Tag Archives: freddie

Affordable Housing for which Low-Income Households?

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The National Low Income Housing Coalition’s latest issue of Housing Spotlight provides its annual examination of “the availability of rental housing affordable to” extremely low income “and low income renter households . . ..” (1) It finds that

the gap between the number of ELI households and the number of rental homes that are both affordable and available to them has grown dramatically since the foreclosure crisis and recession. Despite this growing need, most new rental units being built are only affordable to households with incomes above 50% of AMI. At the same time, the existing stock of federally subsidized housing is shrinking through demolition and contract expirations, and waiting lists for housing assistance remain years long in many communities. Federal housing assistance is so limited that just one out of every four eligible households receives it. (1, emphasis in the original)
The article, “Affordable Housing is Nowhere to be Found for Millions,” describes the role of the National Housing Trust Fund, signed into law by the Housing and Economic Recovery Act of 2008, but only recently funded by Fannie Mae and Freddie Mac:
The NHTF is structured as a block grant to states, and at least 90% of all funding will be used to produce, preserve, rehabilitate and operate rental housing. Further, 75% of rental housing funding must benefit ELI. The funding of the NHTF will make a difference in the lives of many ELI renters by supporting the development and preservation of housing affordable to this income group. However, additional funding to the NHTF will be necessary to assure support to all income eligible households in need of housing. (1, footnote omitted)
The NLIHC’s key findings from this work include,
  • The number of ELI renter households rose from 9.6 million in 2009 to 10.3 million in 2013 and they made up 24% of all renter households in 2013.
  • There was a shortage of 7.1 million affordable rental units available to ELI renter households in 2013. Another way to express this gap is that there were just 31 affordable and available units per 100 ELI renter households. The data show no change from the analysis a year ago.
  • For the 4.1 million renter households DLI renter households in 2013, there was a shortage of 3.4 million affordable rental units available to them. There were just 17 affordable and available units per 100 DLI renter households.
  • Seventy-five percent of ELI renter households spent more than half of their income on rent and utilities; 90% of DLI renter households spent more than half of their income for rent and utilities.
  • In every state, at least 60% of ELI renters paid more than half of their income on rent and utilities. (1)

Given that housing affordability remained a problem during both boom times and bust and given that we should not expect another dramatic expansion of federal subsidies for rental housing, now might be a good time to ask what we can reasonably expect from the Housing Trust Fund. Should it be spread wide and thin, helping many a bit, or narrow and deep, helping a few a lot? No right answers here.

Friday’s Government Reports Roundup

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Transferring Risk from Fannie & Freddie

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The Federal Housing Finance Agency has posted its FHFA Progress Report on the Implementation of FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. As its name suggests, it provides a progress report on a range of topics, but I was particularly interested in its section on credit risk transfers for single-family credit guarantees:

The 2014 Conservatorship Strategic Plan’s goal of reducing taxpayer risk builds on the Enterprises’ previous risk transfer efforts. Under the 2013 Conservatorship Scorecard, FHFA expressed the expectation that each Enterprise would conduct risk transfer transactions involving single-family loans with an unpaid principal balance (UPB) of at least $30 billion. The 2014 Conservatorship Scorecard tripled the required risk transfer amount, with the expectation that each Enterprise would transfer a substantial portion of the credit risk on $90 billion in UPB of new mortgage-backed securitizations. FHFA also expected each Enterprise to execute a minimum of two different types of credit risk transfer transactions. FHFA required the Enterprises to conduct all activities undertaken in fulfillment of these objectives in a manner consistent with safety and soundness. During 2014, the two Enterprises executed credit risk transfers on single-family mortgages with a UPB of over $340 billion, which is well above the required amounts. (14)

Risk transfer is an important tool to reduce the risks that taxpayers will be on the hook for future bailouts. The mechanism for these risk transfer deals are not well understood because they are pretty new. The Progress Report describes how they work in relatively clear terms:

