Tag Archives: FHFA

Structured Finance Journal Launch

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I am excited to be part of the launch of the Structured Finance Journal (SFJ), a double-blind, peer-reviewed publication dedicated to advancing the practices within the structured fixed-income markets. The press release continues,

SFJ is more than just a platform for publishing research—it is a collaborative effort led by an esteemed editorial board and guided by a distinguished advisory council, ensuring the highest quality and relevance of the work we publish.

In tribute to the highly respected but now defunct Journal of Structured Finance, formerly edited by Mark Adelson, we believe in the power of original research to drive practical applications and foster innovation in the field. SFJ is designed for professionals who are dedicated to contributing valuable insights that will help shape the industry’s future.

We invite submissions from industry experts and academics alike. If you have research that offers fresh insights and practical implications, we want to hear from you. Manuscripts should be between 2,500 and 3,500 words, excluding abstracts and references, and must be original work that has not been previously published or is under consideration elsewhere.

In line with our commitment to integrity and transparency, any use of AI tools in your manuscript should be limited to mechanical tasks like editing or citation management, with full disclosure required. Our strict guidelines ensure that only high-quality, relevant, and ethically produced research is featured in the journal.

Submissions must adhere to the Chicago Manual of Style (CMS) for formatting, with specific requirements for typography and content organization. We encourage authors to carefully structure their work, starting with a clear and concise title and abstract, followed by a compelling introduction, organized headings, and a well-rounded conclusion. Exhibits should be properly sourced, and permissions obtained for any previously published material. Details may be found on our online submissions platform.

Join us in advancing the structured finance industry by sharing your expertise and research. Submit your manuscript today and contribute to the growing body of knowledge that SFJ proudly supports. Please contact Elen Callahan at elen.callahan@structuredfinance.org with your questions and interest.

I am excited to join Elen Callahan and the other members of the Editorial Board in this venture:

Mark Adelson, Independent Consultant Content Director, Portfolio Management Research

William Black, Founder and Principal, Black Analytics

Nicole Byrns, Founder and Principal, Dumar Capital

Chun Lin, Managing Director and Head of U.S. Residential Mortgage Modeling, Bank of America

Debra Lofano, Partner, Alston & Bird LLP

Phillip Millman, Advisor, Federal Housing Finance Agency

Tim O’Neil, Managing Director and Head of Canadian Structured Finance, Morningstar DBRS

David Reiss, Clinical Professor of Law & Research Director of the Blassberg-Rice Center for Entrepreneurship Law, Cornell Law School & Cornell Tech

Jeff Schwartz, CFA, Securitized Products Investor

The Wayward Mission of the Federal Home Loan Bank System

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I recently submitted this comment to the Federal Housing Finance Agency in response to its request for input about the mission of the Federal Home Loan Bank System. It opens,

The Federal Housing Finance Agency (the “FHFA”) has requested Input regarding the regulatory statement of the Federal Home Loan Bank System’s (the “System”) mission to better reflect its appropriate role in the housing finance system. I commend the FHFA for being realistic about the System in its Request for Input; it acknowledges that there is a mismatch between its mission and its current operations.

The System’s operations do not do nearly enough to support the System’s stated mission of supporting the financing of housing. The System should recommit to that goal in measurable ways or its name and/or mission should be changed to better reflect its current operations.

While the System was originally designed to support homeownership, it has morphed into a provider of liquidity for large financial institutions. Banks like JPMorgan Chase & Co., Bank of America Corp., Citibank NA and Wells Fargo & Co. are among its biggest beneficiaries and homeownership is only incidentally supported by their involvement with it.

As part of the comprehensive review of the System, we should give thought to at least changing the name of the System so that it cannot trade on its history as a supporter of affordable homeownership. Or we should go even farther and give some thought to spinning off its functions into other parts of the federal financial infrastructure as its functions are redundant with theirs. But best of all would be a recommitment by the System to the measurable support of financing for housing.

This comment draws from a column (paywall) I had published when the FHFA first embarked on its reevaluation of the FLBLS.

Rethinking The Federal Home Loan Bank System

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Law360 published my column, Time To Rethink The Federal Home Loan Bank System. It opens,

The Federal Housing Finance Agency is commencing a comprehensive review of an esoteric but important part of our financial infrastructure this month. The review is called “Federal Home Loan Bank System at 100: Focusing on the Future.”

It is a bit of misnomer, as the system is only 90 years old. Congress brought it into existence in 1932 as one of the first major legislative responses to the Great Depression. But the name of the review also signals that the next 10 years should be a period of reflection regarding the proper role of the system in our broader financial infrastructure.

Just as the name of the review process is a bit misleading, so is the name of the Federal Home Loan Bank system itself. While it was originally designed to support homeownership, it has morphed into a provider of liquidity for large financial institutions.

