- The Federal Housing Administration (FHA) has announced relaxed requirements, effective immediately, for condominium project approval. The move is intended to increase options for affordable housing for 1st time and low income homebuyers. Among the changes are streamlining project recertification, expanding the definition of owner occupancy, and expansion of the eligible condominium project insurance coverage.
- The Federal Housing Finance Agency (FHFA) has released its 2015 Annual Performance and Accountability Report which describes its regulatory activities with regard to the Federal Home Loan Bank and as conservator of Fannie Mae and Freddie Mac
Tag Archives: conservatorship
Fannie, Freddie & The Affordable Housing Feint
Robert J. Shapiro
Elaine C. Kamarck
Robert J. Shapiro and Elaine C. Kamarck have posted A Strategy to Promote Affordable Housing for All Americans By Recapitalizing Fannie Mae and Freddie Mac. While it presents as a plan to fund affordable housing, the biggest winners would be speculators who bought up shares of Fannie and Freddie stock and who may end up with nothing if a plan like this is not adopted. The Executive Summary states that
This study presents a strategy for ending the current conservatorship and majority government ownership of Fannie and Freddie in a way that will enable them, once again, to effectively promote greater homeownership by average Americans and greater access to affordable housing by low-income households. This strategy includes regulation of both enterprises to prevent a recurrence of their effective insolvency in 2008 and the associated bailouts, including 4.0% capital reserves, regular financial monitoring, examinations and risk assessments by the Federal Housing Finance Agency (FHFA), as dictated by HERA. Notably, an internal Treasury analysis in 2011 recommended capital requirements, consistent with the Basel III accords, of 3.0% to 4.0%. In addition, the President should name a substantial share of the boards of both enterprises, to act as public interest directors. The strategy has four basic elements to ensure that Fannie and Freddie can rebuild the capital required to responsibly carry out their basic missions, absorb losses from future housing downturns, and expand their efforts to support access to affordable housing for all households:
- In recognition of Fannie and Freddie’s repayments to the Treasury of $239 billion, some $50 billion more than they received in bailout payments, the Treasury would write off any remaining balance owed by the enterprises under the “Preferred Stock Purchase Agreements” (PSPAs).
- The Treasury also would end its quarterly claim or “sweep” of the profits earned by Fannie and Freddie, so their future retained earnings can be used to build their capital reserves.
- Fannie and Freddie also should raise roughly $100 billion in additional capital through several rounds of new common stock sales into the market.
- The Treasury should transfer its warrants for 79.9% of Fannie and Freddie’s current common shares to the HTF [Housing Trust Fund] and the CMF [Capital Magnet Fund], which could sell the shares in a series of secondary stock offerings and use the proceeds, estimated at $100 billion, to endow their efforts to expand access to affordable housing for even very low-income households.
Under this strategy, Fannie and Freddie could once again ensure the liquidity and stability of U.S. housing markets, under prudent financial constraints and less exposure to the risks of mortgage defaults. The strategy would dilute the common shares holdings of current private investors from 20% to 10%, while increasing their value as Fannie and Freddie restore and claim their profitability. Finally, the strategy would establish very substantial support through the HTF and CPM for state programs that increase access to affordable rental housing by very low-income American and affordable home ownership by low-to-moderate income households.
Wow — there is a lot that is very bad about this plan. Where to begin? First, we would return to the same public/private hybrid model for Fannie and Freddie that got us into so much trouble to begin with.
Second, it would it would reward speculators in Fannie and Freddie stock. That is not terrible in itself, but the question would be — why would you want to? The reason given here would be to put a massive amount of money into affordable housing. That seems like a good rationale, until you realize that that money would just be an accounting move from one federal government account to another. It does not expand the pie, it just makes one slice bigger and one slice smaller. This is a good way to get buy-in from some constituencies in the housing industry, but from a broader public policy perspective, it is just a shuffling around of resources.
There’s more to say, but this blog post has gone on long enough. Fannie and Freddie need to be reformed, but this is not the way to do it.
