Comment Detail

Comment

Please give consideration to following comment regarding the proposed capital framework (RIN-2590-AA95):

(1) The extremes of capitalizing the GSEs with solely private or solely public funds is ill-advised. Capitalization with solely private capital may limit the extent to which the Government can easily use the GSEs as effective, nationwide instruments of public policy (such as the recent forbearance initiatives associated with COVID-19). Public funding, alone, exposes taxpayers to inadequate buffering in case of crisis. Moreover, public organizations frequently lack the entrepreneurial energy and input that drive change, innovation, and efficiency. With the caveat of the need for an improved, durable risk management framework, the quasi-governmental status of the GSEs has resulted in the US housing finance system being the envy of the world. The proximity of the US Government to the GSEs has attracted significant foreign investment, while the proximity of private capital has attracted immense innovation. Recommendation #1: Leave the GSEs as privately-owned, government sponsored enterprises.

(2) As a footnote to the above comment, the existence of two privately-owned GSEs with statutorily-identical charters can be puzzling to all but those who have worked closely with the nation's mortgage lenders. The GSEs compete fiercely with one another over market share and funding costs. This competition has served the taxpayer with innumerable product, documentation, and processing innovations. Recommendation #2: Leave Fannie Mae and Freddie Mac in place as separate, competing enterprises.

(3) The treatment of the shareholders of the GSEs following the housing market disruption of the prior decade was abusive and disgraceful to the US Government. The US Government is clearly entitled to recover its bailout monies with a fair return. However, the need for the takeover itself is questionable in the first place (i.e. the companies appeared able to access the capital markets and continue funding their operations). Even if the need for intervention is conceded, the bailout funds could have been advanced as a simple obligation with payments and interest made pursuant to an agreement. The seizure was catastrophic to shareholders. Admittedly, shareholder losses are rightfully deserved when a corporation fails - the capital base serves that purpose. However, the sum of money confiscated by the government now transcends, by an embarrassing amount, the funds that the Government advanced in connection with the bailout. In the most kindly-worded format, the excess retained was completely unnecessary, unfair, and should be returned to shareholders. In harsher terms, retention of the excess amount borders on criminal and was patently wrong. Recommendations #3 and #4: Return the excess funds as a Federal contribution to the GSE's capital base (lowering the amount of new capital needed), and Do not take siphon, confiscate, or retain earnings from shareholders again. The excesses retained by the government may have already caused irreparable hesitation on the part of the capital markets to willingly invest in GSE equity again. A high-profile recognition of this error is needed (e.g. a court ruling) that this act was ethically wrong and not to be repeated).

(4) FHFA's proposed capital standard recognizes interest-rate risk, credit-risk, and operational (business continuity risk) in an appropriate manner. As data processing improves, the GSEs can be appropriately subjected to near real-time risk monitoring across these dimensions and facilitate regulatory intervention in a vastly more responsive manner, rewarding management with remediating activity such as credit risk transfers. Recommendation #5: Adopt the proposed capital framework as proposed by FHFA and provide for future improvements in risk-management to be easily adopted.

Thank you
Jonathan M. Prince
Private investor (FMCC)