In a hilarious Pepsi ad, NBA all-star guard Kyrie Irving goes undercover as “Uncle Drew”, an elderly man, to face off against young guys at local basketball courts. Thinking they are about to go up against a sluggish, old, man, the kids are embarrassed when Uncle Drew shows off his elite basketball skills.
This act not only inspired a Hollywood film, it also inspired the higher-ups at Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Authority (FHFA).
In 2008, Fannie Mae and Freddie Mac experienced overwhelming losses as a result of a dramatic increase in default rates on residential mortgages, placing them on the brink of insolvency. Congress passed the Housing and Economic Recovery Act of 2008 (HERA), which put Fannie and Freddie under conservatorship and bailed them out to the tune of $187 billion in taxpayer dollars.
Fannie and Freddie have been stuck under federal control ever since.
In 2015, FHFA director Mel Watt approved $4 million annual compensation packages for the CEOs of Fannie and Freddie. Congress, citing the fact that the two housing giants are still backed by taxpayers, rejected these salaries and passed legislation capping compensation for the CEOs of Fannie Mae and Freddie Mac at $600,000 each.
But like Bobby Valentine putting on a mustache to keep managing the Mets, FHFA, Fannie, and Freddie would not be deterred by federal law. Both Fannie and Freddie were looking for a new leader, so they decided to come up with a work around.
Fannie Mae split the CEO position into two, creating the title of President which would assume essentially all of the responsibilities of the CEO while the CEO is responsible for dealing with the board. But the compensation limit only applies to the “CEO”, so the President is making $4.2 million this year – seven times larger than the congressional cap. Similarly, Freddie Mac created a new position of President, which is compensated at $3.85 million annually.
Where was the regulator during this mischief? FHFA Director Mel Watt actually explicitly approved these salaries– bypassing traditional channels of staff review to greenlight the arrangements.
In response to the Inspector General reports unearthing this scheme, Freddie Mac stated that the position will revert back to CEO in July at which point the compensation will be reduced to $600,000. Fannie Mae on the other hand is indignant, arguing that “the decision to have the positions of CEO and President at each enterprise held by different individuals, whose compensation is set differently depending on their positions, did not — and does not — violate the CEO pay cap.”
The Inspector General isn’t buying it, stating “Congress implicitly rejected the former Director’s rationale when it imposed a compensation cap of $600,000 on the CEO position. The Board’s rationale for separating the CEO and President positions and attaching an annual compensation package of $3.25 million to the position of President was virtually the same as the one provided by the former FHFA Director in 2015.”
Congressional intent was clearly to limit excessive pay for taxpayer backed entities, but of course the narrow scope of the implementation left plenty of room for nefarious actions. But, they may want to look even harder, as Fannie Mae has 34 officers and employees whose compensation in 2017 exceeded the CEO pay cap of $600,000. That kind of spending directly impacts the taxpayers – as any funds that are not spent by Fannie and Freddie are sent to the Treasury as part of the bailout agreement ($300 billion has been paid back already).
This impact to the taxpayer is why another recent IG discovery of FHFA, Fannie and Freddie being opaque and wasteful is so troubling. Fannie and Freddie have been developing the Common Securitization Platform (CSP) which would allow them (or other entities) to issue a single security to markets rather than having separate ones – improving the housing finance system. The Inspector General found that the entities spent $2.1 billion over 7 years on the CSP, yet FHFA only publicly disclosed half of the project costs while failing to achieve the goal of third-party integration.
In response to the report that FHFA left taxpayers and Congress in the dark, the regulator said that “disclosure of [integration costs, amounting to half of the overall costs of the project] undermines rather than advances goals of transparency regarding the CSP project” and that including the full costs would create a “misleading impression.” The IG deadpanned in response to that incredulous claim that “we cannot comprehend how being transparent about these costs would be ‘misleading.’”
FHFA is clearly failing to be an effective regulator, which only increases the urgency for Congress to act to get Fannie and Freddie off the backs of the taxpayers. In the meantime, Congress should reiterate that entities in federal conservatorship should not be paying massive salaries to anyone – regardless of which title they concoct.