Realtors Request Reduction in GSE Senior Preferred Dividend
Aug/102
Vicki Cox Golder, the President of the National Association of Realtors, sent a letter to Treasury Secretary Timothy Geithner requesting a retroactive reduction in the preferred dividend rate that Fannie Mae and Freddie Mac must pay the Treasury. The NAR argues that the high dividend rate is delaying the housing recovery, isn’t fair compared to the terms of the bailouts of the commercial banks and AIG, makes no sense to have negative compounding work against the GSEs.
What do you think of the NAR’s letter. How do you think Treasury will respond? Please post a comment.
The complete text of the letter follows:
August 13, 2010
The Honorable Timothy F. Geithner
Secretary
Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220
Dear Secretary Geithner:
On behalf of the 1.1 million members of the National Association of REALTORS® (NAR), I am writing to urge you to reduce, on a retroactive basis, the dividend rate on senior preferred stock issued to the U.S. Treasury Department in exchange for contributing capital to Fannie Mae and Freddie Mac to assure that they maintain a positive net worth.
The National Association of REALTORS® (NAR) is America’s largest trade association, including NAR’s five commercial real estate institutes and its societies and councils. REALTORS® are involved in all aspects of the residential and commercial real estate industries and belong to one or more of some 1,400 local associations or boards, and 54 state and territory associations of REALTORS®.
When Fannie Mae and Freddie Mac (the housing government sponsored enterprises, or GSEs) were placed into conservatorship by the Federal Housing Finance Agency in September 2008, the Treasury Department and each GSE entered into a contract providing for an initial $1 billion issuance of senior preferred stock with a 10 percent quarterly dividend, including warrants representing ownership of 79.9 percent of each GSE. Pursuant to the contracts, additional preferred stock has been issued in recent quarters as Treasury provided additional capital to each GSE to maintain their positive net worth. The agreements also provide for an additional quarterly fee starting in 2010.
Recent news reports have highlighted the 10 percent dividend that the GSEs are required to pay to the Treasury Department on the preferred stock. This dividend is twice the amount charged to banks that received assistance under the Troubled Asset Relief Program (TARP) and more than other firms have been required to pay in exchange for federal support. The Treasury-GSE contract imposes what we think is a punitive dividend that works as an unnecessary drag on the housing and economic recovery. The required dividend should be significantly reduced for a number of reasons.
First, the GSEs are working assiduously to reduce their losses, as they should. But the unintended consequence of their imposing high fees and very tight underwriting standards is to delay the housing recovery. NAR supports strong underwriting standards. In fact, NAR went on record, starting in 2005, at the beginning of the current crisis, warning about predatory lending, including the payment option adjustable rate mortgages and the “teaser” rate 2/28 and 3/27 mortgages that doomed so many homeowners to failure. We now just as firmly believe that the pendulum has swung too far and potential homeowners who are reasonable credit risks are too often unable to find a fair and affordable mortgage. As noted in one recent article, the GSEs’ current book of mortgage business is “pristine.” We think that achieving a pristine book of business means that the GSEs are falling short of their mission to maintain a liquid residential mortgage market, throughout the nation, that serves a wide range of borrowers, including qualified low- and moderate-income families. Reducing the current punitive dividend will enhance their ability to eliminate their losses, which will be further enhanced as the housing markets continue to stabilize and recover. This will give the GSEs the flexibility to adjust their underwriting standards to take into account reasonable lending risks, which will benefit the consumer and the entire economy, without undue risk of additional cost to the taxpayer.
Second, minimizing the amount of preferred stock held by the Treasury Department will make the challenge of restructuring the GSEs easier. One of the thorniest problems will be how to handle the amount of outstanding preferred stock held by the Treasury Department. From today’s perspective, it is hard to imagine how the capital infused into each GSE can ever be repaid. But whatever the solution, it will be easier if the obligation of the GSEs is not artificially increased by imposing the current punitive dividend rate at a level not imposed on banks or other firms, such as A.I.G., receiving government financial support.
Finally, it makes no apparent sense for the Treasury Department to transfer amounts to the GSEs so they will have enough money to pay the dividend back to Treasury. If the GSEs were not required to pay the 10 percent dividend, which significantly increases each of their quarterly losses, it would reduce the amount of additional capital Treasury is called upon to provide to them. The problem is exacerbated because a growing amount is necessary to pay the dividend on amounts received in order to pay earlier dividends. The “miracle” of compounding in this case has become a nightmare that is creating a permanent drag on the ability of the GSEs to fully achieve their mission. It would make more sense to charge the GSEs an amount equal to the Treasury borrowing cost, or the borrowing cost to the GSEs based on the current federal assurance that they will maintain a positive net worth. Both of these amounts are far less than 10 percent.
