Fannie And Freddie Reform--The Right Way

Tuesday, April 29, 2014
With Congress poised to begin marking up legislation to reform mortgage giants Fannie Mae and Freddie Mac by the end of the month, more and more Fannie and Freddie investors have learned exactly what that means for their pensions and personal investments. And what are those investors being told? That Fannie and Freddie are going away and stock held by firefighters, police, school teachers, community banks, pensioners and individual investors will amount to nothing more than worthless paper.


The Federal government used $187.5 billion taxpayer dollars to keep the Government Sponsored Enterprises (GSEs) afloat and placed them into conservatorship at the height of the financial crisis in 2008.  The government held to its original conservatorship agreement until August 2012 when it arbitrarily decided to change the rules in midstream with an amendment that diverted 100 percent of Fannie and Freddie's profits to the Treasury's coffers, effectively wiping out private investors. Some of the investors who had their dividend swept away were invested in the GSEs years before the conservatorship took effect; some people had invested around the outset of the conservatorship and some had invested a few years after.

After hearing outrage from Fannie Mae and Freddie Mac investors from across the country, I decided to organize a group to visit Washington last week to meet with our elected representatives. Our message to lawmakers was simple: Washington must reform the GSEs in such a way that shareholders are paid what they are contractually and legally owed-something that the currently proposed legislation put forth by members of the Senate Banking Committee fails to do.

How does their bill treat shareholders?  First, it permanently writes into law the Treasury Department¹s move to forever seize the profits of Fannie and Freddie.  And second, it wipes out FHFA's legal duties as a conservator to all other entities besides the Treasury Department.  Put another way, individual shareholders, retirees, police and fire pensioners, and others will be left without a penny; the government gets it all.

Senators Corker and Crapo have both said that their legislation "leaves the investor issue to the courts",  but that claim defies credibility.  Their legislation puts Congress' thumb firmly on the scales of justice and on the side of the Obama Administration taking money it wasn¹t entitled to.  Last week, Treasury Secretary Jack Lew explained the federal government's taking by saying "I doubt a lot of people [the taxpayer] would feel they have been made whole."  But Mr. Lew ought to check his math:  the federal government put in $187 billion, and so far has received $205 billion back plus 80 percent of any upside of a recapitalization.   The Treasury Department has made out much better in their support of Fannie and Freddie than they did with the auto bailouts.  But regardless of losses or profits, the government has to live by the terms of its contracts the same way private parties do.   

Moreover, the very premise of this legislation, that Fannie and Freddie need to be wiped out, may be politically convenient but it ignores the realities of how the nation¹s mortgage market is capitalized, and how affordable housing becomes a reality for the middle class. Handing over the housing finance market and the guarantee business to the too-big-to-fail banks, wiping out the community banking system and obliterating Fannie and Freddie investors won¹t encourage private capital to show up for mortgages..

I know this; as a professional money manager, I allocate capital for a living.  If private investors can't rely on the rule of law in the mortgage market, they'll re-allocate capital to fund auto loans, credit card debt, or even apartments.  Capital follows the rule of law. 

America's mortgage market is a $10 trillion industry that needs private capital.  Without it, mortgages will become harder to obtain for ordinary Americans;  mortgage fees will increase, creating substantial burdens for homeowners; and the 30-year mortgage may become a thing of the past.

Ask an investor and they will tell you:  The marketplace functions based upon rules and certainty. Arbitrarily changing the rules in the middle of the game is destructive to investor confidence, and it's un-American.  We can only hope that Washington will listen to investors in its bid to reform Fannie and Freddie ­ the right way.   

Tim Pagliara
Franklin, Tn.


Is Poverty Inherited?

Is poverty inherited was meant and is meant as query to all of us.  The school system is a mess. Yes, a mess. Teachers in most of the schools in both the inner city and the fringes deal with behavior problems of some magnitude. The obvious solutionm rid the troublesome student and all will be well. That argument accomplishes little. Lil Joey in the back of the classroom ... (click for more)

Roy Exum: School Board Can’t Wait

It took the Hamilton County School board nine months before the group hired a search firm to find a new superintendent. But you mark my words – the Department of Education will undoubtedly implode if our leaders wait another nine months simply hoping for some type of mystical salvation. In the last week Signal Mountain leaders have all but given notice they will form their own district ... (click for more)

Valerie Bray Pleads Guilty In Death Of Well-Known Runner Cameron Bean

A long-time Moccasin Bend Hospital employee pleaded guilty on Tuesday morning in connection with the death of well-known runner Cameron Bean. Ms. Bray pleaded guilty to criminally negligent homicide and leaving the scene of an accident with a fatality involved. Defense attorney Bill Speek said she faces one-two years on each charge at a sentencing hearing on Feb. 1 at 1:30 ... (click for more)

Officer Who Was Shot Returned Fire; Is Recovering Well; Shooter Still On Loose

Chattanooga Police Chief Fred Fletcher said Monday morning that the officer who was shot three times on Thursday is recovering well.   Chief Fletcher said the officer was wearing a bullet-proof vest and one bullet hit the vest, which protected him during the shooting.  The officer was able to return fire, although Chief Fletcher would not comment on how many bullets ... (click for more)

Mississippi State Quarterback Nick Tiano To Play At UTC

Former Baylor School quarterback Nick Tiano announced Monday that he is transferring from Mississippi State to UTC. He tweeted, "I'm very excited to announce that I am going back home to play for The University of Tennessee at Chattanooga! # GoMoc" Tiano had announced five days ago that he was leaving the Bulldogs after his freshman year. Tiano appeared in four ... (click for more)

UTC Hoops: UTC vs. Marshall and Toys for Tots Tonight

Tonight is important as the UTC men’s basketball team hosts old rival Marshall at 7 p.m at McKenzie Come ready to watch exciting, fast-paced hoops … a track meet in tennis shoes. The Mocs are 6-2, while the high-scoring Thundering Herd is 5-2. Marshall averages 83 points a game and relies heavily on the 3-point shot (66 of 188), while the Mocs will look to minimize ... (click for more)