Tag Archives: freddie

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.”

Here Comes The Housing Trust Fund

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HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)

The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)

Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction.  Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.

So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.

While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..

Krimminger and Calabria on Conservatorships

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When the Federal Housing Finance Agency (“FHFA”) was appointed conservator for Fannie Mae and Freddie Mac, it was the first use of the conservatorship authority under the Housing and Economic Recovery Act of 2008 (“HERA”), but it was not without precedent. For decades, the Federal Deposit Insurance Corporation (“FDIC”) has successfully and fairly resolved more than a thousand failing banks and thrifts using the virtually identical sections of the Federal Deposit Insurance Act (“FDIA”).
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The predictability, fairness, and acceptance of this model led Congress to adopt it as the basis for authorizing the FHFA with conservatorship powers over Fannie Mae and Freddie Mac in HERA. Instead of following this precedent, however, FHFA and Treasury have radically departed from HERA and the principles underlying all other U.S. insolvency frameworks and sound international standards through a 2012 re-negotiation of the original conservatorship agreement.
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     This paper will:
  • Describe the historical precedent and resolution practice on which Congress based FHFA’s and Treasury’s statutory responsibilities over Fannie Mae and Freddie Mac;
  • Explain the statutory requirements, as well as the procedural and substantive protections, in place so that all stakeholders are treated fairly during the conservatorship;
  • Detail the important policy reasons that underlie these statutory provisions and the established practice in their application, and the role these policies play in a sound market economy; and
  •  Demonstrate that the conservatorships of Fannie Mae and Freddie Mac ignore that precedent and resolution practice, and do not comply with HERA. Among the Treasury and FHFA departures from HERA and established precedents are the following:
    • continuing the conservatorships for more than 6 years without any effort to comply with HERA’s requirements
      to “preserve and conserve” the assets and property of the Companies and return them to a “sound and solvent” condition or place them into receiverships;
    • rejecting any attempt to rebuild the capital of Fannie Mae or Freddie Mac so that they can return to “sound and solvent” condition by meeting regulatory capital and other requirements, and thereby placing all risk of future losses on taxpayers;
    • stripping all net value from Fannie Mae and Freddie Mac long after Treasury has been repaid when HERA, and precedent, limit this recovery to the funding actually provided;
    • ignoring HERA’s conservatorship requirements and transforming the purpose of the conservatorships from restoring or resolving the Companies into instruments of government housing policy and sources of revenue for
      Treasury;
    • repeatedly restructuring the terms of the initial assistance to further impair the financial interests of stakeholders contrary to HERA, fundamental principles of insolvency, and initial commitments by FHFA; and
    • disregarding HERA’s requirement to “maintain the corporation’s status as a private shareholder-owned company” and FHFA’s commitment to allow private investors to continue to benefit from the financial value of the company’s stock as determined by the market. (1-3, footnotes omitted)

I am intrigued by the recollections of these two former government officials who were involved in the drafting of HERA (much as I was by those contained in a related paper by Calabria). But I am not convinced that their version of events amounts to a legislative history of HERA, let alone one that should be given any kind of deference by decision-makers. The firmness of their opinions about the meaning of HERA is also in tension with the ambiguity of the text of the statute itself. The plaintiffs in the GSE conservatorship litigation will see this paper as a confirmation of their position. I do not think, however, that the judges hearing the cases will pay it much heed.

Fannie/Freddie 2015 Scorecard

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The Federal Housing Finance Agency (FHFA) released its 2015 Scorecard for Fannie Mae, Freddie Mac and Common Securitization Solutions. The scorecard identifies priorities for the two companies and their joint venture, Common Securitization Solutions (CSC). The scorecard builds on the FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. These priorities include maintaining credit availability for residential mortgages; reducing taxpayer risk by increasing private capital in the residential mortgage market; and building a new single-family securitization platform for the  secondary mortgage market, the CSC.

There is nothing particularly notable in the scorecard, other than the sense that the FHFA is continuing to move in the direction that it has publicly charted for some time. I was happy to see that the FHFA is still focusing on increasing the role of private capital in the mortgage market:

  • Fannie Mae will transact credit risk transfers on reference pools of single-family mortgages with an unpaid principal balance (UPB) of at least $150 billion. This UPB requirement will be reviewed periodically and adjusted as necessary to reflect market conditions.
  • Freddie Mac will transact credit risk transfers on reference pools of single-family mortgages with a UPB of at least $120 billion. This UPB requirement will be reviewed periodically and adjusted as necessary to reflect market conditions.
  • In meeting the above targets, the Enterprises must each utilize at least two types of risk transfer structures. (3)

The FHFA is clearly trying to get Fannie and Freddie to experiment with risk transfer structures in order to identify approaches that minimize risks for the taxpayers who ultimately backstop the two companies. The FHFA is also trying to keep the cost of doing so to reasonable levels. These steps should be applauded by both Democrats and Republicans who are seeking to reform Fannie and Freddie and change how they operate within the secondary mortgage market.

