Tag Archives: Federal Housing Finance Agency

Reiss on Privatization of Fannie and Freddie

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BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,

Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?

Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:

“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.

However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”

In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.

GSE Nationalization and Necessity

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Nestor Davidson has posted Nationalization and Necessity: Takings and a Doctrine of Economic Emergency to SSRN. This essay will be of interest to those following the Fannie/Freddie shareholder litigation. The abstract reads,

Serious economic crises have recurred with regularity throughout our history. So too have government takeovers of failing private companies in response, and the downturn of the last decade was no exception. At the height of the crisis, the federal government nationalized several of the country’s largest private enterprises. Recently, shareholders in these firms have sued the federal government, arguing that the takeovers constituted a taking of their property without just compensation in violation of the Fifth Amendment. This Essay argues that for the owners of companies whose failure would raise acute economic spillovers, nationalization without the obligation to pay just compensation should be recognized as a natural extension of the doctrine of emergency in takings. Public officials must be able to respond quickly to serious economic threats, no less than when facing the kinds of imminent physical or public health crises — such as wildfires and contagion — that have been a staple of traditional takings jurisprudence. Far from an affront to the rule of law, this reflection of necessity through an extension of emergency doctrine would reaffirm the flexibility inherent in property law in times of crisis.

Davidson looks at the various companies that were nationalized during the financial crisis, including Fannie and Freddie, and concludes,

It does no violence to norms of ownership—or the rule of law—to acknowledge that overriding necessity in times of crisis can be as relevant to economic emergency as it has always been to more prosaic threats. The doctrine of economic emergency that this Essay has proposed accords with the deepest traditions of our system of property, and rightly should be so recognized. (215)

 

Davidson reaches a very different conclusion than does Richard Epstein, who argues that just compensation is warranted for shareholders in the two companies. I have no doubt that the judges deciding these cases will have to struggle with very same issues that Davidson sets forth in this article, so it is worth a read for those who are closely following these cases.

Homeowners Lost in the Shuffle

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The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) issued a report, Homeowners Can Get Lost in the Shuffle And Suffer Harm When Their Servicer Transfers Their Mortgage But Not the HAMP Application or Modification, that highlights some of the structural problems in the servicing industry. The report notes, for instance, that, “Homeowner calls to SIGTARP’s Hotline about difficulties experienced in HAMP as a result of mortgages being transferred from one servicer to another have persisted throughout the life of the program and have escalated in the last year.” (1) This is just the most recent reminder that servicing transfers continue to be a major source of trouble for homeowners.

SIGTARP concludes,

Given the scale of the reported problems related to transfers to new servicers, and the potentially serious harm to struggling homeowners who need relief from HAMP, Treasury must be aggressive and swift in sending the message to servicers that Treasury will not tolerate harm to homeowners in HAMP from servicing transfers. HAMP is five years old, and servicers have had ample time to understand the rules and to follow them. Treasury should no longer tolerate a failure to follow HAMP rules. Treasury should report on violations publicly, and permanently withhold incentive payments from servicers that do not comply with HAMP rules on transfers. (12)
The problems in the servicer industry are structural, but it is far from clear that there are sufficient structural changes in the works to deal with them. This sad state of affairs will last far into the future unless thoughtful solutions are designed and implemented in the present. So, while it is important that SIGTARP draws attention to this problem, it is more important for other regulators like the Consumer Financial Protection Bureau and the Federal Housing Finance Agency to take up the cause and start implementing far-reaching solutions.

Reiss on Who Should Be Providing Mortgage Credit to American Households?

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I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress).  The abstract reads,

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).

Reiss and Lederman on Affordable Housing Goals

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Jeff Lederman and I have posted our comment to the FHFA’s proposed housing goals for Fannie Mae and Freddie Mac for 2015 through 2017.  We argue,

As the FHFA sets the housing goals for 2015-2017, it should focus on maximizing the creation and preservation of affordable housing. Less efficient proposed subgoals should be rejected unless the FHFA has explicitly identified a compelling rationale to adopt them. The FHFA has not identified one in the case of the proposed small multifamily subgoal. Thus, it should be withdrawn.

