Tag Archives: fannie

Good Data for the FHFA

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The Federal Housing Finance Agency released a White Paper on the FHFA Mortgage Analytics Platform.  By way of background, the White Paper states that

The Federal Housing Finance Agency (FHFA) maintains a proprietary Mortgage Analytics Platform to support the Agency’s strategic plan. The objective of this white paper is to provide interested stakeholders with a detailed description of the platform, as it is one of the tools the FHFA uses in policy analysis. The distribution of this white paper is part of a larger effort to increase transparency on mortgage performance and the analytical tools used for policy analysis and evaluation within the FHFA.

The motivation to build the FHFA Mortgage Analytics Platform derived from the Agency’s need for an independent empirical view on multiple policy initiatives. Academic empirical studies may suffer from a lack of high quality data, while empirical work from inside the industry typically represents a specific view. The FHFA maintains several vendor platforms from which an independent view is possible, yet these platforms tend to be inflexible and opaque. The unique role of the FHFA as regulator and conservator necessitated platform flexibility and transparency to carry out its responsibilities.

The FHFA Mortgage Analytics Platform is maintained on a continuous basis; as such, the material herein represents the platform as of the publication date of this document. As resources permit, this document will be up dated to reflect enhancements to the platform. (2)

This platform is a very welcome development for exactly the reasons that the White Paper sets forth.  Academics have a very hard time accessing good data on the mortgage markets (its usually expensive, untimely, limited).  Industry interpretations of data typically have agendas.

A sampling of the Platform’s elements include:

  • Performing Unpaid Principal Balance
  • Scheduled Paid Principal Balance
  • Unscheduled Paid Principal
  • Dollars of New 90 Day Delinquencies
  • Non-Performing Balances
  • Property Value of Non-Performing Loans (30-31)

Let us hope that the Platform offers a transparent and flexible tool to track this very dynamic market.

Reiss on Mortgage Insurance Proposal

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Law360 quoted me in FHFA Capital Rules Will Squeeze Older Mortgage Insurers (behind a paywall). It opens,

The Federal Housing Finance Agency on Thursday released proposals that would impose higher capital requirements on private mortgage insurers doing business with Fannie Mae and Freddie Mac, but experts say insurers with bubble-era mortgages in their portfolios may find it tough to meet the new mandates.

The new standards will force mortgage insurers to determine the amount of cash and other liquid assets they retain to cover potential payouts using more of a risk-based formula than they have up to this point, meaning that the riskier the mortgage, the more capital will be required.

Because of that, mortgage insurers that were in business during the housing bubble era and have older loans on their books will be hit harder than insurers that have only post-financial crisis loans on their books, said Paul Hastings LLP partner Kevin Petrasic.

“The older vintage mortgages have more challenging issues than the newer mortgages,” he said.

Fannie Mae and Freddie Mac are barred from backing mortgages where the borrower has contributed less than a 20 percent down payment without getting private mortgage insurance to make up the difference. The insurance on those mortgages absorbs any losses before Fannie Mae and Freddie Mac do in the case of default, in essence putting private money before taxpayer money.

During the financial crisis, private mortgage insurers paid out billions of dollars on bad mortgages even as Fannie Mae and Freddie Mac took on over $180 billion in federal bailout money in the fall of 2008, when they were put under the FHFA’s conservatorship.

However, the financial crisis also saw many of the larger mortgage insurers fail under the weight of the huge number of claims they had to cover, contributing to Fannie and Freddie’s collapses.

“The history of the mortgage insurance industry is a history of good profits during good times and catastrophic losses in bad times,” said Brooklyn Law School professor David Reiss. “It seems like what the FHFA is doing is saying we don’t want the taxpayer on the hook during the next period of catastrophic losses.”

That is exactly what the FHFA says it intends with its new regulations, part of a so-called strategic plan to strengthen Fannie Mae and Freddie Mac and to bring more private money into the mortgage market.

What Should the 21st Century Mortgage Market Look Like?

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Treasury is requesting Public Input on Development of Responsible Private Label Securities (PLS) Market.  Comments are due on August 8, 2014. The request for information wants input on the following questions:

1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?

2. What are the key obstacles to the growth of the PLS market? How would you address these obstacles? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?

