The mortgage giants Fannie Mae and Freddie Mac are headed for another government bailout soon unless policymakers act, their regulator warned Thursday.
In a speech to the Bipartisan Policy Center, Federal Housing Finance Agency Director Mel Watt noted that under the terms of the government's conservatorship, the government-sponsored enterprises are prevented from raising capital and must pass on their profits. When their capital runs out, the GSEs will have to draw on Treasury Department funds to continue operating.
"We are now over halfway down a five-year path toward eliminating the buffer completely," Watt said. "A disruption in the housing market or a period of economic distress could also lead to credit-related losses and trigger a draw" from taxpayer coffers.
The capital buffer is due to be gradually reduced until it runs out in 2018, but GSE executives are warning it may happen even earlier. In a conference call Thursday, Donald Layton, Freddie's chief executive, said there was an "increasing risk" the draw could come sooner.
While Fannie and Freddie could then turn to their $118 billion and $141 billion lines of credit with the Treasury, that could anger voters who demand Congress take action. Watt, a former Congressman from North Carolina, said he fears what would happen in that scenario."Future draws could lead to a legislative response adopted in haste or without the kind of forethought it should be given," he said.
Observers agreed that point could stoke market fears and public anger.
"As their capital runs down, these draws are going to become much more frequent, and then the question is how much tolerance do we have for them?" said Laurie Goodman director of the Housing Finance Policy Center at the Urban Institute and former managing director at Amherst Securities Group. "At some point the draws get large enough that you begin to undermine investor confidence in the market."
Fannie and Freddie have received $187.5 billion from the Treasury but have paid $241 billion back in the form of dividends. Neither company has received a draw from the Treasury since 2012.
Watt said he was alarmed that the situation is not getting more attention in the 2016 debate.
"While it's not my place to meddle in political discussions, I'm also not hearing much discussion of housing finance reform in any of the presidential campaigns," Watt said. (Hillary Clinton is the only candidate to put forward a housing plan, but it does not make mention of the GSEs.)
Still, some said Watt's speech may serve as a call to action, particularly if he keeps discussing the issue.
"It was a significant shift in terms of tone and tenor for the FHFA as it suggests that there could be a policy push for a change to the terms of the bailout agreement, which would likely include capital retention or an expansion of the Treasury backstop," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
Watt stopped short of directly calling to amend the Treasury arrangement but said action of some kind is needed.
"Uncertainty has a price, so something needs to be done to tell the markets and the American people what to expect in the future," he said during a discussion after his speech with former Housing and Urban Development Secretary Henry Cisneros.
A few trade groups are already urging action. The Community Home Lenders Association, the Independent Community Bankers of America and the Community Mortgage Lenders Association sent a letter to Watt on Wednesday urging him to suspend the dividend payments to Treasury.
"The purpose of this suspension would be to allow the GSEs to build a capital buffer to deal with potential earnings volatility driven by external economic developments rather than by actions or missteps by the GSEs," the groups wrote.
They argued that the "FHFA has the absolute authority" to suspend the dividends and rebuild the GSEs' capital.
But congressional action clearly remains the preferred course of action for Watt.
"I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind," he said in his speech.
Lawmakers, however, do not appear poised to act. Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., who co-authored bipartisan legislation to create a new housing finance system, concurred Thursday that it was past time for Congress to act.
"I agree Congress has waited far too long to solve the last remaining issue of the financial crisis, and that the status quo remains unsustainable," Corker said in a statement.
During his discussion with Cisneros, Watt warned that the situation will only worsen as the day of reckoning approaches.
"It is going to get more and more difficult as we go along, which is one reason why I am kind of sounding the call for somebody to take action of some kind to clarify the situation," he said.
Brian Collins and Kate Berry contributed to this article.