Tag Archives: FHFA

Qualified Residential Mortgage Comments

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The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday.  And comments there were.  Here is a sampling:

The Urban Institute argues that

In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)

The Securities Industry and Financial Markets Association effectively agrees with this and argues that

QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)

The American Enterprise Institute, on the other hand, argues that

The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)

My thoughts on the proposed QRM rule can be found here, here, here and here.

Private Capital and the Mortgage Markets

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The American Securitization Forum recently wrote to the Federal Housing Finance Agency to argue for at least a small reduction in the size of the loans that Fannie and Freddie can guaranty. While this makes sense to me, it is pretty controversial.  The ASF argues that “incremental reductions are appropriate for the following reasons:”

(i) as a means to begin scaling back the outsized role the GSEs currently play in the U.S. housing finance system and encourage the return of private capital;

(ii) FHFA has the legal authority in its role as conservator to act according to its dual mandate; and

(iii) the timing of any Congressional action on wide-ranging housing finance reform remains uncertain. (1)

Various groups like the Realtors and some members of Congress argue that any restriction of credit is unwarranted while the housing recovery is so tentative. The ASF notes, however, that the federal government is insuring roughly 90% of new residential mortgages. Virtually no one supports such a level of government support for the mortgage market, so the only question is one of timing. Do we start cutting back now or do we wait for better market conditions?

Others argue that there is not enough private capital to replace the government guaranteed capital in the market. But scaling back the Fannie/Freddie loan limit is a great way to work private capital back into the market gradually. The long term health of the American mortgage market is best assured by having private capital assume as much of the credit risk as it can responsibly handle. This private capital should also be subject to consumer protection regulation to ensure that it is not put to predatory uses. The Consumer Financial Protection Bureau has rules in place to provide that consumer protection. The FHFA should complement that regulatory action with its own. It should reduce the Fannie and Freddie loan limits starting in 2014.

Mortgage Reform Schooling on 30 Year Term

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S&P has posted U.S. Mortgage Finance Reform Efforts and the Potential Credit Implications to school us on the current state of affairs in Congress. It provides a useful lesson on three major mortgage reform bills introduced in Congress this year.  They are the Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner); Protecting American Taxpayers and Homeowners ACT of 2013 (PATH); and the FHA Solvency Act.

Given the current mood in D.C., S&P somewhat optimistically states that there “seems to be a bipartisan commitment to encourage private capital support for the U.S. housing market while winding down Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that hold dominant positions in the mortgage market.” (1) S&P uses this report as an opportunity to “comment on the potential credit implications of these mortgage finance reform efforts on several market sectors.” (1)

In this post, I focus on, and criticize, S&P’s analysis of the appropriate role of the 30 year fixed-rate mortgage. S&P states that

The 30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S. And while some market players have looked at current rates on jumbo mortgages (those that exceed conforming-loan limits) and suggested that the private market could support mortgage interest rates below 5%, we think this view is distorted. Jumbo mortgage rates carrying the lowest interest rates, for the most part, are limited to a narrow set of borrowers who have FICO credit scores above 750 and equity of roughly 30% in their homes. We don’t believe that these same rates would be available to average prime borrowers, such as those with credit scores of 725 and 25% equity in a property. (3)

While I think that S&P is probably right about the limited usefulness of comparing current jumbo loans to a broad swath of conforming loans, I see no support in their analysis for the assertion that the “30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S.” First, a 30-year FRM typically carries a higher interest rate than an ARM of any length. Second, a typical American household only stays in a home for about seven years. Thus, a 30-year FRM provides an expensive insurance policy against increases in interest rates that most Americans do not end up needing.

While we may end up providing governmental support for the 30-year FRM because of its longstanding popularity, S&P’s mortgage reform school should be based on facts, not fancy.

Reiss on Fannie/Freddie Loan Limits

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Law360 quoted me in Time May Not Be Right To Limit Fannie, Freddie Loans (behind a paywall).  It reads in part,

The Federal Housing Finance Agency has proposed lowering the maximum size of the loans Fannie Mae and Freddie Mac can purchase as part of an effort to attract more private-sector lending, but some experts warn that other market factors including rising interest rates will keep private lenders from filling the gap.

