March 25, 2014
Fannie and Freddie’s Debt to Treasury
Larry Wall of the Federal Reserve Bank of Atlanta has posted one of his Notes from the Vault, Have the Government-Sponsored Enterprises Fully Repaid the Treasury? It opens,
Have U.S. taxpayers been fully compensated for their bailout of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac? The Treasury is reported to have argued that “the value of Treasury’s commitment to the GSEs was “incalculably large,'” with the implication that it could never be repaid. Richard Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution [and who discloses that he consults “with several hedge funds with positions in Fannie and Freddie”], responded that “the level of the Treasury commitment was not ‘incalculably large’: it was $188 billion, all of which will shortly be repaid.” The significance of Epstein’s argument is that if Treasury has been fully compensated for its bailout of Fannie and Freddie, a case can be made that the future profits of the two GSEs should go to their private shareholders.
As an accounting matter, one could argue that Epstein is correct; the dividends equal the amount of Treasury funds provided to the GSEs. And as a legal matter, the issue may ultimately be resolved by the federal courts. However, as an economic matter, the value of the government’s contribution clearly exceeds $188 billion once the risk borne by taxpayers is taken into account.
In this Notes from the Vault I examine the value of the taxpayers’ contribution to Fannie and Freddie from an economic perspective. My analysis of these contributions is divided into three parts: (1) the GSEs’ profitability prior to the 2008 conservatorship agreement (bailout), (2) the value of the taxpayer promise at the time of the bailout, and (3) support of new investments since they were placed in conservatorship. (1)
The article goes on to explain each of these three parts of the taxpayers’ contribution and concludes,
The claim that the taxpayers and Treasury have been fully repaid for their support of Fannie Mae and Freddie Mac is based on an accounting calculation that does not withstand economic analysis. The claim that Treasury’s commitment has been fully repaid attributes no dividend payments to Treasury starting in 2012, attributes no value to the government guarantee to absorb whatever losses arose in the pre-conservatorship book of business, and arguably reflects Treasury setting too low of a dividend rate on its senior preferred stock. Moreover, the profits that are being used to pay the dividends did not arise from the contributions of private shareholders but rather entirely reflect risks borne by the Treasury and taxpayers. Thus, the Treasury claim that the value of the aid was “incalculable” is an exaggeration; the value surely can be fixed within reasonable bounds. However, the implication of this claim, that the GSEs cannot repay the economic value on behalf of their common shareholders, is nevertheless accurate. (2)
This article offers a useful corrective to the story one hears from those representing Fannie and Freddie’s shareholders. They have constructed a simple narrative of the bailout of the two companies that ignores the way that the two companies’ fortunes have been intrinsically tied to the federal government’s support of them. That simple narrative just nets out the monies that Treasury fronted Fannie and Freddie with the payments that the two companies made back to Treasury. After netting the two, they say, “Case closed!” Wall has demonstrated that there are a lot more factors at play than just those two.
I would also highlight something that Wall did not: the federal government actually determines the level of profits that Fannie and Freddie can make by setting the fees the two companies charge for guaranteeing mortgages. So, the federal government could wipe away future profits by lowering the guaranty fees. And wiping away those profits would make those outstanding shares worthless.
So the question remains: what is the endgame for the investors who have brought these lawsuits?
March 25, 2014 | Permalink | No Comments
March 24, 2014
Is $50 Billion of Mortgage Relief Enough?
The National Mortgage Settlement Monitor issued his Final Crediting Report. The report states that
In total, the servicers have provided more than $50 billion of gross dollar relief, which translates into more than $20 billion in credited relief under the Settlement’s scoring system. More than 600,000 families received some form of relief under the Settlement. Aggregate credited relief includes:
• $7,589,277,740, or 37 percent of total credited relief, of first lien principal forgiveness.
• $3,105,152,359, or 15 percent of total credited relief, of second lien forgiveness.
• $3,587,672,814, or 17 percent of total credited relief, of refinancing assistance.
• $6,410,554,173, or 31 percent of total credited relief, of other forms of relief, including, but not limited to, assistance related to short sales and deeds in lieu of foreclosure. (2)
I am not going to criticize the substance of the mortgage settlement. But I have a hard time translating these massive numbers into an understanding of how much help people got from the settlement. $20 Billion of credited relief divided by 600,000 households comes out to about $33,000 in relief per household. The Monitor gives us no sense as to whether that $33,000 made a difference to the affected families.
Perhaps going forward, massive settlements like this should include metrics that help to break down these large numbers into categories that make more intuitive sense: for instance, did the mortgage relief reduce the monthly payment to a sustainable level? What percent reduction was there in monthly mortgage payments? How many mortgages were converted from underwater mortgages into ones that were in the money as a result of the settlement? Metrics such as these would help give an understanding of how many people were helped (certainly more than one of the metrics often repeated by the monitor, “My team spent 36,000 hours reviewing and testing the consumer relief and refinancing activities reported by the banks.”