Obama Administration on Frannie
Michael Stegman, a White House Senior Policy Advisor, offered up the Obama Administration’s “perspective on critical housing issues” recently. (1) I found the remarks on the future of Fannie and Freddie to be of particular interest:
Before discussing what we would like to see happen in this Congress on GSE reform, you should be aware that last week the Administration made clear its opposition to taking any action in support of what has become known as “recap and release.” We believe that recapitalizing the GSEs with taxpayer funds and administratively- or legislatively-releasing them from conservatorship with a business model that conflicts with their public mission— in essence turning back the clock to the run up to the crisis~ would be both bad policy and poor stewardship of the taxpayers’ interest; willfully recreating the very system that helped do this nation so much harm.
ln remarks I presented two weeks ago at the Mortgage Bankers Association conference, I cautioned that no one should be misled by the increasingly noisy chorus of the advocates of recap and release, many of whom have placed big bets against reform so they can make a‘profit, and are doing everything they can to make sure that those bets pay off.
Nor, I said, should their promise that recap and release would generate a pot of money for affordable housing be taken seriously.
Despite claims to the contrary, recapitalizing the GSEs would not itself provide any resources for affordable housing. Nor can a related — or even unrelated — sale of Treasury’s investment in the GSEs provide any resources for affordable housing. The proceeds of the sale of any GSE obligations acquired by Treasury must by law be “dedicated for the sole purpose of deficit reduction.”
Rather than freeing recapitalized GSEs from conservatorship with their flawed charters intact, we should pursue more comprehensive approaches to reform such as those that members of Congress have introduced over the past two years including mutualizing Fannie and Freddie, or build upon bipartisan agreements on the features of a future secondary market system that were hammered out in the Senate Banking Committee last year:
Preservation of the TBA market; an explicit, paid for government guarantee of catastrophic losses for investors in qualifying MBS; maintaining a clear separation of the primary and secondary markets; ensuring the flow of mortgage credit in both good times and bad; separating the securitization plumbing from private credit risk taking; ensuring that community lenders have the same access to the secondary market as big banks; and making the benefits of government guaranteed MBS available to all households — both those who choose to rent and those with the ability and desire to own.
Members in Congress also reached bipartisan consensus on a transparent way to serve those the private market cannot serve without subsidy, through an annual 10 basis point assessment on the outstanding balance of government-guaranteed MES—which once fully implemented, would generate about 15 times more resources a year for affordable housing than FHFA is expected to raise through the GSEs’ current affordable housing levy–though we were pleased to see the Director begin collections on the affordability fee and look forward to effectively implementing the dollars through the Housing Trust Fund and the Capital Magnet Fund that should become available for the first time in the early months of 2016.
But there is much more work to be done on ensuring a level playing field in the new system, including a robust role for community banks and credit unions who know how best to serve their customers, and ensuring that all communities are served fairly, which can be most effectively achieved through a statutory duty to serve. Regrettably, the Committee could not agree upon such a provision during last year’s negotiations, and we will continue to fight for it. (3-4)
Much of these remarks are eminently reasonable but I have to say that the Obama Administration has not deployed much political capital on reforming the housing finance system. This has left the whole system in limbo and the longer it stays in limbo, the more likely it is that special interests will make inroads into the reform of the system, inroads that will not be in the public interest.
While the likelihood of reform coming out of the current Congress is incredibly small, the Administration should take all of the administrative steps it can to sketch out an outline of a housing finance system that can work for a broad range of borrowers through the credit cycle without putting excessive risk on taxpayers.
The Administration has taken some steps in the right direction, like off-loadling some risk from Fannie and Freddie to private investors. But there is a lot more work to be done if we are to have a system that provides the optimal amount of credit through the 21st century.
Friday’s Government Reports
- The U.S. Census Bureau/HUD has released the New Residential Construction Statistics which show new building permits down slightly since August but 4.5% higher than Sept. 2014. Housing completions are up both month over month and year to year.
- The New York Federal Reserve has released a paper: The Rescue of Fannie Mae and Freddie Mac and a related blog post: Evaluating the Rescue of Fannie Mae and Freddie Mac in which the authors evaluate the now seven years and running government conservatorship which injected $187.5 billion into the two entities. The authors conclude that the short term intervention was necessary “because of the central role of Fannie Mae and Freddie Mac in the U.S. mortgage market, and the GSEs’ interconnections with the rest of the global financial system.” They go on to argue that the conservatorship was meant to be a temporary “time out” and characterize the lack of mortgage finance reform a “striking failure” and cite broad consensus that the GSEs should be replaced with a private system.