3. How should new issue PLS support safe and sound market practices?

4. What are the costs and benefits of various methods of investor protection? In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances?

5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?

6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?

7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?

8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?

These are all important questions that go way beyond Treasury’s portfolio and touch on those of the FHFA, the FHA and the CFPB to name a few. Nonetheless, it is important that Treasury is framing the issue so broadly because it gets to the 10 Trillion Dollar Question:  Who Should Be Providing Mortgage Credit to American Households?

Some clearly believe that the federal government is the only entity that can do so in a stable way and certainly history is on their side.  Since the Great Depression,when the Home Owners Loan Corporation, the Federal Housing Administration and Fannie Mae were created, the federal government has had a central role in the housing finance market.

Others (including me) believe that private capital can, and should, take a bigger role in the provision of mortgage finance. There is some question as to how much capacity private capital has, given the size of the residential mortgage market (more than ten trillion dollars). But there is no doubt that it can do more than the measly ten percent share or so of new mortgages that it has been originating in recent years.

Treasury should think big here and ask — what do we want our mortgage finance to look like for the next eight or nine decades? Our last system lasted for that long, so our next one might too. The issue cannot be decided by empirical means alone. There is an ideological component to it. I am in favor of a system in which private capital (albeit heavily-regulated private capital) should be put at risk for a large swath of residential mortgages and the taxpayer should only be on the hook for major liquidity crises.

I also favor a significant role for government through the FHA which would still create a market for first-time homebuyers and low- and moderate-income borrowers. But otherwise, we would look to private capital to price risk and fund mortgages to the extent that it can do so.  Round out the system with strong consumer protection regulation from the CFPB, and you have a system that may last through the end of the 21st century.

Comments are due August 8th, so make your views known too!

Kroll: Non-Banks A Non-Systemic Risk

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Kroll Bond Rating Agency released a Commentary on Capital Requirements for Non-Bank Mortgage Companies. I may be missing something, but this just seems to be a love letter to the securitization industry. The Commentary opens,

Federal and state regulators are currently considering the imposition of capital requirements and other prudential rules on various classes of non-bank financial institutions, including insurers and mortgage servicers. This report examines some of the issues involving non-bank financial companies with a focus on non-bank loan mortgage originators and/or servicers (“seller/servicers”) in the context of the evolving discussion among regulators and researchers toward developing “appropriate” regulation and supervision like that traditionally applied to insured depository institutions (IDIs).

We believe that regulatory efforts to impose capital requirements on non-bank financial institutions such as mortgage loan seller/servicers need to consider the following factors:

• First, most non-bank financial companies operating in the mortgage space have significantly higher levels of tangible capital and lower risk-weighted assets than do IDIs, especially when considering that much of the asset base of a seller/servicer is collateralized and that the mortgages which they service typically are owned by third parties, in most cases institutional investors. The chief sources of risk for seller/servicers are operational and legal, not credit or market risk.

• Second, the recent call by state and federal regulators for capital requirements for non-bank mortgage companies somewhat ignores the real point of the 2007-2009 financial crisis, namely the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.

• Third, since non-banks in the US are already dependent upon the commercial banking system for short-term funding and are effectively prohibited from capitalizing their asset and maturity transformation activities in the short-term debt capital markets (e.g., commercial paper), it is unclear why capital requirements for non-banks are appropriate.

We believe that large non-bank companies and particularly seller/servicers in the mortgage sector do not require formal capital requirements and other types of prudential regulation. In our view, the real issue behind the 2007-2009 financial crisis involved securities fraud and the resulting withdrawal of investor liquidity behind various classes of securities issued by off balance sheet vehicles, not a lack of capital in either IDIs or non-bank firms. (1, footnotes omitted)

First of all, it is not clear to me why Kroll is conflating mortgage originators with seller/servicers in this analysis. I think that Kroll is right that seller/servicers predominantly face operational risk, and whatever credit risk they might face (unless they own mortgages that they service) is quite low. But mortgage originators are a different story completely. If they fund themselves from the short-term commercial paper market they are subject to runs much like an uninsured bank would be. See generally Gary Gorton, Slapped by the Invisible Hand (2009). One would expect that regulators would prescribe different capital levels for different types of non-banks — and could conceivably exempt some seller/servicers completely.

