Tag Archives: Federal Housing Finance Agency

GSE Investors’ Hidden Win

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Judge Brown

The big news yesterday was that the US Court of Appeals for the DC Circuit ruled in the main for the federal government in Perry Capital v. Mnuchin, one of the major cases that investors brought against the federal government over the terms of the Fannie and Freddie conservatorships.

In a measured and carefully reasoned opinion, the court rejected most but not all of the investors’ claims.  The reasoning was consistent with my own reading of the broad conservatorship provisions of the Housing and Economic Recover Act of 2008 (HERA).

Judge Brown’s dissent, however, reveals that the investors have crafted an alternative narrative that at least one judge finds compelling. This means that there is going to be some serious drama when this case ultimately wends its way to the Supreme Court. And there is some reason to believe that a Justice Gorsuch might be sympathetic to this narrative of government overreach.

Judge Brown’s opinion indicts many aspects of federal housing finance policy, broadly condemning it in the opening paragraph:

One critic has called it “wrecking-ball benevolence,” James Bovard, Editorial, Nothing Down: The Bush Administration’s Wrecking-Ball Benevolence, BARRON’S, Aug. 23, 2004, https://tinyurl.com/Barrons-Bovard; while another, dismissing the compassionate rhetoric, dubs it “crony capitalism,” Gerald P. O’Driscoll, Jr., Commentary, Fannie/Freddie Bailout Baloney, CATO INST., https://tinyurl.com/Cato-O-Driscoll (last visited Feb. 13, 2017). But whether the road was paved with good intentions or greased by greed and indifference, affordable housing turned out to be the path to perdition for the U.S. mortgage market. And, because of the dominance of two so-called Government Sponsored Entities (“GSE”s)—the Federal National Mortgage Association (“Fannie Mae” or “Fannie”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “Freddie,” collectively with Fannie Mae, the “Companies”)—the trouble that began in the subprime mortgage market metastasized until it began to affect most debt markets, both domestic and international. (dissent at 1)

While acknowledging that the Fannie/Freddie crisis might justify “extraordinary actions by Congress,” Judge Brown states that

even in a time of exigency, a nation governed by the rule of law cannot transfer broad and unreviewable power to a government entity to do whatsoever it wishes with the assets of these Companies. Moreover, to remain within constitutional parameters, even a less-sweeping delegation of authority would require an explicit and comprehensive framework. See Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001) (“Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.”) Here, Congress did not endow FHFA with unlimited authority to pursue its own ends; rather, it seized upon the statutory text that had governed the FDIC for decades and adapted it ever so slightly to confront the new challenge posed by Fannie and Freddie.

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[Congress] chose a well-understood and clearly-defined statutory framework—one that drew upon the common law to clearly delineate the outer boundaries of the Agency’s conservator or, alternatively, receiver powers. FHFA pole vaulted over those boundaries, disregarding the plain text of its authorizing statute and engaging in ultra vires conduct. Even now, FHFA continues to insist its authority is entirely without limit and argues for a complete ouster of federal courts’ power to grant injunctive relief to redress any action it takes while purporting to serve in the conservator role. See FHFA Br. 21  (2-3)

What amazes me about this dissent is how it adopts the decidedly non-mainstream history of the financial crisis that has been promoted by the American Enterprise Institute’s Peter Wallison.  It also takes its legislative history from an unpublished Cato Institute paper by Vice-President Pence’s newly selected chief economist, Mark Calabria and a co-author.  There is nothing wrong with a judge giving some context to an opinion, but it is of note when it seems as one-sided as this. The bottom line though is that this narrative clearly has some legs so we should not think that this case has played itself out, just because of this decision.

Kushner Conflicts with Fannie & Freddie

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photo by Lori Berkowitz

Jared Kushner, Senior Advisor to President Trump

Bloomberg quoted me in Kushner’s Use of U.S.-Backed Apartment Loans Poses Conflict Risk. It opens, 

Jared Kushner relinquished control of his family’s multibillion-dollar real-estate business in January to eliminate conflicts of interest when he became a top White House adviser to his father-in-law, President Donald Trump.