Reiss on Easing Credit

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Law360 quoted me in With Lessons Learned, FHFA Lets Mortgage Giants Ease Credit (behind a paywall). It reads in part,

The Federal Housing Finance Agency’s plan to boost mortgage lending by allowing Fannie Mae and Freddie Mac to purchase loans with 3 percent down payments may stir housing bubble memories, but experts say better underwriting standards and other protections should prevent the worst subprime lending practices from returning.

FHFA Director Mel Watt on Monday said that his agency would lower the down payment requirement for borrowers to receive the government-sponsored enterprises’ support in a bid to get more first-time and lower-income borrowers access to mortgage credit and into their own homes.

However, unlike the experience of the housing bubble years — where subprime lenders engaged in shoddy and in some cases fraudulent underwriting practices and borrowers took on more home than they could afford — the lower down payment requirements would be accompanied by tighter underwriting and risk-sharing standards, Watt said.

“Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account ‘compensating factors,’” Watt said at the Mortgage Bankers Association’s annual meeting in Las Vegas, according to prepared remarks.

*     *     *

The realities of the modern mortgage market, and the new rules that are overseeing it, should prevent the lower down payment requirements from leading to Fannie Mae, Freddie Mac, and by extension taxpayers taking on undue risk, Brooklyn Law School professor David Reiss said.

Tighter underwriting requirements such as the Consumer Financial Protection Bureau’s qualified mortgage standard and ability to repay rules have made it less likely that people are taking on loans that they cannot afford, he said.

Prior to the crisis, many subprime mortgages had the toxic mix of low credit scores, low down payments and low documentation of the ability to repay, Reiss said.

“If you don’t have too many of those characteristics, there is evidence that loans are sustainable” even with a lower down payment, he said.

The FHFA is also pushing for private actors to take on more mortgage credit risk as a way to shrink Fannie Mae and Freddie Mac. There is a very good chance that private mortgage insurers could step in to take on the additional risks to the system from lower down payments, rather than taxpayers, Platt said.

“You’ll need a mortgage insurer to agree to those lower down payment requirements because they’re going to have to bear the risk of that loss,” he said.

The 97 percent loan-to-value ratio that the FHFA will allow for Fannie Mae and Freddie Mac backing is not significantly higher than the 95 percent that is currently in place, Platt said.

Having the additional risk fall to insurers could mean that the system can handle that additional risk, particularly with the FHFA looking to increase capital requirements for mortgage insurers, Reiss said.

“It could be that the whole system is capitalized enough to take this risk,” he said.

The Other GSE Conservatorship Lawsuit

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While there has been a lot of attention over Judge Lamberth’s ruling on the shareholders’ cases regarding Fannie and Freddie’s conservatorships, much less has been given to Judge Cooke’s dismissal of Samuels v. FHFA (No. 13-22399 S.D. Fla. ) (Sept. 29, 2014 ). The low-income and organizational plaintiffs in Samuels challenged the FHFA’s decision to suspend Fannie and Freddie’s obligation to fund the Housing Trust Fund after they entered into conservatorship. The Housing Trust Fund was to be funded by contributions by that were based on Fannie and Freddie’s annual purchases. The FHFA took the position that they GSEs need not pay into the fund while they themselves were in such a precarious financial position. Judge Cooke held that “The Individual and Organizational Plaintiffs lack Article III standing because their alleged injuries are too remote from and not fairly traceable to the Defendants’ allegedly unlawful conduct.” (13)

I found the dicta in the case to be the most interesting. The court found that the relevant provision from the Housing and Economic Recovery Act of 2008

provides no meaningful standards for determining when “an enterprise” is financially instable, undercapitalized, or in jeopardy of unsuccessfully completing a capital restoration plan. Considering the history of Fannie Mae and Freddie Mac; the government’s placing Fannie Mae and Freddie Mac in conservatorship; the Treasury Department providing liquidity to Fannie Mae and Freddie Mac through preferred stock purchase agreements, the mortgage backed securities purchase program, and an emergency credit facility; it is not for this Court to judicially review Defendants’ statutorily mandated suspension of payments into the Housing Trust Fund. (13)

My takeaway from this opinion is that we  now have another federal judge finding that the federal government is to be given great deference in its handling of the financial crisis. And this deference derives not just from the text of the relevant statute but also from the particular historical events that led to its adoption and that followed it. This seems like an important trend, as far as I am concerned.