Second, Kroll writes that the financial crisis was caused by “the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.” But capital requirements go directly to investor confidence in individual firms as well as in an entire sector.

Third, Kroll’s analysis is heavily dependent on describing the troubles of IDIs. Yes, big banks were at the heart of the problems of the financial crisis, but that does not mean that non-banks should get a free pass on regulation, one that will allow them to grow to be the 800 pound gorillas of the next crisis.

Finally, Kroll writes,

One of the most widely held views espoused by US regulators is that non-bank financial firms caused the subprime crisis. A better way to state the reality is that the non-bank firms were involved in subprime mortgage origination and sales because the largest commercial banks and their partners such as Fannie Mae and Freddie Mac had a monopoly position in the prime mortgage space. Large banks and the GSEs made the whole subprime market work by being willing to buy the senior tranches of subprime deals. (7)

I am not sure how to best characterize that argument, but it is of the ilk of “The Devil made me do it” or “Everyone else was doing it” or “I was just a small fry — much bigger companies than mine were doing it.” This is really not an argument against regulation — if anything it is a call for regulation. If appropriate incentives do not align without regulation, then that is just when the government should step in.

Investors Unite for High GSE-Fees

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Investors Unite, a “coalition of private investors . . . committed to the preservation of shareholder rights for those invested in” Fannie Mae and Freddie Mac sent a letter to FHFA Director Watt pushing for higher guarantee fees (g-fees). The technical issue of how high g-fees should be set actually contains important policy implications, as I had blogged about earlier.

Tim Pagliara, the Executive Director of Investors Unite, writes,

g-fees were historically determined by the GSEs and FHFA does not have a mandate as conservator to run the GSEs as not-for-profit entities. We urge you to adhere to a set of principles that takes into account the critical purpose of setting appropriate guarantee fees while respecting the rights of all economic stakeholders, including the GSE’s shareholders. Ideally, after undoing the 2012 sweep, when setting guarantees fees, FHFA should also take into full consideration that:

1. Fannie Mae and Freddie Mac have profit-making purposes onto which public mandates are layered, and they should charge guarantee fees that earn an appropriate market-based return on the capital employed, whether taxpayer capital or private capital. This is an absolutely critical factor “other than expected losses, unexpected losses and G&A fees” that should be considered when determining g-fees.

2. Increasing guarantee fees will provide more cash flow with which the GSEs can build capital and be restored to “safe and solvent condition.” Maximizing returns is not only consistent with, but arguably required by, the conservatorship.

3. FHFA as conservator has legal duties to the direct economic stakeholders – including all shareholders – that must be respected alongside the interests of other parties.

4. Earning an appropriate return on capital is entirely consistent with the conservatorship and affordable housing mandates. There is no conflict here between the GSEs building capital and setting aside funds for affordable housing. Indeed, it is only when the GSEs have earned their way back to a “safe and solvent condition” that they can sustainably meet their public affordable-housing mandates. After the GSEs have adequate capital, the suspension of those mandates can be reversed, i.e. the affordable housing support can be turned back on.

5. Keeping guarantee fees low to support the housing market in general, including homeowners and homebuyers that are well off and do not need help, is not as important as charging higher guarantee fees (a) to build a capital base to protect against future credit losses, and (b) to redistribute a portion of earnings to targeted constituencies that  particularly need financial support.

6. Guarantee fee rates should be tied to sound underwriting standards. If FHFA directs the GSEs to relax underwriting standards, it is essential that guarantee fees be adjusted upwards to account for the greater credit risk assumed in doing so.

Ultimately, g-fees profits should be allowed to stay within the housing market and should be set at levels that help ensure safety and soundness of the GSEs, that protect long-term health of the housing market, and that respect the rights of all economic stakeholders-including the GSE’s shareholders. (1-2, emphasis added)

This letter goes to the heart of the g-fee debate and the GSE litigation, as far as I am concerned.  The g-fee level will determine whether Fannie and Freddie shares have any value at all. A low g-fee means no profits and no value. A high g-fee means profits and shareholder value. I agree with Pagliara that g-fees should reflect “sound underwriting.” The FHFA should therefore clearly outline the goals that the g-fee is intended to achieve. I may disagree with Pagliara as to what those goals should be, but sound underwriting is key to any vision of a sustainable housing finance market.