Yet Kushner Cos. has apartment buildings from New Jersey to Maryland with more than $500 million in government-backed mortgages financed by Fannie Mae and Freddie Mac. That could put officials at those agencies in an awkward spot: If Kushner Cos. applies for a new loan, or wants to refinance, would Freddie turn them down? If Kushner Cos. fails to comply with the terms of a loan, will Fannie seek to foreclose on a property owned by the president’s in-laws?

“It clearly represents a conflict-of-interest because the government or the president can take actions that would benefit his family,” said David Reiss, a professor at Brooklyn Law School who has written about issues related to Fannie and Freddie.

Hope Hicks, a White House spokeswoman, said Kushner would comply with applicable ethics rules and would recuse himself from any discussions about overhauling Fannie and Freddie, which lawmakers have sought to do in recent years. Jamie Gorelick, an attorney who has represented Jared Kushner, didn’t respond to a request for comment.

Kushner Cos. says Jared’s White House position won’t have any effect on the family business. “The election has not changed Kushner Companies’ relationship with Fannie Mae and Freddie Mac,” said Kushner Cos. spokesman James Yolles. “And we will respond to policy changes like any other private company in the marketplace.”

The federal government took over Fannie and Freddie in 2008, amid the financial crisis, putting them under the control of the Federal Housing Finance Agency, an independent regulator.

Mortgage Bankers and GSE Reform

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photo by Daniel Case

The Mortgage Bankers Association has released GSE Reform Principles and Guardrails. It opens,

This paper serves as an introduction to MBA’s recommended approach to GSE reform. Its purpose is to outline what MBA views as the key components of an end state, the principles that MBA believes should be incorporated in any future system, the “guardrails” we believe are necessary in our end state, as well as emphasize the need to ensure a smooth transition to the new secondary mortgage market. (1)

While there is very little that is new in this document, it is useful, nonetheless, as a statement of the industry’s position. The MBA has promulgated the following principles for housing finance reform:

  • The 30-year, fixed-rate, pre-payable single-family mortgage and longterm financing for multifamily mortgages should be preserved.
  • A deep, liquid TBA market for conventional single-family loans must be maintained. Eligible MBS backed by a well-defined pool of single-family mortgages or multifamily mortgages should receive an explicit government guarantee, funded by appropriately priced insurance premiums, to attract global capital and preserve liquidity during times of stress. The government guarantee should attach to the eligible MBS only, not to the guarantors or their debt.
  • The availability of affordable housing, both owned and rented, is vitally important; these needs should be addressed along a continuum, incorporating both single- and multifamily approaches for homeowners and renters.
  • The end-state system should facilitate equitable, transparent and direct access to secondary market programs for lenders of all sizes and business models.
  • A robust, innovative and purely private market should be able to co-exist alongside the government-backed market.
  • Existing multifamily financing executions should be preserved, and new options should be permitted.
  • The end-state system should rely on strong, transparent regulation and private capital (including primary-market credit enhancement such as mortgage insurance [MI] and lender recourse, or other available forms of credit risk transfer) primarily assuming most of the risk.
  • While the system will primarily rely on private capital, there should be a provision for a deeper level of government support in the event of a systemic crisis.
  • There should be a “bright line” between the primary and secondary mortgage markets, applying to both allowable activities and scope of regulation.
  • Transition risks to the new end-state model should be minimized, with special attention given to avoiding any operational disruptions. (3-4)

This set of principles reflect the bipartisan consensus that had been developing around the Johnson-Crapo and Corker-Warner housing reform bills. The ten trillion dollar question, of course, is whether the Trump Administration and Congressional leaders like Jeb Hensarling (R-TX), the Chair of the House Banking Committee, are going to go along with the mortgage finance industry on this or whether they will push for a system with far less government involvement than is contemplated by the MBA.

