The housing mortgage giants Fannie Mae and Freddie Mac could need another bailout in the next few years because they are being left undercapitalized by the Treasury Department, according to the former chairman of the Federal Deposit Insurance Corporation.

William Isaac, who chaired the FDIC from 1981 to 1985 during the Reagan administration, wrote an op-ed last week for The Wall Street Journal pointing to a warning from the Inspector General of the Federal Housing Finance Agency that Fannie and Freddie could require more government bailouts if the housing markets decline. Fannie Mae CEO Tim Mayopoulos sounded a similar warning during a recent earnings call.

The problem stems from a decision by the Treasury Department in 2012 to include Fannie and Freddie’s earnings within general revenues for the government rather than allowing the two government-sponsored enterprises to build a capital reserve.

Isaac is currently a senior managing director at FTI Consulting and an advisor to a shareholder group known as Investors Unite that opposes the Treasury’s accounting for Fannie and Freddie’s earnings. He talked with Accounting Today last week about his perspective on the issue.

“Fannie and Freddie burned through a fair amount of capital in 2008 and 2009, and then they were able to start rebuilding capital,” he noted. “Then in 2012 the Treasury stepped in and decided to not only confiscate 100 percent of their earnings going forward, changing the deal from a 10 percent interest rate on the preferred to an infinite payout of all of the earnings of Fannie and Freddie. Now they’re going even further, and by 2016 or 2017, I believe they will have depleted all capital at Fannie and Freddie. That’s no way to run a railroad, much less Fannie and Freddie. They have got to have capital.”

Isaac pointed out that one of the factors behind the mortgage crisis was Fannie and Freddie were overleveraged and lacked sufficient capital. In 2002, the ratio of assets to total equity was 44 times at Freddie Mac and 118 times at Fannie Mae. Then the year before the crisis set in, in 2007, the leverage ratio in terms of assets to total equity had grown to 81 times for Freddie Mac. However, the leverage ratio did improve at Fannie, to 68 times. Still, that was too much risk compared to the banks, and now the situation has grown more lopsided.

“Even the very big banks would be at no higher than 25 to 1,” said Isaac. “Let me tell you where they are today. In Freddie, it’s 734 times, and in Fannie it’s 873 times. We had a problem with these two institutions being way too overleveraged, growing way too rapidly, taking on risks they shouldn’t be taking on. Then the crisis hits and seven years later, they have substantially more leverage than they had going into the crisis. Then Treasury decides that’s still too much capital and needs to take all of it. So they’re going to take them into zero with their capital by 2017.”

Isaac contends that the Treasury Department has basically walked away from a deal it made in 2008, in which Fannie and Freddie were supposed to pay a 10 percent dividend on the preferred stock, which was far higher than any of the private banks were paying.

“I don’t know what their plan is,” he said. “Whatever the plan is for Freddie and Fannie, unless they’re just going to wind them down and liquidate them, whether they take them private or turn them into public entities, they’re not going to be able to operate without capital. In effect, what’s happening is the Treasury is making it much more likely that these entities are going to have to borrow substantially more from taxpayers.”

He noted that various plans have been proposed by both Republicans and Democrats in Congress, but none have been passed yet by Congress. Rep. Marsha Blackburn, R-Tenn., for example, introduced a bill last month that would take the funds out of the general revenues and put them into escrow accounts that could be used by Fannie and Freddie if needed.

Isaac pointed out that the conservatorship for Fannie and Freddie was supposed to be temporary. “That’s what a conservatorship is,” he added. “It’s to conserve the assets until things turn around in the economy. Then you try to get back out of the conservatorship and back into the marketplace. And instead of getting this thing in and out of the conservatorship in a period of a couple of years, which I think is what most people had anticipated would happen, here we are seven years later and they still don’t have a consensus on what they want to do with these things. So Treasury decides to strip them of all their capital, which changes the deal. That’s not the deal that was agreed to when this conservatorship was set up. I don’t know there they think they got the authority to do that, but they’re doing it.”

Ultimately the issue may be up to the next presidential administration to decide. However, the unresolved matter of capitalization for Fannie and Freddie could pose a threat to the mortgage or housing industry in case of a decline in the now-booming housing market.

“It’s hard for me to imagine that the taxpayers aren’t going to be called upon to help these entities once again because the government is stripping out all their capital,” said Isaac. “They don’t have the ability to withstand a downturn. And I don’t know anybody that’s bold enough to say we’re not in for another downturn.”