Banks like JPMorgan Chase & Co., Bank of America Corp., Citibank NA and Wells Fargo & Co. are among its biggest beneficiaries and homeownership is only incidentally supported by their involvement with it.

As part of the comprehensive review of the system, we should give thought to at least changing the name of the system so that it cannot trade on its history as a supporter of affordable homeownership. But we should go even farther and give some thought to spinning off its functions into other parts of the federal financial infrastructure as its functions are redundant with theirs. 

Common Sense for the Shareholders of Fannie and Freddie

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The United States Court of Appeals for the Eighth Circuit issued a mixed decision for Fannie & Freddie shareholders in  Bhatti v. Federal Housing Finance Agency, No. 18-2506 (8th Cir. Oct. 6, 2021).  While the Court ruled (consistent with the Supreme Court’s recent ruling in Collins v. Yellin, 141 S. Ct. 1761 (2021)) that the shareholders could sue for retrospective relief (damages), it otherwise ruled against the shareholders.  The court ends on what I found to be a very commonsensical note in its discussion of the nondelegation claim:

Congress’s delegation of authority directs the FHFA to act as a “conservator,” with clear and recognizable instructions. 12 U.S.C. § 4617(a). “[T]he Agency is authorized to take control of a regulated entity’s assets and operations, conduct business on its behalf, and transfer or sell any of its assets or liabilities.” Collins, 141 S. Ct. at 1776, citing 12 U.S.C. §§ 4617(b)(2)(B)-(C), (G). “When the FHFA exercises these powers, its actions must be ‘necessary to put the regulated entity in a sound and solvent condition’ and must be ‘appropriate to carry on the business of the regulated entity and preserve and conserve [its] assets and property.’” Id. (alteration in original), quoting 12 U.S.C. § 4617(b)(2)(D). “Thus, when the FHFA acts as a conservator, its mission is rehabilitation, and to that extent, an FHFA conservatorship is like any other.” Id. There is one difference: “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” Id. But this difference clarifies that serving the public is one goal of the FHFA’s conservatorship; it does not render the delegation unintelligible. See id. (explaining how the FHFA works to rehabilitate housing in the public interest under the statute). In light of the Court’s identification of the principles guiding the FHFA, it is clear those principles are intelligible. See Saxton v. Fed. Hous. Fin. Agency, 901 F.3d 954, 960 (8th Cir. 2018) (Stras, J., concurring) (“The provision is broad but not boundless.”). Congress’s delegation in the Recovery Act was permissible. Id. at 963 (“Picking among different ways of preserving and conserving assets, deciding whose interests to pursue while doing so,
and determining the best way to do so are all choices that the Housing and Economic Recovery Act clearly assigns to the FHFA, not the courts.”). This court affirms dismissal of the nondelegation claim. Page 6.

The plain reading of the Housing and Economic Recovery Act gave the FHFA broad authority to act on the public’s behalf.  The FHFA acted within that broad authority.  The court therefore rightly defers to the FHFA’s response to the financial crisis.  Case closed?

 

 

Housing Finance Reform Endgame?

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The Hill published my column, There is Hope of Housing Finance Reform That Works for Americans.  It opens,

The Trump administration released its long awaited housing finance reform report and it is a game changer. The report makes clear that it is game over for the status quo of leaving Fannie Mae and Freddie Mac in their conservatorship limbo. Instead, it sets forth concrete steps to recapitalize and release the two entities. This has been a move that investors, particularly vulture investors who bought in after the two companies entered into their conservatorships, have clamored for.

It is not, however, one that is in the best interests of homeowners and taxpayers. The report recognizes that there are better alternatives. Indeed, it explicitly states that the “preference and recommendation is that Congress enact comprehensive housing finance reform legislation.” But the report also states that the conservatorships, which are more than a decade old, have gone on for too long. So the report throws down a gauntlet to Congress that if it does not take action, the administration will begin the formal process of implementing the next best solution.

Hope for GSE Shareholders

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Judge Lamberth issued an opinion in Fairholme Funds, Inc. v. FHFA (Civ. No.13-1439) (Sept. 28, 2018) that gives some hope to the private shareholders of Fannie Mae and Freddie Mac. These shareholders have been on the losing end of nearly every case brought against the government relating to its handling of the conservatorships of the two companies.  Readers of this blog know that I have long been a skeptic of the shareholders’ claims because of the broad powers granted the government by the Housing and Economic Recovery Act of 2008, passed during the height of the financial crisis, as well as the highly regulated environment in which the two companies operate. This highly regulated environment means that GSE profits are driven by regulatory decisions much more than those of other financial institutions. As such, Fannie and Freddie live and die by the sword of government intervention in the mortgage market.