Muddled Future for Fannie & Freddie

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The United States Government Accountability Office released a report, Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorships.  The GAO’s findings read a bit like a “dog bites man” story — stating, as it does, the obvious:  “Congress should consider legislation that would establish clear objectives and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. FHFA agreed with our overall findings.” (GAO Highlights page) I think everyone agrees with that, except unfortunately, Congress.  Congress has let the two companies languish in the limbo of conservatorship for over eight years now.

Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, asked the GAO to prepare this report in order to

examine FHFA’s actions as conservator. This report addresses (1) the extent to which FHFA’s goals for the conservatorships have changed and (2) the implications of FHFA’s actions for the future of the enterprises and the broader secondary mortgage market. GAO analyzed and reviewed FHFA’s actions as conservator and supporting documents; legislative proposals for housing finance reform; the enterprises’ senior preferred stock agreements with Treasury; and GAO, Congressional Budget Office, and FHFA inspector general reports. GAO also interviewed FHFA and Treasury officials and industry stakeholders (Id.)

The GAO’s findings are pretty technical, but still very important for housing analysts:

In the absence of congressional direction, FHFA’s shift in priorities has altered market participants’ perceptions and expectations about the enterprises’ ongoing role and added to uncertainty about the future structure of the housing finance system. In particular, FHFA halted several actions aimed at reducing the scope of enterprise activities and is seeking to maintain the enterprises in their current state. However, other actions (such as reducing their capital bases to $0 by January 2018) are written into agreements for capital support with the Department of the Treasury (Treasury) and continue to be implemented.

In addition, the change in scope for the technology platform for securitization puts less emphasis on reducing barriers facing private entities than previously envisioned, and new initiatives to expand mortgage availability could crowd out market participants.

Furthermore, some actions, such as transferring credit risk to private investors, could decrease the likelihood of drawing on Treasury’s funding commitment, but others, such as reducing minimum down payments, could increase it.

GAO has identified setting clear objectives as a key principle for providing government assistance to private market participants. Because Congress has not established objectives for the future of the enterprises after conservatorships or the federal role in housing finance, FHFA’s ability to shift priorities may continue to contribute to market uncertainty. (Id.)

One finding seems particularly spot on to me. As I wrote yesterday, it appears as if the FHFA is not focusing sufficiently on building the infrastructure to serve secondary mortgage markets other than Fannie and Freddie.  It seems to me that a broader and deeper bench of secondary mortgage market players will benefit the housing market in the long run.

 

Fannie/Freddie Scorecard

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The Federal Housing Finance Agency released its 2017 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.  The scorecard highlights how the FHFA’s reform of Fannie Mae and Freddie Mac is proceeding apace, absent direction from Congress.  This reform path had been set by Acting Director DeMarco, appointed by President Bush, and has continued relatively unchanged under Director Watt, appointed by President Obama.

The scorecard’s assessment criteria for the two companies are,

  • The extent to which each Enterprise conducts initiatives in a safe and sound manner consistent with FHFA’s expectations for all activities;
  • The extent to which the outcomes of their activities support a competitive and resilient secondary mortgage market to support homeowners and renters;
  • The extent to which each Enterprise conducts initiatives with consideration for diversity and inclusion consistent with FHFA’s expectations for all activities;
  • Cooperation and collaboration with FHFA, each other, the industry, and other stakeholders; and
  • The quality, thoroughness, creativity, effectiveness, and timeliness of their work products. (2)

The scorecard states that Fannie and Freddie should increase credit risk transfers to investors.  Currently, the focus is on transferring risk from pretty safe and standard mortgages, but the FHFA is pushing Fannie and Freddie to increase risk transfers on a broader array of mortgage types.

The scorecard also states that the effort to integrate Fannie and Freddie through the Common Securitization Platform and the Single Security should continue so that the Single Security is operational in 2018.  The scorecard emphasizes that the Platform should allow “for the integration of additional market participants in the future.” (6)  While this has been a design requirement from the get-go, I have heard through the grapevine that this element of the Platform has not been pursued so vigorously.  To my mind, it seems like a key component if we want to build the infrastructure for a healthy secondary mortgage market for the rest of the 21st century.

