Tag Archives: bailout

Reiss on Castro at HUD

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Law360 quoted me in Obama Chooses San Antonio Mayor As Next HUD Chief (behind a paywall). It reads in part,

President Barack Obama on Friday nominated San Antonio Mayor Julian Castro to be the next secretary of housing and urban development, a move that observers say will result in the continuation of his administration’s housing policies.

If confirmed, Castro would take over an agency that is still dealing with the after-effects of the bursting of the housing bubble in 2007 and the resulting foreclosure crisis. HUD is also struggling to deal with a dearth of affordable housing in major metropolitan areas and reforming the Federal Housing Administration’s work.

Obama called Castro an “all-star” who has done a “fantastic job” in San Antonio over the last five years.

“He’s become a leader in housing and economic development,” the president said.

Speaking at the White House on Friday, Castro said that he looked forward to helping Americans get access to “good, safe affordable housing.”

“We are in a century of cities. America’s cities are growing again and housing is at the top of the agenda,” Castro said.

Castro would take over HUD from outgoing Secretary Shaun Donovan, whom Obama nominated to lead the Office of Management and Budget. Donovan would in turn replace Sylvia Mathews Burwell, Obama’s nominee to be the next secretary of health and human services.

Among his major tasks will be overseeing the FHA, which provides a government guarantee on mortgages issued to low-income and first-time homebuyers. The agency, which is led by Commissioner Carol Galante, last year was forced to take a $1.7 billion bailout from the Treasury Department as its reserves were depleted due to losses on bad loans.

In response, the FHA has increased insurance premiums on most new mortgages by 10 basis points and sold off some defaulting mortgages as part of a series of reforms aimed at bolstering its capital levels. Even with those changes, the bailout was necessary.

HUD has also been a key player in the Obama administration’s heavily criticized programs aimed at stemming foreclosures, including the Home Affordable Mortgage Program, and in efforts to develop affordable housing stock around the country.

The department is also at the center of fair lending and fair housing litigation against banks and other lenders.

Castro’s views on those subjects are unknown, but observers expect him to follow closely policies established by his predecessor Donovan.

“Our conversations lead us to believe that Castro is unlikely to deviate materially from the existing FHA single-family strategy,” Isaac Boltansky, an analyst at Compass Point Research & Trading LLC, said in a note to clients.

Castro, 39, is serving his third term as San Antonio’s mayor. A rising star in the Democratic party, Obama tapped Castro to give the keynote address at the 2012 Democratic National Convention in Charlotte, North Carolina.

In many ways the appointment is seen as a political decision as much as a policy one for housing experts, and a departure from Donovan, an expert on housing policy.

“Donovan focused his entire career on housing and affordable housing in particular. He is known for his deep understanding of housing issues. Mayor Castro has had a broader portfolio of concerns as a big city mayor,” said Brooklyn Law School professor David Reiss.

*     *     *

While Castro has focused on affordable housing issues, the mayor of San Antonio is a nonexecutive position, Reiss noted.

“So his ability to implement his vision will be tested in this new position,” he said.

Fannie and Freddie’s Debt to Treasury

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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?

FHA’s Net Cost of $15 Billion

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The Congressional Budget Office posted FHA’s Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? In response to the question, “Has FHA’s Guarantee Program for Single-Family Mortgages Produced Net Savings to Taxpayers,” the CBO responds,

No. Collectively, the single-family mortgage guarantees made by FHA between 1992 and 2012 have had a net federal budgetary cost of about $15 billion, according to the most recent estimates by FHA. In contrast, FHA’s initial estimates of the budgetary impact of those guarantees sum to savings of $45 billion . . .. That swing of $60 billion from savings to cost primarily reflects higher-than-expected defaults by borrowers and lower-than-expected recoveries when the houses of defaulted borrowers have been sold—especially for loans made over the 2004-2009 period. (1)

The document contains a chart of estimates of the budgetary impact of the FHA’s single-family mortgage guarantees by year. It shows that the 2008 vintage was particularly bad, accounting for over $15 billion in losses by itself (the other years’ savings and costs would thus net out).

There are some disturbing aspects of this finding and some that are not. First, the disturbing ones. The FHA has not been transparent about its potential for losses and bailouts (see here for instance). Second, its own financial projections have been overly optimistic.

That being said, the mere fact that the FHA is expected to have losses is not in itself an indictment of the government’s strategy of using the FHA to provide liquidity to the mortgage markets during the financial crisis. If only this were done forthrightly . . . but perhaps that is too much to ask in the midst of the crisis itself.