GSE Conservatorship History Lesson

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Mark Calabria, the Director of Financial Regulation Studies at the Cato Institute, has posted a very interesting paper, The Resolution of Systemically Important Financial Institutions: Lessons from Fannie and Freddie. This is a more formal version of what he presented at the AALS meeting early this month. I do not agree with all of Mark’s analysis, but this paper certainly opened my eyes about what can happen in committee when important statutes are being drafted. It opens,

There was perhaps no issue of greater importance to the financial regulatory reforms of 2010 than the resolution, without taxpayer assistance, of large financial institutions. The rescue of firms such as AIG shocked the public conscience and provided the political force behind the passage of the Dodd-Frank Act. Such is reflected in the fact that Titles I and II of Dodd-Frank relate to the identification and resolution of large financial entities. How the tools established in Titles I and II are implemented are paramount to the success of Dodd-Frank. This paper attempts to gauge the likely success of these tools via the lens of similar tools created for the resolution of the housing government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
An additional purpose of this paper is to provide some additional “legislative history” to the resolution mechanisms contained in the Housing and Economic Recovery Act of 2008 (HERA), which established a resolution framework for the GSEs similar to that ultimately created in Title II of Dodd-Frank. The intent is to inform current debates over the resolution of systemically important financial institutions by revisiting how such issues were debated and agreed upon in HERA. (1-2)
As an outside-the-Beltway type, I found the “legislative history” very interesting, even if it wouldn’t qualify as any type of legislative history that a judge would consider in interpreting a statute. It does, however, offer policy wonks, bureaucrats and politicians an inside view of how a Congressional staffer helps to make the sausage that is legislation. It also shows that in the realm of legislation, as in the realm of fiction, author’s intent can play out in tricky ways.

Calabria concludes,

The neglect of HERA’s tools and the likely similar neglect of Dodd-Frank’s suggest a much deeper reform of our financial regulatory system is in order. The regulatory culture of “whatever it takes” must be abandoned. A respect for the rule of law and obedience to the letter of the law must be instilled in our regulatory culture. More important, the incentives facing regulators must be dramatically changed. If we hope to end “too-big-to-fail” and to curtail moral hazard more generally, significant penalties must be created for rescues as well as deviations from statute. A very difficult question is that lack of standing for any party to litigate to enforce statutory prohibitions against rescues. (19)

I take a couple of lessons from this paper. First, tight drafting of legislation that is supposed to kick in during a crisis is key. If a statute has wiggle room, decision makers are going to stretch it out as they see fit. And second, I agree with Mark that even tight drafting won’t necessarily keep government actors from acting as they see fit in a crisis.

If Congress really want to constrain the choices of future decision makers, it will need to grant a third party standing to enforce that decision as it is unlikely that crisis managers will have the self-restraint to forgo options that they would otherwise prefer. Congress should be very careful about constraining the choices of these future decision makers. But if it chooses to do so, that would be the way to go.

 

S&P on Jumbos

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Last week, I discussed an up beat S&P report on the overall RMBS market. Today I discuss and S&P report on the jumbo mortgage market. This report sees much slower growth in the private-label jumbo residential mortgage-backed securities market. It opens,

U.S. housing has been recovering, and residential mortgage collateral performance continues to improve, a trend that we expect to continue in 2015. However, housing finance still faces challenges and relies on government support. Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years. Standard & Poor’s Ratings Services believes nonagency securitization—-utilizing private capital–could be a key contributor to a more healthy housing finance market while limiting risk to taxpayers.

A revival in the U.S. nonagency residential mortgage-backed securities (RMBS) market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the government-sponsored enterprises (GSEs)–such as Fannie Mae or Freddie Mac–hit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014. Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBS-related issuance remains negligible in the $10 trillion housing finance market.

We believe the slow pace of non-agency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid-2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist.

Hopefully, S&P has correct identified the cause of the slow growth in this sector. But we need to be vigilant to ensure that there is not a more fundamental problem with the jumbo private-label MBS market. it is vital that this sector of the market develops in order to provide a private capital alternative to the existing market which depends to a very large extent on government guarantees.

S&P’s Upbeat Outlook on Mortgage Market

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S&P posted U.S. RMBS Roundtable: Mortgage Origination And Securitization In The Post-Qualified Mortgage/Ability-To-Repay Market. The roundtable discussion offers views on many aspects of the 2015 mortgage market, but I found this passage to be particularly interesting:

Originators agreed loans that fall outside of the safe harbor by virtue of interest-only (IO) features have been and will continue to be attractive non-QM lending products. These loans have been originated post-crisis, and originators expect to continue lending to high-quality borrowers with substantial equity in their properties. There was general consensus that IO loans should not have been automatically excluded from QM treatment.

However, large bank depository lenders have shown a desire to originate and hold larger balance IO loans on their balance sheets rather than including them in securitizations. One participant from a major depository institution indicated that, given the increasing IO concentration on those institutions’ balance sheets, there may be a desire to securitize these loans upon meeting balance sheet thresholds. (1)

After Dodd-Frank, there was a lot of concern that the Qualified Mortgage and Ability-to-Repay rules would shut down the mortgage markets. It seems pretty clear to me that lenders are figuring out how to navigate both the plain-vanilla world of the Qualified Mortgage and the exotic world of the non-Qualified Mortgage, with its interest-only and other non-prime products. Lenders are still figuring out how far afield they can roam from a plain-vanilla product, but that is to be expected during a major transition such as the one from the pre- to the post-Dodd-Frank world.