Tag Archives: fannie

State of the Nation’s Housing 2013: Build It and They Will Come

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The Joint Center for Housing Studies of Harvard University released The State of the Nation’s Housing 2013.  As always there is much of interest in this annual report. I was particularly intrigued by Figure 21 on page 20, “The Government Continues to Have an Outsized Footprint in the Mortgage Market.” The report states

Despite efforts to entice private capital into the mortgage market, the GSEs and FHA continue to back the vast majority of loans(Figure 21). In 2001, loans securitized into private-label securities or held in bank portfolios accounted for nearly half of loan originations. Their market share rose to about two-thirds at the height of the housing boom before retreating to the low single-digits. Beginning in 2009, government-backed loans have accounted for roughly 90 percent of all originations. While the private securities market was still moribund in 2012, portfolio lending by banks showed its first substantial increase in years (albeit to a modest level), bringing the government share down slightly. (20-21)

As Fannie and Freddie return to profitability, policymakers are acting as if only the government can provide credit to the residential mortgage market, but from Figure 21 we can see that over a relatively short time period, capital can meaningfully shift from the secondary market (private MBS) to the government (FHA, Fannie and Freddie) to the primary market (portfolio lenders). Instead of assuming that the present structure is the best of all possible worlds, we should design the system we want and incentivize capital to find it.

Build it and they will come.

FHFA: Critical Concerns Remain, Future Uncertain

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The FHFA issued its 2012 Report to Congress which provides a report of the annual examinations of Fannie, Freddie and the FHLBs. The report documents critical concerns about Fannie and Freddie, none of which are particularly newsworthy at this late date. But the report does have some intimations of what may lay ahead, which are particularly interesting now that the Senate has finally taken up GSE reform.

The report reviews the three goals set in 2012 for the ongoing conservatorship of Fannie and Freddie:

Build. Build a new infrastructure for the secondary mortgage market.
Contract. Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations.
Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. (1)

There are some interesting specifics attached to these general goals.

For the Build goal, FHFA has taken the position that there should be a new infrastructure for the secondary mortgage market that operates like a “market utility,” a model bandied about by Henry Paulson when he was Treasury Secretary. (13)

For the Contract goal, FHFA has indicated that it “will continue increasing guarantee fees in 2013  and evaluating how close current guarantee fee pricing is to the point where private capital would be willing to absorb credit risk.” 14)

For the Maintain goal, FHFA has taken the position that the mortgage market should transition to a more “competitive ” model, moving away from one in which “the government touches more than 9 out of every 10 mortgages.” (15)

While not surprising given Acting Director DeMarco’s past statements and actions, this report indicates that at least the FHFA believes that we should move away from such intense government involvement in the mortgage market to a system that better prices risk and which spreads that risk across a range of competitors. At such a high level of generality, I agree that these are worthwhile goals. But as with everything involving housing finance policy — the devil will be in the details.

Investor HERA-sy

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As I have previously noted, Fannie and Freddie investors have filed a complaint, Washington Federal et al. v. U.S.A., No. 1:13-cv-00385-MMS (June 10, 2013), alleging that the federal government “expropriated [Fannie and Freddie’s] common and preferred shareholders’ rights and the value of their equity in the Companies without due process, and without just compensations, thereby constituting an impermissible exaction and/or taking in violation of the Fifth Amendment to the Constitution.” (8)

Personally, I think that there is a lot of nonsense in the complaint, both in terms of its factual description of the events that led up to the placement of Fannie and Freddie in conservatorship as well as its interpretation of those events.  But I did find its analysis interesting as to whether the government complied with HERA’s requirements for placing the two companies in conservatorship.  Not compelling, just interesting.

As the complaint notes, the federal government had a number of grounds for appointing a conservator. It takes the position that none of those grounds were met. This seems facially wrong.

One of the grounds is whether Fannie or Freddie “incurred, or became likely to incur, losses that would deplete substantially all of its capital with no reasonable prospect of becoming adequately capitalized.” (31) The complaint alleges that the two companies had not incurred such losses at the time that they were placed in conservatorship. (38-39) But it does not even argue that the two companies never “became likely to incur” such losses prior to their placement in conservatorship. Seems hard, particularly with the benefit of hindsight, to take the position that they were not “likely” to incur such losses. And if the plaintiffs can’t make that case, they lose.

Reform for Whom?

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David Stevens, the head of the Mortgage Bankers Association, gave an important and revealing speech about the direction of housing finance reform.  It contains some good ideas, but also raises an alarm.  Because the Administration and Congress are at an impasse, Stevens is leading the private sector in pushing for reform of Fannie and Freddie.

While Stevens is proposing some good ideas, the federal housing finance system should be designed — big surprise here — by the federal government first and foremost.  Unfortunately, the private sector can take the lead because the federal government has not.  Housing finance policy abhors a vacuum.

Stevens’ prepared remarks provide a “proposal for transition” for Fannie and Freddie. (3)  The proposal has three steps:

First, it is imperative in this state of overlapping regulatory confusion that the White House name a Housing Policy Coordinator.  This is an immediate need with a simple solution.