Judge Lamberth had dismissed the plaintiffs’ claims in their entirety, but was reversed in part on appeal. In this case, he revisits the issues arising from the reversal of his earlier dismissal. Once again, Judge Lamberth dismisses a number of the plaintiffs’ claims, but he finds that that their claim that the government breached the duty of good faith survives.

The opinion gives a road map that shareholders can follow to success. The judge identifies allegations that, if true, would be a sufficient factual basis for a holding that the government breached the implied covenant of good faith and fair dealing. It is plausible that the preponderance of proof may support these allegations. Some evidence has already come to light that indicates that at least some government actors had good reason to believe that Fannie and Freddie were on the cusp of sustained profitability when the government implemented the net worth sweep. The net worth sweep had redirected the net profits of the two companies to the U.S. Treasury.

Judge Lamberth highlights some of aspects of the plaintiffs’ argument that he found compelling at the motion to dismiss phase of this litigation. First, he notes that absence of “any increased funding commitment” is atypical when senior shareholders receive “enhanced disbursement rights,” as was the case when the government implemented the net worth sweep. (21) He also states that the plaintiffs would not have expected that the GSEs would have extinguished “the possibility of dividends arbitrarily or unreasonably.” (22)

While this opinion is good news for the plaintiffs, it is still unclear what their endgame would be if they were to get a final judgment that the net worth sweep was invalid. Depending on the outcome of regulatory and legislative debates about the future of the two companies, the win may be a pyrrhic one. Time will tell. In the interim, expect more discovery battles, motions for summary judgment and even a trial in this case. So, while this opinion gives shareholders some hope of ultimate success, and perhaps some leverage in political and regulatory debates, I do not see it as a game changer in itself.

In terms of the bigger picture, there are a lot of changes on the horizon regarding the future of the housing finance system. The midterm elections; Hensarling and Corker’s departure from Congress; and the Trump Administration’s priorities are all bigger drivers of the housing finance reform train, at least for now.

Housing Finance Transitions

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The Congressional Budget Office released a report, Transitioning to Alternative Structures for Housing Finance: An Update. The report updates a 2014 analysis

to inform policymakers about how different approaches to restructuring the housing finance system would affect federal costs, risks to taxpayers, and mortgage interest rates. The study focuses on the secondary mortgage market, in which financial institutions buy residential mortgages, pool them into mortgage-backed securities (MBSs), and sell the securities to investors with a guarantee against defaults on the underlying loans. That market is dominated by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that have been under the control of the federal government since the financial crisis of 2008.

• Federal Costs. CBO projects that under current policy, the GSEs will guarantee almost $12 trillion in new MBSs over the next 10 years and that those guarantees will cost the government about $19 billion on a fair-value basis. That cost represents the estimated amount that the government would have to pay private guarantors to bear the credit risks of the new guarantees. New structures for the secondary mortgage market that emphasized private capital would greatly reduce federal costs, compared with current policy, and would decrease taxpayers’ exposure to credit risk, but mortgage borrowers would face slightly higher costs.

• Risks to the Government. Three of the four approaches to restructuring the secondary market that CBO analyzed would keep some type of explicit federal guarantee of MBSs to provide stability to the market during a financial crisis. Under those approaches, the government would continue to bear most of the risks on new guarantees during a financial crisis, but the approaches differ in the extent to which private guarantors and investors would share risks under normal market conditions. Alternatively, if the secondary market were largely privatized, there would be no explicit federal guarantees on most residential mortgages. But some type of government intervention might be necessary to stabilize mortgage markets during a financial crisis.

• Availability of Mortgages and Changes in Interest Rates. New structures for the secondary market that emphasized private capital would lead to slightly higher interest rates and slightly lower home prices under normal conditions (because the fees that the GSEs currently charge for their guarantees are close to the prices that CBO judges private firms would charge). If the market were controlled by a single, fully federal agency, interest rates could fall slightly. During a financial crisis, however, borrowers could face significant constraints on the availability of mortgages and higher interest rates under a largely private secondary market, though not under the other structures, unless the government chose to intervene.

This report is particularly valuable because it focuses on the transition from the limbo state of conservatorship that we find ourselves in to a more stable one that is built to last. The report considers four possible pathways:

  • A secondary market in which a single, fully federal agency would guarantee qualifying MBSs. (1)
  • A hybrid public-private market in which government and several private guarantors would share the credit risk on eligible MBSs. (1)
  • A secondary market in which the government would play a very small role during normal times, but would act as the “guarantor of last resort” during a financial crisis. (2)
  • A largely private model in which there would be no federal guarantees in the secondary market. (2)

Things still are very much up in the air as to which way things will go when Congress finally turns its attention to this issue, but this report helps to plan for the transition no matter which path is followed.