An Interesting Idea

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The Federal Housing Finance Agency (FHFA) can use existing powers to reverse the government’s control of Fannie Mae and Freddie Mac – without Congress, says Cliff Rossi, professor of the practice in finance at the University of Maryland’s Robert H. Smith School of Business and executive-in-residence at the school’s Center for Financial Policy.

Rossi has held senior risk management positions at Freddie Mac and Fannie Mae. The reform process would involve:

>> Developing a recapitalization plan that complies with FHFA capital buffers for the agencies

>> Developing a set of stringent risk-based capital requirements to be phased in over a specified period of time

>> Terminating the sweep of Fannie and Freddie profits to the U.S. Treasury

>> Establishing strict executive compensation requirements imposed by the FHFA

>> Accelerating the wind-down of both government sponsored enterprises’ (GSEs) retained portfolios

Rossi says such action is overdue:

“The demise of Fannie and Freddie in 2008 by entering conservatorship represented one of the darkest days in the history of the US housing finance system,” he said. “Weak regulatory oversight, low capital standards, a poor underwriting environment and large retained portfolios ultimately brought these companies to their knees financially. In the wake of this crisis it virtually wiped out private capital investment in the mortgage secondary market.

“Today, U.S. taxpayers remain liable for losses generated by Fannie and Freddie. And, each year that goes by is another year of contingent liability for the government.

“A legislative solution is virtually impossible given previous attempts by Congress for a balanced proposal, as well as the sheer complexity of redesigning a new secondary market,” he says. “The diffusion of interests is so broad and the implications from any reform is so little understood, the only pragmatic solution is to devise a GSE exit plan from conservatorship.”

Rossi was intimately involved in TARP and stress test activities as Managing Director and Chief Risk Officer for Citigroup’s Consumer Lending Group, and he was Chief Credit Officer at Washington Mutual and at Countrywide. He started his career during the thrift crisis at the U.S. Treasury’s Office of Domestic Finance and later at the Office of Thrift Supervision working on key policy issues affecting depositories.

His Capitol Hill appearance was part of a forum organized by Investors Unite, a coalition of private investors calling for an end to government conservatorship of GSEs.

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