The FHFA announced earlier this month that it planned to reduce the maximum size of home mortgage loans eligible for backing by the government-sponsored enterprises. The move is part of the agency’s strategic plan of slowly backing away from the mortgage market and encouraging private capital to take its place. But some real estate attorneys and practitioners say private lenders need more than customers to convince them to take the plunge.

Many other environmental factors affect private lenders’ decisions about whether to enter the residential mortgage market, said Bob Bostrom, a shareholder of Greenberg Traurig LLP and former counsel to Freddie Mac.

Reducing the number of loans eligible for Fannie and Freddie backing and raising guarantee fees — another recent tactic — sound good in theory, but they don’t change the fact that the interest rate for a 30-year fixed-rate mortgage rose a full percentage point over the past several months and the housing market dipped correspondingly, Bostrom said.

“The housing recovery is extraordinarily fragile right now,” he said.

The steps the FHFA is taking to reduce the GSEs’ size and scope will work only when there’s a private sector ready to step in, experts say. Until then, these measures can only push the housing market backward, they warn.

* * *

Not everyone is convinced of this dark forecast, however. David Reiss, a Brooklyn Law School professor and real estate finance scholar, told Law360 on Thursday that he’s not convinced the FHFA’s moves will have a negative effect.

Although the pullback should be gradual, it must be done, because the government can’t continue to hold up the mortgage market indefinitely, he said.

Reiss says current market factors actually favor weaning borrowers off Fannie and Freddie, noting that private capital in the sector has increased — particularly in the market for jumbo loans — and that the overall housing market has stabilized.

“We’re past the immediate crisis,” he said. “There’s nothing going on right now that makes me think a downward adjustment in conforming loan limits won’t be met by an increase in capital from private lenders,” Reiss said.

Fannie and Freddie’s Unreported Billions of Losses

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The Federal Housing Finance Agency’s Inspector General has warned FHFA Acting Director DeMarco that the FHFA has allowed Fannie and Freddie to defer acknowledgment of billions of dollars of losses relating to seriously delinquent singe-family residential mortgage loans for far too long.

The Office of the IG recommends that estimates of these losses be reported immediately, on an ongoing basis. There are all sorts of obvious good reasons to do this, including the fact that “[c]lassification of loans according to risk characteristics is a critical factor considered by financial regulators to evaluate a financial institution’s safety and soundness”  and that it accords with Generally Accepted Accounting Principles. (1)

directly through interest

Fannie and Freddie’s recent reports of billions of dollars of profits have caused a scrum to form around the two companies, as investors in preferred shares seek to get a slice of those profits through a series of lawsuits (here, here, here and here for example), as low-income advocates seek to fund the Housing Trust Fund through a lawsuit (here) and as some politicians forget the risks that these two companies present to the American taxpayer and seek to reanimate the two companies.

In a perfect world, we would ask what kind of residential housing finance infrastructure we want to implement for the next fifty years or so and what should happen to Fannie and Freddie should have little to nothing to do with their current profits or losses. But the political reality is that it does. With that as a given, we should at least have an honest assessment of their balance sheets. But the FHFA is keeping us in the dark. It needs to turn the lights on so that we can understand the true magnitude of these unreported losses so that the debate about Fannie and Freddie can be held with as much accurate information as possible.

Whither The Housing Trust Fund?

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As part of my review of the litigation surrounding the newly-profitable Fannie And Freddie (here, here, here and here), I turn to the complaint filed by “extremely low income tenants in desperate need of affordable housing” and the National Low Income Housing Coalition and the Right to the City Alliance, Samuels et al. v. FHFA et al., No. 1:13-cv-22399 (Jul. 9, 2009).

As the complaint notes, Congress created the Housing Trust Fund as part of the Housing and Economic Recovery Act of 2008 (HERA).  The Housing Trust Fund was to be funded by contributions by Fannie and Freddie that were based on their annual purchases.   Those contributions could amount to hundreds of millions of dollars a year.

