Tag Archives: DeMarco

Reiss on FHFA Leadership of Housing Finance Reform

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Law360.com quoted me in FHFA Set To Take The Lead In Housing Finance Reform (behind a paywall). It reads in part,

With hopes for a legislative fix for the U.S. housing finance market fading after six key Democrats reportedly refused to support a reform bill pending in the Senate Banking Committee, the Federal Housing Finance Agency will become the central player in reshaping the market and set the terms for any future changes.

The Banking Committee’s leaders — Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho — were unable to scare up the overwhelming support their housing finance reform bill needed in a last-gasp effort at getting a vote from the full Senate. That leaves the bill’s prospects of getting to President Barack Obama prior to the midterm elections at near zero and the FHFA, the conservator for Fannie Mae and Freddie Mac since 2008, as the biggest player in reshaping the U.S. housing market.

“It was always my operating assumption that it was going to be exceedingly difficult to get congressional consensus. Most of the action was going to take place by way of the actions at the FHFA,” said former Republican Rep. Rick Lazio, now a partner at Jones Walker LLP.

The lack of legislation also throws a wild card into the equation, since FHFA head Mel Watt has essentially been silent about his intentions for the FHFA since he won Senate confirmation in December.

“Hopefully, Watt will have a positive vision of the future of the two companies,” said Brooklyn Law School professor David Reiss.

More than five years after Fannie Mae and Freddie Mac were placed under FHFA conservatorship after receiving a more-than-$187 billion taxpayer bailout in the fall of 2008, Congress has yet to act on creating a new system for home purchases and eliminating the two companies.

And then, beginning last spring, Congress kicked into gear.

First, Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., introduced a bill that Johnson and Crapo would use as the basis for their own legislation, leaving a limited role for government in guaranteeing the mortgage market.

Soon after, the House Financial Services Committee passed its own housing finance reform bill looking to eliminate the government’s role in the housing market entirely.

Johnson and Crapo released their bill, which would eliminate Fannie and Freddie within five years and replace it with a mortgage insurance agency modeled on the Federal Deposit Insurance Corp., in March. They scheduled a markup and vote on the bill for late April.

But the two senators delayed the vote at the last minute when it became clear that while they had the 12 votes needed to pass the bill out of the 22-member committee, they lacked the 16 to 18 votes needed to force Senate Majority Leader Harry Reid to bring it up for a vote.

Johnson and Crapo said they would continue negotiations with six undecided Democrats, but according to media reports, those negotiations foundered on worries about access to affordable housing in the bill.

Undeterred, Johnson vowed to bring the bill up for a vote next week.

“Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week,” Sean Oblack, a Democratic spokesman for the committee, said in a Thursday statement.

Still, the failure to get overwhelming support for the Johnson-Crapo bill essentially dooms the prospects for housing finance legislation this year, Lazio said.

“The administration will probably wait until early next Congress to make a decision about whether they think reform is possible,” he said.

But reform efforts will not stop, since the FHFA has a large amount of discretion over the futures of Fannie Mae and Freddie Mac.

“The regulator here is very powerful,” Reiss said.

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Fannie and Freddie’s Unreported Billions of Losses

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The Federal Housing Finance Agency’s Inspector General has warned FHFA Acting Director DeMarco that the FHFA has allowed Fannie and Freddie to defer acknowledgment of billions of dollars of losses relating to seriously delinquent singe-family residential mortgage loans for far too long.

The Office of the IG recommends that estimates of these losses be reported immediately, on an ongoing basis. There are all sorts of obvious good reasons to do this, including the fact that “[c]lassification of loans according to risk characteristics is a critical factor considered by financial regulators to evaluate a financial institution’s safety and soundness”  and that it accords with Generally Accepted Accounting Principles. (1)

directly through interest

Fannie and Freddie’s recent reports of billions of dollars of profits have caused a scrum to form around the two companies, as investors in preferred shares seek to get a slice of those profits through a series of lawsuits (here, here, here and here for example), as low-income advocates seek to fund the Housing Trust Fund through a lawsuit (here) and as some politicians forget the risks that these two companies present to the American taxpayer and seek to reanimate the two companies.