Credit Risk Transfer Deals
The Federal Housing Finance Agency released an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions. It opens,
In 2012, the Federal Housing Finance Agency (FHFA) initiated a strategic plan to develop a program of credit risk transfer intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers. In just three years, the Enterprises have made significant progress in developing a market for credit risk transfer securities, evidenced by the fact that they have already transferred significant credit risk on loans with over $667 billion of unpaid principal balance (UPB).
Credit risk transfer is now a regular part of the Enterprises’ business. The Enterprises are currently transferring a significant amount of the credit risk on almost 90% of the loans that account for the vast majority of their underlying credit risk. These loans constitute about half of all Enterprise loan acquisitions. Going forward, FHFA will continue to encourage the Enterprises to engage in large volumes of meaningful credit risk transfer through specific goals in the annual conservatorship scorecard and by working closely with Enterprise staff to develop and evaluate credit risk transfer structures. (2)
This is indeed good news for taxpayers and should reduce their exposure to future losses at Fannie and Freddie. There is still a lot of work to do, though, to get that risk level as low as possible. The report notes that these transactions have not yet been done for adjustable-rate mortgages or 15 year mortgages. Most importantly, the report cautions that
Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. (22)
Taxpayers are exposed to many heightened risks during Fannie and Freddie’s conservatorship, such as operational risk. These risk transfer transactions are thus particularly important while the two companies linger on in that state.
Tuesday’s Regulatory & Legislative Round-Up
- Fannie Mae announced HomeReady – a new affordable lending product which will be rolled out later in the year. The program includes features designed to make it more flexible for lenders and buyers alike. For lenders Desktop Underwriter (DU) allows lenders to make credit risk, eligibility and loan availability assessment in one tool. HomeReady loans also promise simplified execution due to the ability to commingle them with standard loans into Mortgaged Backed Security polls. Purchasers are able to put as little as 3% down, and are able to use rental income from the property and non-borrower household income to meet the requirements.
The Importance of Understanding G-Fees
The Federal Housing Finance Agency has released Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014. Ok, ok, this is some really technical stuff. But it gives us a lot of important information about what goes into the cost of a home mortgage.
The executive summary opens, “The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to submit reports to Congress annually on the guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises).” (2, footnotes omitted) The report finds that “the average level of guarantee fees charged has increased since 2009. The guarantee fees are currently two-and-a-half times their previous level; from 2009 to 2014, average fees increased from 22 basis points to 58 basis points. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.” (2, footnote omitted)
For all of you non-experts out there, a basis point is 1/100th of a percentage point. So a guarantee fee (or g-fee in the lingo) of 58 basis points increases the interest rate paid by more than half a percentage point (for instance, from 4.5% to 5.08%). So homeowners should want to understand why g-fees have more than doubled since 2009.
The report breaks down how g-fees gradually increased in response to Congressional and FHFA requirements, some of which are not tied to housing finance goals at all. For instance, Congress added ten basis points to fund an extension of a tax cut.
Many have argued that g-fees should be kept as low as possible in order to help out the housing market. I do not take that position, in large part because cheap credit does not necessarily lower the cost of housing; sellers may just be able to raise the price of their homes in a cheap credit environment. I also believe that the housing market and the mortgage market need to achieve some sort of equilibrium and unnaturally low g-fees will distort such an equilibrium.
The price of the g-fee should reflect the real costs of the g-fee. For instance, it should cover the cost of losses that result from borrower default. It should not be used to fund programs unrelated to housing. G-fees that are unnaturally high distort the housing finance market and make homeowners subsidize other constituencies. Federal housing finance policy tends to get screwed up if it veers too much from its fundamentals, so we should not ask too much of the g-fee.
Fannie and Freddie have been in limbo ever since they entered conservatorship in 2008. The longer they are in that limbo, the more likely it is that Congress will use them to do all sorts of things that do not relate to maintaining a liquid housing finance market. This study outlines how the g-fee has morphed over time and is a wake-up call to homeowners and policy makers alike to set Fannie and Freddie on a healthy course for the long term, starting with that obscure and technical g-fee.