But here was the rub:  the Director of the FHFA could suspend  those contributions if the Director finds that they

(1) are contributing, or would contribute, to the financial instability of [Fannie or Freddie];

(2) are causing, or would cause, the [Fannie or Freddie] to be classified as undercapitalized; or

(3) are preventing, or would prevent, [Fannie or Freddie] from successfully completing a capital restoration plan under section 4622 of this title. (14, quoting 12 U.S.C. section 4567(b))

And that is just what happened in 2008:  the FHFA put them into conservatorship because of fears of their impending insolvency and their mounting losses. With the housing recovery, Fannie and Freddie have returned to profitability — massive profitability. But the federal government has redirected those profits to the Treasury, which had provided many billions of dollars to the two companies during the early years of the crisis without funding the Housing Trust Fund.

The plaintiffs allege that despite “the record profits of the Enterprises and despite the statutory requirement that any suspension of payments be temporary,  the Federal Defendants have failed and refused to review these findings and/or discontinue their suspension of the statutorily required payments by Fannie Mae and Freddie Mac into the Housing Trust Fund.” (17) The plaintiffs allege that this is “arbitrary and capricious in light of the changed and current financial condition of the Enterprise. The required statutory contribution is a small percentage of the Enterprise’s profits and thus would not contribute to the financial instability” of the two companies or to the other two bases for suspending the contributions pursuant to section 4567(b). (18, citations omitted) In sum, “the level of capitalization is solely a function of the policy decisions of the conservator not the cost of contributions to the Housing Trust Fund.” (22)

The big challenge that the plaintiffs face, as far as I can tell, is how they can convince the Court that the two companies are financially stable when they are still so deeply in debt to the federal government, notwithstanding the billions of dollars of profits that they two companies have remitted so far to the Treasury.

Fannie, Freddie & Affordable Housing

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I was quoted in a Law360.com story, Affordable Housing May Trip Up Fannie, Freddie Fixes (behind a paywall).  It reads in part,

While the debate over housing finance reform in Washington has focused on the government’s role as market backstop, analysts say questions about federal funding for affordable housing add another potential pitfall for lawmakers looking to dismantle and replace Fannie Mae and Freddie Mac.

Fannie and Freddie long have been part of a broader government program to add to the country’s affordable housing stock. Republicans have been critical of that mission and targeted it as something that should be abolished along with the two mortgage giants, while Democrats want to keep programs promoting affordable housing in any reform of the housing finance system.

As the U.S. House of Representatives and Senate move forward with their own visions of a new system for financing home purchases, it is likely that those two perspectives on affordable housing promotion will clash, said Rick Lazio, a former four-term Republican member of Congress from New York.

“That will be a significant obstacle to getting an agreement,” said Lazio, now the chairman of Jones Walker LLP’s housing and housing finance industry team.

One of the main issues lawmakers will have to confront will be what to do with the National Housing Trust Fund, a program created by the 2008 Housing and Economic Recovery Act.

HERA required Fannie Mae and Freddie Mac to transfer a small percentage of the money from new business to the fund, which would then be used to subsidize the construction of rental housing for low-income families.

The fund’s inclusion in HERA was seen as a major victory for affordable housing advocates, but the benefits never materialized.

Soon after HERA passed, Fannie and Freddie were placed into conservatorship after mounting losses from exposure to subprime mortgages, and the two companies took a combined $187 billion bailout. The Federal Housing Finance Agency canceled all contributions to the fund.

Several housing advocacy groups have sued the FHFA to force the agency to allow Fannie Mae and Freddie Mac to resume their contributions now that the entities are generating profits and repaying the bailout money.

What seems more likely than getting the money the two companies were supposed to pay out is that the funds allocated to affordable housing will be shrunk under a new system, as envisioned by a Senate bill, or eliminated altogether, as proposed by a bill introduced by House Republicans.

“If it’s included at all, it will be smaller,” Brooklyn Law School professor David Reiss said of affordable housing money.