Reiss on GSE Transfer Taxes

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Law360 quoted me in Fannie, Freddie Look Unstoppable In Transfer Tax Fight (behind a paywall).  It reads in part,

Class actions against Fannie Mae and Freddie Mac over hundreds of millions of dollars in unpaid transfer taxes in states and cities around the country continue to pile up, but experts say any attempt to challenge the housing giants’ exempt status is likely futile as court after court rules in their favor.

The Eighth Circuit on Friday joined the Third, Fourth, Sixth and Seventh circuits in ruling that Fannie Mae and Freddie Mac are exempt from local transfer taxes when it ruled in favor of the government-sponsored enterprises, or GSEs, after reviewing a suit brought by Swift County, Minnesota.

Swift County, as with a multitude of counties, municipalities and states before it, sought to dispute Fannie and Freddie’s claim that while they must pay property taxes, they are exempt from additional taxes on transfers of assets. But in what some experts say has come to seem like an inevitable answer, the Eighth Circuit found in favor of Fannie and Freddie.

“The federal statutes that set forth the charters of Fannie and Freddie are pretty clear that the two companies have a variety of regulatory privileges that other companies don’t,” David Reiss, a professor at Brooklyn Law School, said. “One of the privileges is an exemption from nearly all state and local taxation.”

The legal onslaught against the GSEs began in 2012 after U.S. District Judge Victoria A. Roberts ruled in March that they should not be considered federal agencies. In a suit filed by Oakland County, Michigan, over millions in unpaid transfer taxes, Judge Roberts rejected the charter exemption argument and, citing a 1988 U.S. Supreme Court ruling in U.S. v. Wells Fargo, found that “all taxation” refers only to direct taxes and not excise taxes like those imposed on asset transfers.

Counties, municipalities and states across the country were emboldened by the decision. Putative class actions soon followed in West Virginia, Illinois, Minnesota, Florida, Rhode Island, Georgia and elsewhere as plaintiffs rushed to see if they could elicit a similar ruling and recoup millions of dollars allegedly lost thanks to the inability to tax Fannie and Freddie’s mortgage foreclosure operations.

But Judge Roberts’ decision was later overturned by the Sixth Circuit, as were other similar orders, though many district judges found in favor of Fannie and Freddie from the start.

*     *    *

Many cases remain in the lower courts as well, but experts say the outcomes will likely echo those that played out in the Third, Fourth Sixth, Seventh and Eighth circuits, because the defendants’ chartered exemption defense appears waterproof.

“I find the circuit court decisions unsurprising and consistent with the letter and spirit of the law,” Reiss said. “I am guessing that other federal courts will follow this trend.”

G-Fee Entreaty

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The FHFA has issued a Request for Input about Fannie Mae and Freddie Mac Guarantee Fees. The Request both provides a good explanation of g-fees and poses important questions about their appropriate role in the functioning of the housing finance system. The Request opens,

On December 9, 2013, the Federal Housing Finance Agency (FHFA) announced proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac (the Enterprises) charge lenders. The Enterprises receive these fees in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in Mortgage Backed Securities (MBS) if the borrower fails to pay. The MBS, in turn, are backed by mortgages that lenders sell to the Enterprises.

 The proposed changes included an across-the-board 10 basis point increase, an adjustment of up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states. On January 8, 2014, Director Melvin L. Watt suspended implementation of these changes pending further review. (1)

The Request asks for responses to 12 questions. The most important, as far as I am concerned, is the first: “Are there factors other than those described in section III – expected losses, unexpected losses, and general and administrative expenses that FHFA and the Enterprises should consider in setting g-fees? What goals should FHFA further in setting g-fees?” (7)

Setting the g-fee has far-reaching consequences not just for the financial health of the two companies, but also for the health of the overall housing market and the mortgage industry. It will also have predictable effects on the litigation over the conservatorships of the two companies. For instance, a high g-fee will make the two companies appear to be more valuable than a low one. The size of the g-fee may also impact the scope of federal affordable housing initiatives.

While this Request for Input is pretty technical (particularly the parts of it that I didn’t blog about), it touches on some of the most fundamental aspects of our system of housing finance. As such, it invites responses from more than just industry insiders. Input is due by August 4th.