Testimony

The President’s Proposed Fee on Financial Institutions Regarding TARP

Chairman Baucus, Ranking Member Grassley, and members of the Committee, thank you for the opportunity for the Federal Housing Finance Agency (FHFA) to testify on the Financial Crisis Responsibility Fee and the nation’s housing government-sponsored enterprises (GSEs)—the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks (FHLBs).

The Emergency Economic Stabilization Act of 2008, the statute that created the Troubled Asset Relief Program (TARP), requires the President put forward a plan "that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt." In January, President Obama proposed a Financial Crisis Responsibility Fee that will be levied on the liabilities of the largest financial firms. The purpose of the fee is both to raise sufficient revenue to offset any budget cost of TARP and, by levying a fee on the liabilities of the largest financial firms, to provide a deterrent against excessive leverage.

The Administration proposal has the following key features:

• The fee would be applied to banks, thrifts, bank and thrift holding companies, brokers, and securities dealers that were eligible for the emergency assistance program put in place to resolve the crisis. Firms with consolidated assets of less than $50 billion would not be subject to the fee for the period when their assets are below this threshold.

• The assessable base of the fee would include the worldwide consolidated liabilities of U.S. financial firms. The fee base would include a broad set of liabilities with a few.

• The fee rate would be approximately 15 basis points.

We understand that the Administration does not intend for Fannie Mae and Freddie Mac (the Enterprises) to be covered by the proposal. And as I will explain, given the Enterprises’ current financial condition and financial support from the Treasury Department, subjecting the Enterprises to the fee would not increase revenue to the Federal government. While Fannie Mae and Freddie Mac are not TARP recipients, they are the recipients of substantial government support.

When the housing bubble burst, the Enterprises’ financial situation deteriorated rapidly, driven by credit losses and other than temporary impairments on mortgage-backed securities held on their balance sheets. These losses quickly overwhelmed the relatively low levels of capital that the Enterprises were required to hold against potential losses. Ultimately intervention was required because of the inability of the Enterprises to raise new capital and access debt markets in their customary way. These actions were necessary because the Enterprises’ ability to fulfill their mission was compromised by their financial condition and their collapse would have had devastating consequences for the housing finance system and the broader economy due to their interconnectedness.

Therefore, in September 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships—a statutory process designed to stabilize the troubled institutions. In conjunction with that action, the Treasury Department agreed to provide financial support to the Enterprises through the Senior Preferred Stock Purchase Agreements (PSPAs). The PSPAs are structured to provide ongoing financial support to the Enterprises to ensure they remain active participants in the marketplace. The PSPAs are ongoing, explicit and irreversible contractual commitments by the Federal government to ensure that Fannie Mae and Freddie Mac can meet their obligations. The PSPAs work by ensuring that the Enterprises maintain a positive net worth. Since the initial establishment of the PSPAs, the Treasury Department twice has increased its financial commitment to maintain market confidence in the Enterprises.

The PSPAs have worked as intended. Investors have confidence in the U.S. government’s commitment to honor these obligations. As a result, investors have continued to support U.S. housing finance through investment in Enterprise securities. This has been of tremendous benefit to homeowners, home buyers, local communities, lenders, and pension funds, among others. To see this benefit, consider that roughly three-quarters of mortgages originated last year were guaranteed by the Enterprises, with most of the remainder guaranteed by the Federal Housing Administration or the Veterans Administration. Further, more than four million households last year lowered their monthly mortgage payment or moved to a more stable mortgage by refinancing their mortgages with the involvement of the Enterprises. And, while serious delinquencies continue to rise, we have begun to see some signs of improvement, however fragile, in house prices and mortgage performance.

In the first two full years of this housing crisis, from July 2007 through 2009, combined losses at the Enterprises totaled $207 billion. During 2009 alone, the Enterprises reported net losses of $94 billion. The Enterprises’ financial performance continues to be dominated by credit-related expenses and losses stemming principally from purchases and guarantees of mortgages originated in 2006 and 2007. Since the establishment of the conservatorships, the combined losses at the two Enterprises depleted all their capital and required them to draw over $125 billion from the Treasury Department under the PSPAs. As conservator and regulator, FHFA is acting aggressively to assure that Fannie Mae and Freddie Mac are fully supervised for safety and soundness, are acting to reduce losses, and are undertaking only activities tied to their core responsibilities. Nevertheless, with continuing uncertainty regarding economic conditions, employment, house prices, and mortgage delinquency rates, the short-term outlook for the Enterprises remains uncertain and they are likely to require additional draws under the PSPAs.

More detailed information on the purpose and status of the conservatorships, as well as FHFA’s views on the future direction of the Enterprises’ business activities while they are in conservatorship, is detailed in a letter I sent to Chairmen Frank and Dodd and Ranking Members Bachus and Shelby in February 2010. This letter is available on the FHFA website.

Today the financial state of the Enterprises makes them poor candidates for inclusion in a fee proposal because the Enterprises are projected to have continuing losses that will be funded by the PSPAs. Any additional fee assessments will add to those losses, resulting in increased draws through the PSPAs. Applying the fee to the Enterprises would be an exercise in moving money between government accounts.

Let me make two related observations. First, the Enterprises already have the obligation to pay a ten percent dividend to Treasury on draws made under the PSPAs. Today, this quarterly obligation exceeds $1 billion for each company and those dividends are effectively being "paid" by further draws on the PSPA. So, we are already moving money from one government account to another. Second, the Housing and Economic Recovery Act of 2008 required each Enterprise to allocate 4.2 basis points of the principal balance of new business purchases to support the Housing Trust Fund established by the legislation. In view of the condition of the Enterprises, FHFA has used its authority to suspend these contributions. Had FHFA allowed these payments, they would have been funded entirely by Treasury draws.

Looking ahead, the Enterprises’ operating in conservatorship cannot be a long-term solution. We are in the midst of a "time-out" to allow careful consideration of the role of the Federal government in housing finance and the ultimate resolution of the Enterprises. I believe we are in the midst of an important national discussion about this issue. As the new roles, responsibilities, form, and structure of the Enterprises or their successors emerge from this debate, 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. However, in the absence of concluding the debate on fundamental reform, it would be premature to subject the Enterprises to the Financial Crisis Responsibility Fee. As I stated earlier, given the Enterprises’ current financial condition and financial support from the Treasury Department, subjecting the Enterprises to the fee would not increase revenue to the Federal government.

Before closing, let me turn to the Federal Home Loan Banks (FHLBanks). While the Administration did not propose applying the fee to the FHLBanks, I would like to make some observations about the potential impact of such a fee. As member-owned cooperatives, the FHLBanks are owned by two groups of financial institutions: those that would be subject to the proposed fee and those explicitly not subject to the proposed fee. Consequently, assessing the fee on FHLBanks would result in some combination of further increasing the fee that would be assessed on large institutions and imposing the fee on smaller institutions that the Administration had sought not to assess. Beyond this, there are numerous questions of how such a fee would affect the FHLBanks, including equity within the System, the availability of System funding, and the weak financial state of several FHLBanks. In addition, if advances are included in the fee assessment base for other financial institutions, the current operation and structure of some FHLBanks could be materially affected. These are important issues that should be fully considered in the context of overall housing finance reform.

Thank you for the opportunity to appear here today. I would be glad to answer any questions.

Letter to Congress on the Status of the Conservatorship of Fannie Mae and Freddie Mac

Contacts:

Corinne Russell (202) 649-3032 / Stefanie Johnson (202) 649-3030