The primary way that the Enterprises have executed single-family credit risk transfers to date has been through debt-issuance programs. Freddie Mac transactions are called Structured Agency Credit Risk (STACR) notes, and Fannie Mae transactions are called Connecticut Avenue Securities (CAS). Following the release of historical credit performance data in 2012, each Enterprise has issued either STACR or CAS notes that transfer a portion of the credit risk from large reference pools of single-family mortgages to private investors. These reference pools are comprised of loans that the Enterprises had previously securitized to sell the interest rate risk of the loans to private investors. The STACR and CAS transactions take the next step of transferring a portion of the credit risk for these loans to investors as well. Each subsequent credit risk transfer transaction is intended to provide credit protection to the issuing Enterprise on the mortgages in the relevant reference pool. (14)

The Progress Report provides more detail for those who are interested. For the rest of us, we may just want to think through the policy implications. How much credit risk can Fannie and Freddie offload? Is it sufficient to make a real dent in the overall risk that the two companies pose to taxpayers? It would be helpful if the FHFA answered those questions in future reports.

Another Fannie/Freddie Bailout?

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The Federal Housing Finance Agency Office of the Inspector General has issued a White Paper Report, The Continued Profitability of Fannie Mae and Freddie Mac Is Not Assured. The Executive Summary opens,

Fannie Mae and Freddie Mac (collectively, the Enterprises) returned to profitability in 2012 after successive years of losses. Their improved financial performance is encouraging; however, their continued profitability is not assured. The mortgage industry is complex, cyclical, and sensitive to changes in economic conditions, mortgage rates, house prices, and other factors. The Enterprises have acknowledged in their public disclosures that adverse market and other changes could lead to additional losses and that their financial results are subject to significant variability from period to period.

Notwithstanding the Enterprises’ recent positive financial results, they face many challenges. For example:

  The Enterprises must reduce the size of their retained investment portfolios over the next few years pursuant to the terms of agreements with the U.S. Department of Treasury (Treasury) and additional limits from FHFA. Declines in the size of these portfolios will reduce portfolio earnings over the long term. These portfolios have been the Enterprises’ largest source of earnings in the past.

  Core earnings from the Enterprises’ business segments—single-family guarantee, multifamily, and investments—comprised only 40% of net income in 2013. Sixty percent of the Enterprises’ net income came from non-recurring tax-related items and large settlements of legal actions and business disputes, which are not sustainable sources of revenue. Core earnings comprised 55% of net income in 2014.

  The Enterprises are unable to accumulate a financial cushion to absorb future losses. Pursuant to the terms of agreements with Treasury, the Enterprises are required to pay Treasury each quarter a dividend equal to the excess of their net worth over an applicable capital reserve amount. The applicable capital reserve amount decreases to zero by January 1, 2018.

  Stress test results released by the Federal Housing Finance Agency (FHFA) in April 2014 indicate that the Enterprises, under the worst scenario—a scenario generally akin to the recent financial crisis— would require additional Treasury draws of either $84.4 billion or $190 billion, depending on the treatment of deferred tax assets, through the end of the stress test period, which is the fourth quarter of 2015.

  Absent Congressional action, or a change in FHFA’s current strategy, the conservatorships will go on indefinitely. The Enterprises’ future status is beyond their control. At present, it appears that Congressional action will be needed to define what role, if any, the Enterprises play in the housing finance system. (1-2)

While I am overall sympathetic to the underlying message of this white paper — Reform Fannie and Freddie Now! — I think it is somewhat misleading. Fannie and Freddie have been sending billions of dollars to the Treasury that exceed the amount of support that they received during the financial crisis. Before we could talk about a second taxpayer bailout, I think we would have to credit them with those excess payments.

That being said, the Obama Administration and Congress have left Fannie and Freddie to linger for far too long in conservatorship limbo. I have no doubt that this state of affairs will contribute to some kind of crisis for the two companies, so we should support some kind of exit strategy that gets implemented sooner rather than later. Inaction is the greatest threat to Fannie and Freddie, and to the housing finance system itself.

Reiss on Toxic Debt Claims

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Bloomberg quoted me in Nomura First to Fight U.S. Toxic Debt Claims at Trial. The article reads in part,

Nomura Holdings Inc. will defend claims by a U.S. regulator that it sold defective mortgage-backed securities to Fannie Mae and Freddie Mac before the 2008 financial crisis, becoming the first bank to take such a case to trial.

The Federal Housing Finance Agency, suing on behalf of the two government-owned companies, claims Nomura sold them $2 billion of bonds backed by faulty mortgages. The agency seeks more than $1 billion in damages in the trial, which is set to start Monday in Manhattan federal court.