As counter-intuitive as the question may seem, do we have enough information to really know whether $50 Billion of mortgage relief made a meaningful difference for American households?
March 24, 2014 | Permalink | No Comments
March 21, 2014
Unsexy but Essential: NYC’s Infrastructure Needs
The Center for an Urban Future has released a much-needed report, Caution Ahead: Overdue Investment for New York’s Aging Infrastructure. The report finds that
too much of the city’s essential infrastructure remains stuck in the 20th Century—a problem for a city positioning itself to compete with other global cities in today’s 21st Century economy.
* * *
This report finds that city agencies and authorities will have to invest approximately $47.3 billion to maintain the safety and functioning of New York’s infrastructure—leaving a $34.2 billion capital funding gap at the city, Port Authority, New York City Transit, Housing Authority and CUNY over the next five years. This funding gap includes only the replacement and repair of existing infrastructure—not new structures or increased capacity. (3)
Good government reports like this are often heeded for a day or two in the press and then filed away with other examples of wishful thinking. The fact is that it is hard for politicians to fix the old when it is so much more noteworthy to do ribbon cuttings for the new. But given that Mayor de Blasio has placed housing construction at the top of his agenda, a report like this might gain more traction than usual.
The report highlights work that is needed to be in the following areas, among others:
- Roads
- Subways
- Natural Gas
- Electricity Distribution
- Water Mains
- Sewage Pipes
- Stormwater Management
- Parks
All of these infrastructure needs are integral to large scale housing construction. Large, new buildings need to be supported with investments across these areas. This is a cost. But large scale housing construction also provides the opportunity to upgrade infrastructure more broadly. Concentrated development makes it more cost-effective to upgrade and modernize the infrastructure that supports new developments as well as their surrounding areas. There is no question that the de Blasio Administration should integrate infrastructure improvement with its ambitious affordable housing agenda. It may not be able to get two for the price of one. But with proper planning, it certainly could get two for less than the price of two.
March 21, 2014 | Permalink | No Comments
March 20, 2014
CFPB Strategy on Mortgage Data
The CFPB released its Strategic Plan, Budget, and Performance Plan and Report which provides a good summary of what the Bureau has done to date. I was particularly interested in this summary of its work to build a representative database of mortgages:
In FY 2013, the CFPB began a partnership with the Federal Housing Finance Agency (FHFA) to build the National Mortgage Database (NMDB). This work continues in FY 2014. For this database, the FHFA and the Bureau have procured (from a credit reporting agency) credit information with respect to a random and representative sample of 5% of mortgages held by consumers. The NMDB is the first dataset that will provide a truly representative sample of mortgages so as to allow analysis of mortgages over the life of the loans, including firsts, seconds, and home equity loans.
In all of the data used for its analyses, the Bureau will work to ensure that strong protections are in place around personally identifiable information. (66)
Such a database (assuming privacy concerns are adequately addressed) will be an invaluable tool for the Bureau (and researchers too, to the extent that they are allowed to access it). One question that the Strategic Plan does not answer is how fresh will the mortgage data be. The mortgage market can innovate at warp speed, as it did in the mid-2000s, so it will be important for the CFPB database to be as current as possible and accessible to researchers as quickly as possible. That being said, even if the data is a bit stale, it will still provide invaluable guidance regarding abusive behaviors in the market. It should also provide guidance regarding a lack of sustainable credit in the market generally as well as within those communities that have historically suffered from such a lack, low- and moderate-income communities as well as communities of color.
On a separate note, I would say that the Strategic Plan makes some assumptions about the efficacy of financial education that should probably be studied carefully. There is a lot of research that challenges the usefulness of financial education. The Bureau should grapple with that research before it invests heavily in financial education implementation.
March 20, 2014 | Permalink | No Comments
March 19, 2014
Reiss on Fannie and Freddie Conservatorship Litigation
I have posted An Overview of the Fannie and Freddie Conservatorship Litigation to SSRN (and to BePress as well). The abstract reads:
The fate of Fannie Mae and Freddie Mac are subject to the vagaries of politics, regulation, public opinion, the economy, and not least of all the numerous cases that have been filed in 2013 against various government entities arising from the placement of the two companies into conservatorship. This short article will provide an overview of the last of these. The litigation surrounding Fannie and Freddie’s conservatorship raises all sorts of issues about the federal government’s involvement in housing finance. These issues are worth setting forth as the proper role of these two companies in the housing finance system is still very much up in the air. The plaintiffs, in the main, argue that the federal government has breached its duties to preferred shareholders, common shareholders, and potential beneficiaries of a housing trust fund authorized by the same statute that authorized their conservatorships. At this early stage, it appears that the plaintiffs have a tough row to hoe.