In a perfect world, we would ask what kind of residential housing finance infrastructure we want to implement for the next fifty years or so and what should happen to Fannie and Freddie should have little to nothing to do with their current profits or losses. But the political reality is that it does. With that as a given, we should at least have an honest assessment of their balance sheets. But the FHFA is keeping us in the dark. It needs to turn the lights on so that we can understand the true magnitude of these unreported losses so that the debate about Fannie and Freddie can be held with as much accurate information as possible.

Two (or Three) Cheers for DeMarco’s Swan Song

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FHFA acting Director Edward Demarco gave a thoughtful speech, Housing Finance, Systemic Risk, and Returning Private Capital to the Mortgage Market, on the future of federal housing finance policy.  Given that the Administration has nominated Mel Watt as his permanent replacement, it is likely that DeMarco is seeking to leave a good final impression.  I give the speech two real cheers, no more and no less.

First Cheer.  The speech provides a review of two reasons why the government might intervene in the housing market.  First, a “potential market failure could arise in housing finance if market participants have undue or unnecessary concerns about the ongoing stability and liquidity of mortgage credit in a purely private market across various economic environments.” (2)  Second, another “potential market failure is what is often thought of as the positive externality associated with homeownership. In this view, the benefits of homeownership extend beyond the individual household to the broader aspects of society, hence if left solely to the market the number of homeowners will be less than optimal.” (3)

Second Cheer. The speech also provides a very nice summary of the two main approaches that the government can take to address housing market failures.  First, is the issuer-based approach, which “is generally associated with a financial institution guaranteeing principal and interest repayment to investors. In this model, the issuer’s guarantee is backed by its shareholders’ capital. While not necessarily part of an issuer-based approach, typically this approach assumes a further credit enhancement in the form of a government guarantee on the securities issued.” (4)  Second is the securities-based approach.  With this approach, “as opposed to credit risk being absorbed by the equity of the securities issuer, credit risk would be absorbed through capital markets.” (6)

And One Bronx Cheer.  That’s right, no real third cheer for DeMarco.  Does he take a clear stand as to what course we should follow?  No.  Like the Administration in its oft-discussed White Paper, DeMarco sets forth the options and effectively punts on the trillion dollar question.

My two cents?  The federal housing finance infrastructure should focus on two goals:  (i) increasing housing affordability for low- and moderate-income households and (ii) providing a backstop during liquidity crises.  Leadership is needed now, before Congress gets riproaringly drunk on Fannie and Freddie’s massive return to profitability.  Otherwise, we have let one perfectly good crisis go to waste.

 

Reiss on Future of the FHFA

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Law360 wrote a story (here, behind a paywall) on the Obama Administration’s plans for the Federal Housing Finance Agency.  It reads in part

Although the Obama administration has dealt aggressively with congressional Republicans in some areas, it’s unlikely to make a recess appointment before the U.S. Supreme Court rules on the NLRB case, or chooses not to take it.

“The notion of a recess appointment is even harder to fathom,” said Brooklyn Law School professor David Reiss.

Still, despite those challenges, there are whispers that DeMarco could be replaced within the next few weeks. The names of some potential replacements, including Rep. Mel Watt, D-N.C., have been publicly floated.

A second part of DeMarco’s job is to help figure out just what to do with Fannie and Freddie, and how to bring more private money into the mortgage market.

Currently, Fannie and Freddie own or guarantee around 75 percent of all residential mortgages. Combined with the mortgages owned by the FHFA and the U.S. Department of Veterans Affairs, more than 90 percent of mortgages have some sort of federal backing.

DeMarco in October laid out a five-year plan for winding down Fannie and Freddie, including a common securitization platform for the two companies.

The Obama administration may well be on board with those plans and DeMarco provides convenient cover, Reiss said.

“It’s hard to imagine that Ed DeMarco is taking big positions like that without the administration’s at least tacit approval,” he said.

Opposition to FHFA Increase in Guaranty Fees for States with Lengthy Foreclosures

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Senators from the five affected states have written a letter to the FHFA’s DeMarco.  This debate presents a choice between risk-based pricing on the one hand and what is generally considered a pro-homeowner legal regime on the other.

The FHFA’s notice is here.