Nomura, the Tokyo-based investment bank, is choosing to fight claims that 16 other banks settled after the blow-up of toxic mortgage bonds led to the global credit crunch. FHFA has reached $17.9 billion in settlements from banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co. If Nomura prevails at trial, it may embolden other firms facing mortgage-related suits to defend themselves rather than settle.

*     *     *

For Nomura and RBS to succeed, they will have to overcome Cote’s rulings as well as the widely held perception that banks packaged toxic debt and pushed it off on unsuspecting investors, said David Reiss, a professor at Brooklyn Law School.

Reiss said Nomura may believe it can show it was more careful than other banks in structuring mortgage-backed bonds and stands a good chance of winning.

As the trial approaches, a settlement becomes less likely, Bloomberg Intelligence analysts Elliott Stein and Alison Williams said yesterday. Stein said a resolution this late in the proceedings may exceed his earlier estimate of $100 million to $300 million, particularly if Cote’s rulings continue to favor FHFA.

Washington’s Farewell

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President Washington had this to say in his farewell address:

The unity of government which constitutes you one people is also now dear to you. It is justly so, for it is a main pillar in the edifice of your real independence, the support of your tranquility at home, your peace abroad; of your safety; of your prosperity; of that very liberty which you so highly prize. But as it is easy to foresee that, from different causes and from different quarters, much pains will be taken, many artifices employed to weaken in your minds the conviction of this truth; as this is the point in your political fortress against which the batteries of internal and external enemies will be most constantly and actively (though often covertly and insidiously) directed, it is of infinite moment that you should properly estimate the immense value of your national union to your collective and individual happiness; that you should cherish a cordial, habitual, and immovable attachment to it; accustoming yourselves to think and speak of it as of the palladium of your political safety and prosperity; watching for its preservation with jealous anxiety; discountenancing whatever may suggest even a suspicion that it can in any event be abandoned; and indignantly frowning upon the first dawning of every attempt to alienate any portion of our country from the rest, or to enfeeble the sacred ties which now link together the various parts.

We should heed these words as much today as in Washington’s own time. And while they should guide us in many areas, I would focus on what they mean in the context of housing finance reform.

Democrats and Republicans have not found common ground on the future of Fannie Mae and Freddie Mac. And yet the nation is likely to be made worse off by leaving them in limbo for so long, with a variety of crises lurking just over the horizon. I hope Congress can hear Washington’s advice to his fellow citizens and commit to placing the reform of these two gargantuan financial institutions at the top of its agenda for the coming year. Seems like a good way to truly commemorate his contribution to our country.

Reiss on $191B for Fannie & Freddie

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GlobeSt.com quoted me in About that $191B Profit from the GSEs. It opens,

Last week when the White House released its budget for fiscal year

2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship.

The item gave the commercial real estate industry pause for a few reasons. This number 1) assumes the GSEs will remain under federal conservatorship 2) it assumes that the lawsuits filed by GSE shareholders disgruntled by the government’s decision to sweep all profits from the GSEs back to the US Treasury will go nowhere 3) it assumes the GSEs will continue to bring in record profits.

Of all of these, the latter supposition is the least controversial.

The two GSEs have paid back more than what their received in federal aid; Fannie Mae has sent back the government $134.5 billion in payments compared to $116.1 billion it received, while Freddie Mac has sent $91 billion compared to $72.3 billion it received in rescue funds.

This cash flow is one reason why some in the industry quietly speculate that the government has little intention of cutting the GSEs loose to be privatized—despite the stated intention of the Obama Administration to do so.

Also, consider that the government can basically set the GSEs’ profit levels, David Reiss, professor of Law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, tells GlobeSt.com.

“Their regulator, the Federal Housing Finance Agency, sets the amount of their guarantee fee. If the FHFA raises it, it tends to raise profits for the two companies,” he notes.

The FHFA also sets, within limits, the types of mortgages the GSEs can buy, thereby increasing the size of the total market and the market share of the two entities, Reiss continues. “For instance, the FHFA recently lowered the down payment requirements for Fannie/Freddie loans. This action will increase the total number of loans made and will also increase Fannie and Freddie’s market share because they can now operate in a part of the market that had been off limits.”