Tag Archives: Federal Housing

Housing Finance Reform at the AALS

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The Financial Institutions and Consumer Financial Services Section and the Real Estate Transactions section of the American Association of Law Schools hosted a joint program at the AALS annual meeting on The Future of the Federal Housing Finance System. I moderated the session, along with Cornell’s Bob Hockett.
Former Representative Brad Miller (D-N.C.) keynoted.  Until recently he was a Senior Fellow, at the Center for American Progress and is now a Senior Fellow at the Roosevelt Institute. He was followed by four more great speakers:
The program overview was as follows:
The fate of Fannie Mae and Freddie Mac are subject to the vagaries of politics, regulation,public opinion, the economy, and not least of all the numerous cases that were filed in 2013 against various government entities arising from the placement of the two companies into conservatorship. All of these vagaries occur, moreover, against a backdrop of surprising public and political ignorance of the history and functions of the GSEs and their place in the broader American financial and housing economies. This panel will take the long view to identify how the American housing finance market should be structured, given all of these constraints. Invited speakers include academics, government officials and researchers affiliated to think tanks. They will discuss the various bills that have been proposed to reform that market including Corker-Warner and Johnson-Crapo. They will also address regulatory efforts by the Federal Housing Finance Agency to shape the federal housing finance system in the absence of Congressional reform.
During the presentations, I felt a bit of awe for the collective knowledge of the speakers.  The program also emphasized for me how much there always is to learn about a topic as complex as housing finance.
Laurie Goodman was kind enough to let me post her PowerPoint slides from the program. If you are looking for a good overview of the current state of housing finance reform, you will want to take a look at them.
I was a bit depressed by the slide titled, “Why GSE reform is unlikely before 2017:”
1. There is no sense of urgency: GSEs are profitable, current system is functioning.
2. Higher legislative priorities.
3. No easy answers as to what a new housing finance system should look like.
4. Bipartisan action requires compromise, and some believe they have more to lose than to gain by compromising in this arena.
While the slide depressed me, I think it offers a pretty realistic assessment of where we are. I hope Congress and the Obama Administration prove me wrong.

Fannie and Freddie in Play?

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Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac.  News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed.  The proposal, according to Fairholme,

  • Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
  • Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
  • Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
  • Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
  • Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
  • Ends the unsustainable Federal conservatorship. (Press Release, 1)

Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)

Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.