Seizing the “10 percent moment”
The idea of the “10 percent moment” was laid out two years ago by Alex J. Pollock, a former president and CEO of the Federal Home Loan Bank of Chicago, now a senior fellow at R Street, a Washington think tank. Simply stated, Fannie and Freddie have met their debt obligations to taxpayers.
The Housing and Economic Recovery Act (HERA), which infused the GSEs with $187.5 billion in public funds and placed them in a conservatorship, stipulated that the preferred stock the government received in exchange for the bailout money must achieve a 10 percent rate of return. This week, following some rigorous review and recalculation, Pollock said this milestone was reached.
“Even after its fourth quarter 2017 loss, and counting the resulting negative cash flow for the Treasury in 2018’s first quarter, we conclude that Treasury’s IRR (internal rate of return) on Fannie is 10.04 percent,” Pollock wrote in a March 6 blog post. Freddie already had its “10 percent moment.”
So, now that the GSEs have paid back the U.S. Treasury and the required 10% compound rate of return, the Treasury Department and the Federal Housing Finance Agency, the GSEs’ conservator, have a free hand to move ahead in ending the ten-year-old conservatorship and implement long term reforms – the most important of which require no action by Congress.
Among the reforms Pollock sees as essential for protecting taxpayers and creating a more sustainable and stable secondary mortgage market system are strict capital requirements for the government sponsored enterprises (GSEs), a fee the GSEs would pay to Treasury for its credit support, and adjustment of Fannie and Freddie’s mortgage backed security (MBS) guarantee fees.
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Exposing taxpayers, making home finance less accessible and abandoning policies to help struggling Americans afford housing fly directly in the face of housing reform principles stipulated by Treasury Secretary Mnuchin. So why would the Trump Administration wait for lawmakers who will likely become more action-averse as this year’s volatile mid-term elections draw closer to come up with a bad bill that will not pass? It would be better to stay the course with successful reforms undertaken in recent years, embrace sound and pragmatic ideas embodied by proposals from Pollock, Moelis &Co., and others, and use statutory authority to put in place federal housing finance policy that is sound and fair for all stakeholders. It is time to seize the “10 percent” moment with a 100 percent commitment to putting a coda on the 2008 financial crisis.