March 19, 2014 | Permalink | No Comments
March 18, 2014
Reiss on Frannie Reform
Law360.com quoted me in Capital Rules To Spread Beyond Banks Under Housing Bill (behind a paywall). The story reads in part,
Mortgage servicers, aggregators and other actors in the U.S. housing finance market would for the first time be subject to the same capital requirements that apply to banks under a new bipartisan bill aimed at replacing Fannie Mae and Freddie Mac, potentially eliminating an advantage nonbank firms currently enjoy.
The elimination of Fannie Mae and Freddie Mac is the centerpiece of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2014, introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and the committee’s ranking Republican, Sen. Mike Crapo, R-Wyo. The government-sponsored entities would be replaced by a proposed Federal Mortgage Insurance Corp. that would backstop the housing finance market in a manner similar to the Federal Deposit Insurance Corp.’s backing of the banking system.
Among the details in the 442-page bill released Sunday are provisions that would allow the FMIC to impose capital standards and other “safety and soundness” rules to mortgage servicers, firms that package mortgages into securities and guarantors that provide the private capital backing to mortgage-backed securities. Compliance with these standards would be required for access to a government guarantee.
Previously those types of institutions have not been subject to safety and soundness rules, unless they were part of a bank. If the Johnson-Crapo bill moves forward as currently written, those firms could be in for a big change, said David Reiss, a professor at Brooklyn Law School.
“Historically, nonbanks have had a lot less regulation than banks. So, by giving them a safety and soundness regulator you are taking away a regulatory advantage – that is, less regulation – that they have had as financial institutions,” he said.
* * *
“What it effectively does is create safety and soundness standards for guarantors, aggregators and servicers, as if they were banks. There’s been this long debate about what you do about the nondepository institutions, and this would empower FMIC to supervise private-party participants like banks,” said Laurence Platt, a partner with K&L Gates LLP.
Specifically, the potential rules would apply to aggregators, which serve to collect mortgages and pack them into securities, and guarantors, or firms that provide the private capital to back those securities. Mortgage servicers that process payments and provide other services to mortgages inside those securities would also be included under the FMIC’s regulatory umbrella, according to the bill.
The FMIC would also have the power to force the largest guarantors and aggregators to maintain higher capital standards than their smaller competitors as a way to mitigate the risk of any such market player becoming too big to fail, and will be able to limit such firms’ market share if they get too big, according to the bill.
Underwriting standards for mortgages that would be backed by the FMIC would match, as much as possible, the Consumer Financial Protection Bureau’s qualified mortgage standards, which went into effect in January, according to the legislation.
Moreover, the FMIC would be able to write regulations for force-placed insurance that is applied to mortgages where borrowers do not purchase their own private mortgage insurance under the legislation. The CFPB and other regulators have tackled perceived problems in the force-placed insurance market in recent months.
Extending those capital and other safety and soundness requirements to nonbank firms would be akin to extending supervision authority of nonbank mortgage servicers and other firms to the CFPB, a power granted by the Dodd-Frank Act, Reiss said.
“It can be described as part of the effort since the passage of Dodd-Frank to regulate the breadth of the financial services industry instead of one part of it, the banking sector,” he said.
March 18, 2014 | Permalink | No Comments
March 26, 2014
Ohio Court Decided There Was no Basis to Challenge Standing Through a Civ.R. 60(B) Motion
By Ebube Okoli
The court in deciding Deutsche Bank Nat’l Trust Co. v. Santisi, 2013-Ohio-5848 (Ohio Ct. App., Trumbull County, 2013) ultimately denied the motion to vacate and affirmed the lower court’s decision.
Santisi appealed the lower court’s decision and raised the following assignments of error:
1) plaintiff (appellee) failed to present an affidavit or any other record evidence sufficient to meet its burden to establish it had standing to pursue a foreclosure action.
2) Plaintiff (appellee) failed to establish standing as there was no admissible evidence to explain material inconsistencies regarding the promissory note.
The bank asserted its standing to foreclose the mortgage by alleging that it was the holder and owner of a note in its complaint, and that allegation was legally sufficient to establish the bank’s standing to foreclose. The bank also provided evidence of standing by virtue of holding the note. The also bank established its interest in both the note and the mortgage, which was not disputed by the mortgagor prior to judgment and, thus, properly invoked the trial court’s jurisdiction. Based on these facts this court upheld the lower court’s decision.
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March 26, 2014 | Permalink | No Comments