulos, for example, said the “fact that we don’t have a significant amount of capital increases the likelihood” that Fannie will need additional capital from Treasury at some point.
The GSE capital depletion is a direct outcome of the repayment terms embedded in the Preferred Stock Purchase Agreements (PSPAs) between the GSEs and the U.S. Treasury. That agreement requires the GSEs to remit 100 percent of profits, which precludes building capital.
CMLA Chair Paulina McGrath said “this precarious balance in earnings, derivative and market risks versus capital is an irrational approach to preserving the housing market. The Treasury agreement generates cash flow into the Federal coffers but this could prove to be at the expense of lenders and
homebuyers alike.” After Freddie Mac makes its next dividend payment, the GSE will have returned $91.8 billion to Treasury versus draws of $72.3 billion, resulting in an account surplus of $19.5 billion.
Fourth quarter (4Q) 2014 earnings at Freddie Mac plummeted 90 percent to
$227 million; Fannie Mae’s dropped 66 percent to $1.3 billion. Both GSEs tagged the earnings drop to derivative losses in 4Q, driven by a decline in long-term interest rates and a flattening of the yield curve. Fannie reported $2.5 billion in 4Q derivative losses while Freddie had a $3.4 billion loss.
Nevertheless, both GSEs have recorded 12 consecutive profitable quarters while, at the same time, each is approaching zero capital levels. That leaves the GSEs – and in turn, the taxpayers – at risk from market or overall economic declines as well as continued losses from GSE derivatives.
The CMLA is repeating its call for Treasury to take immediate corrective action to cure the undercapitalization of the GSEs. “There is neither a need nor a rational reason to wait on Congress to act, particularly since GSE reform legislation is far from certain,” McGrath said.
About the CMLA
CMLA is the only trade association solely dedicated to advocating for independent, community-based residential mortgage lenders. Founded in 2009, The CMLA is committed to the preservation of a thriving independent mortgage lending sector, which increases competition in the industry and, thus, provides borrowers with greater choice and lower costs. The CMLA membership includes lenders nationwide that, collectively, originate more than $100 billion worth of residential mortgage loans annually. The CMLA works to ensure the interests of its members are effectively represented before members of Congress, Federal regulators and the Executive branch.
For more information, please visit www.thecmla.com and/or direct policy and
member inquiries to Glen Corso at 925.323.7084