 

Surveying Mortgage Originations, Going Forward

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REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category.  Please vote here if you like what you read.

As I had earlier noted, the Federal Housing Finance Agency has issued a request for comments on the National Survey of Mortgage Originations (NSMO).  The NSMO is “a recurring quarterly survey of individuals who have recently obtained a loan secured by a first mortgage on single-family residential property.” (81 F.R. 62889) I submitted my comment, written in the context of the newly-elected Trump Administration. It reads, in part,

I write to support this proposed collection, but also to raise some concerns about its efficacy.

The NSMO is very important to the health of the mortgage market.  We need only look at the Subprime Boom of the late 1990s and early 2000s to see why this is true:  subprime mortgages went from “making up a tiny portion of new mortgage originations in the early 1990s” to  “40 percent of newly originated securitized mortgages in 2006.” David Reiss, Regulation of Subprime and Predatory Lending, International Encyclopedia of Housing and Home (2010). During the Boom, subprime lenders like Countrywide changed mortgage characteristics so quickly that information about new originations became outdated within months.See generally Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report 105 (2011) (“Countrywide was not unique: Ameriquest, New Century, Washington Mutual, and others all pursued loans as aggressively. They competed by originating types of mortgages created years before as niche products, but now transformed into riskier, mass-market versions”) Policymakers and academics did not have good access to the newest data and thus were operating, to a large extent, in the dark.  The information in the NSMO will therefore not only help regulators, but will also assist outside researchers to “more effectively monitor emerging trends in the mortgage origination process . . ..” (81 F.R. 62890)

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there is no question that this “collection of information is necessary for the proper performance of FHFA functions . . ..” (81 F.R. 62890) Given the likely changes to the federal role in the mortgage markets over the next four years, the NSMO can provide critical insight into whether homeowners feel that that market serves their needs.

Will Congress Recap and Release Fannie & Freddie?

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Senator Shelby

Senator Shelby

Richard Shelby, the Chair of the Senate Committee on Banking, Housing, and Urban Affairs asked the Congressional Budget Office to prepare a report on The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital. The report acknowledges that the legislative reform of the two companies is going nowhere, but it analyzed one potential reform option that shares characteristics with some of the GSE reform bills that have been introduced over the years. The option studied by the CBO contemplates recapitalizing the two companies along the following lines:

each GSE would be allowed to retain an average of $5 billion of its profits annually and would thus increase its capital by up to $50 billion over 10 years. The government’s commitment to purchase more senior preferred stock from Fannie Mae and Freddie Mac if necessary to ensure that they maintain a positive net worth would remain in place. In addition, the GSEs would invest the profits that they retained under the option in Treasury securities, and returns on those securities would raise the GSEs’ income. Through its holdings of senior preferred stock, the government would continue to have a claim to the GSEs’ net worth ahead of other stockholders. (2, footnote omitted)

The CBO’s mandate is “to provide objective, impartial analysis,” but this report seems like it is laying the groundwork for a proposal to recapitalize Fannie and Freddie so that they can be released from conservatorship. Most policy analysts (as opposed to investors in the two companies) think that allowing the two companies to return to their prior lives as public/private hybrids is a terrible idea. It is too difficult for them to simultaneously answer to the federal regulators who set their public mission as well as to the private shareholders who would ultimately own them. And, if we were to take this path, the taxpayer would be left holding the bag once again if they were to ever need another bailout.

I think that Senator Shelby has done GSE reform a disservice by looking at this recapitalization option out of context. What we need is an analysis of a compromise plan that Congress can pass once the election is settled. Otherwise we are just leaving the two companies to limp along in conservatorship, slouching toward their next, yet unknown, crisis. Or worse, we are preparing to release them from conservatorship to go back to business as usual. Both of those options are very bad. Congress owes it to the American people to create a workable housing finance system for the 21st century that does not repeat our past mistakes.