The interest of the National Association of REALTORS® in the relative financial health of the GSEs, in receivership, is based on the desire of our members for robust real estate and mortgage markets that recover as quickly as possible to assist the nation as it regains its footing after the worst economic downturn since the Great Depression. Regulators have many enforcement tools and the duty to ensure that finance corporations comply with laws, regulations, and sound underwriting. However, with respect to the GSEs, it appears that government policy has imposed a dividend rate and capital structure that singles them out for particularly onerous treatment. This strikes us as misguided at best and destructive to the housing market and economy at worst.
As you know, NAR does not defend past GSE practices that resulted in the conservatorship and recommends their total restructuring at the appropriate time. Eliminating a punitive dividend is a step that should be taken now, regardless of how the GSEs may be restructured in the coming years. NAR’s proposal for their restructuring is founded on eliminating the prior private profit and public loss structure, which was inherently flawed. We believe that it is the mission of the GSEs that must be protected, not their structure. For the benefit of homeowners, home buyers, renters, and the entire economy, the nation must have a way to assure the flow of capital to the mortgage market, regardless of the state of the housing or mortgage markets or the overall economy. The path out of receivership that achieves this result will be easier if the contract with the GSEs is amended to minimize the amount of preferred stock held by the Treasury Department.
Accordingly, NAR urges you to reduce, retroactively, the current punitive dividend rate now imposed on Fannie Mae and Freddie Mac, which together with the Federal Housing Administration, currently make possible the vast majority of mortgage lending. Doing so will speed our nation’s recovery and facilitate the movement towards a permanent GSE reform solution. If you would like additional information or an opportunity to discuss our concerns, please contact Jeff Lischer, NAR’s Managing Director for Regulatory Policy, at jlischer@realtors.org or 202.383.1117.
Sincerely yours,
Vicki Cox Golder, CRB
2010 President
National Association of REALTORS®
cc: Edward J. DeMarco, Acting Director, Federal Housing Finance Agency
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10:02 am on August 15th, 2010
Derek -
This is the same question Kenny Merchant (R-TX) asked of Geithner. Treasury did not respond to his request for lowering of the rate. Geithner’s response, was the he wanted the best return for the taxpayer; and surely, taking all profits and then some, from Fannie and Freddie works out best for the taxpayer.
This is the same question the NAR posed a few months ago.
Apparently, Fannie and Freddie have been asking this question of Treasury since day one, via internal communications. Through their quarterly and annual reports, they have continually stated that this burden exceeds their prior profits, insinuating that it’s excessive.
Camden Fine (ICBA) has written letters to treasury to re-instate the dividend, and has not had action taken or a response given.
Donald Manzullo (R-IL) asked this same question of Geithner in March. Why are the small banks and preferred holders (mainly US holders) not treated as well as the Foreign bondholders (mainly Chinese). As documented in his book, Henry Paulson determined that his friends, the Chinese could rely on the US to back their commitments.
First, if history is an indication, these requests are not responded to. They have gone unanswered – not a ‘no’ and certainly not a ‘yes’.
Second, I don’t know if Treasury will write a letter or respond in that manner. They will simply take an action which will be the response.
To answer the question then, “How will they respond”, the hopeful answer would be there will be a surprise announcement of the lowering of the rate. This may or may not come as a recapitalization package whereby Senior, Junior and Common shareholders agree to a modification.
I’ll use Fannie Mae as the example:
According to my calculations, converting Senior preferred to 3% rate would allow for a preferred conversion to either common or new preferreds with the same rate. The common could easily receive .05 per quarter and .20 per year.
If ALL senior and junior preferred were converted to common, along with the warrants (4B shares), the total would common shares would be 20B shares. If the Treasury added 5B shares to allow for a $35B capital cushion, the total would be 25B shares.
25B shares would equate to a total dividend payout of $5B. Much less than the current $8.6B annual sr. dividend payment.
Everyone would win with this recapitalization:
US govt. immediately has $28B in profit (4B shares from the warrants); ‘bailout’ and ‘cost’ to the taxpayers are now thought of as an investment – and a profitable one at that.
Share price would be between $5-7 (current common happy); this is still a 90% loss for some common holders – a haircut.
Junior preferred holders would receive between $15 and $21 in value for their $25 in stated value – a haircut, but better than current price.
Other benefits:
Small banks can use the additional capital and liquidity to lend $200B
US govt. will be able to tax the dividends to common holders, so a portion will go back to them.
Fannie and Freddie will not be on death’s door, and overall, their debt costs will lower
Lowering the rate from 10% to 3% in itself would provide similar stabilizing benefits, but a recapitalization to all common stock would really be stabilizing.
1:34 pm on October 26th, 2010
The NAR will sell their soul to make house prices go up. Led by their cult leader Mr Yun.
NAR assumes that tighter lending standards are a bad thing. (see 2005)
Plus, all of this assumes that recapitalization of Freddie and Fannie is something that will stick considering that house prices are falling again.