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Second, we must have absolute transparency.  FHFA, Fannie Mae and Freddie Mac must stop making market shifting decisions without the input of consumers or the industry.

Finally, we must have a clear path to transition out of conservatorship.   To achieve this goal, we must move toward a single security, encourage additional risk sharing by mandating Fannie and Freddie to accept lower guarantee fees for deeper credit enhancements, and redirect the FHFA platform initiative. (3-4)

The first suggestion — some kind of Housing Czar — is both intuitively right and attractive.  Housing cuts across so many arms of the federal government:  the FHFA, HUD, FHA, CFPB and on and on.  Those arms are frequently at cross purposes.  A Housing Czar could seek to rationalize them.  The second is also attractive, but given the focus of the housing finance industry, one would assume that “industry” would get a lot more input than “consumers.”  And the third suggestion may have merit, but is not the type of decision that we want industry to make — we want the government, the people, to make it.

It is no secret that both parties have punted on housing finance reform.  But it will be a tragedy if they do not recover the ball.  Otherwise, industry will write the rules for future homeowners.  Homeowners will then be playing a game designed for industry to win, not them.

Reiss on New Limits on Lending for Fannie and Freddie

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Law360 interviewed me in Fannie, Freddie Will Only Buy Qualified Mortgages, FHFA Says (behind a paywall) about the new limits on lending imposed on Fannie and Freddie:

The Federal Housing Finance Agency on Monday said that Fannie Mae and Freddie Mac would only be allowed to purchase so-called qualified mortgages when the new standard comes into effect in January.

Under the new standard, Fannie Mae and Freddie Mac will only be able to purchase and securitize mortgages that qualify to an exemption to the Consumer Financial Protection Bureau’s ability to repay rule, which the federal consumer finance watchdog finalized in January.

* * *

Given the cautious state of mortgage lending, the change is likely to only affect Fannie, Freddie and the mortgage market along the margins, said Brooklyn Law School professor David Reiss.

“It will be interesting to see, however, whether the private-label market will step into the void and offer more of these products — and it will be interesting to see how the market prices them,” he said in an email.

Principled Forgiveness

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The Congressional Budget Office issued a report, Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness, that reviews where we are with principal-forgiveness loan modifications. It notes that “Fannie Mae and Freddie Mac have not been allowed to implement principal forgiveness out of concerns about fairness, implementation costs, and the incentive that the approach could provide for people to become delinquent in order to obtain principal forgiveness.” (1)

The report examines how the GSEs could employ principal forgiveness. A key issue that the report addresses is how to deal with the moral hazard of homeowners “becoming delinquent in order to obtain principal forgiveness.” (3) This could result in large costs for the federal government and would be inequitable to those who are similarly situated who choose not to become delinquent.

The CBO analyzes three principal forgiveness options.  Each option would allow a GSE to choose between a standard HAMP modification or one that involved principal forgiveness, “depending on which one lowered the government’s expected costs more.” (3) CBO estimates that 1.2 million borrowers might be eligible for such a program, which would be about 40 percent of all underwater borrowers. CBO estimates that the federal government would save a modest amount of money with these options.

The CBO’s cost-benefit principle seems like a reasonable basis upon which to expand principal forgiveness loan modifications.  The FHFA should pursue these options even before its new leadership is in place.

Judiciary’s Take on the Subprime Zeitgeist

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The 2nd Circuit’s opinion in FHFA v. UBS Americas Inc. et al. (April 5, 2013, No. 12-3207-cv) offers an interesting window into how at least some members of the judiciary understand the Subprime Crisis. On its face, the case was about some technical issues of procedure — whether the case was untimely and whether the FHFA lacked standing.  The Court’s reasoning, however, delved into some deep issues.

In discussing the timeliness issue, the Court concluded that given the statute’s plain language and the particular provision as a whole, “a reasonable reader could only understand” it to resolve the issue in favor of the FHFA. (17) Then, seemingly gratuitously, the Court delved into the legislative history of the statute.  But this legislative history seemed to be drawn as much from the Court’s understanding of recent events as from the record.  It wrote

Congress obviously realized that it would take time for this new agency to mobilize and to consider whether it wished to bring any claims and, if so, where and how to do so. Congress enacted HERA’s extender statute to give FHFA the time to investigate and develop potential claims on behalf of the GSEs — and thus it provided for a period of at least three years from the commencement of a conservatorship to bring suit.

Of course, the collapse of the mortgage-backed securities market was a major cause of the GSEs’ financial predicament, and it must have been evident to Congress when it was enacting HERA that FHFA would have to consider potential claims under the federal securities and state Blue Sky laws. It would have made no sense for Congress to have carved out securities claims from the ambit of the extender statute, as doing so would have undermined Congress’s intent to restore Fannie Mae and Freddie Mac to financial stability. (17-18)

I agree with the Court on the substance, but I found it interesting that certain things about the legislative history were “obvious,” certain facts “must have been evident” and alternative interpretations would make “no sense.”  I am not sure if I could go that far.

This version of legislative history does, however, reflect a view that Congress intended the Executive Branch to take extraordinary measures to hold financial institutions accountable for their role in the financial crisis.