Tag Archives: liquidity

Obama Administration on Frannie

Posted on by

Michael Stegman

Michael Stegman, a White House Senior Policy Advisor, offered up the Obama Administration’s “perspective on critical housing issues” recently. (1) I found the remarks on the future of Fannie and Freddie to be of particular interest:

Before discussing what we would like to see happen in this Congress on GSE reform, you should be aware that last week the Administration made clear its opposition to taking any action in support of what has become known as “recap and release.” We believe that recapitalizing the GSEs with taxpayer funds and administratively- or legislatively-releasing them from conservatorship with a business model that conflicts with their public mission— in essence turning back the clock to the run up to the crisis~ would be both bad policy and poor stewardship of the taxpayers’ interest; willfully recreating the very system that helped do this nation so much harm.
ln remarks I presented two weeks ago at the Mortgage Bankers Association conference, I cautioned that no one should be misled by the increasingly noisy chorus of the advocates of recap and release, many of whom have placed big bets against reform so they can make a‘profit, and are doing everything they can to make sure that those bets pay off.
Nor, I said, should their promise that recap and release would generate a pot of money for affordable housing be taken seriously.
Despite claims to the contrary, recapitalizing the GSEs would not itself provide any resources for affordable housing. Nor can a related — or even unrelated — sale of Treasury’s investment in the GSEs provide any resources for affordable housing. The proceeds of the sale of any GSE obligations acquired by Treasury must by law be “dedicated for the sole purpose of deficit reduction.”
Rather than freeing recapitalized GSEs from conservatorship with their flawed charters intact, we should pursue more comprehensive approaches to reform such as those that members of Congress have introduced over the past two years including mutualizing Fannie and Freddie, or build upon bipartisan agreements on the features of a future secondary market system that were hammered out in the Senate Banking Committee last year:
Preservation of the TBA market; an explicit, paid for government guarantee of catastrophic losses for investors in qualifying MBS; maintaining a clear separation of the primary and secondary markets; ensuring the flow of mortgage credit in both good times and bad; separating the securitization plumbing from private credit risk taking; ensuring that community lenders have the same access to the secondary market as big banks; and making the benefits of government guaranteed MBS available to all households — both those who choose to rent and those with the ability and desire to own.
Members in Congress also reached bipartisan consensus on a transparent way to serve those the private market cannot serve without subsidy, through an annual 10 basis point assessment on the outstanding balance of government-guaranteed MES—which once fully implemented, would generate about 15 times more resources a year for affordable housing than FHFA is expected to raise through the GSEs’ current affordable housing levy–though we were pleased to see the Director begin collections on the affordability fee and look forward to effectively implementing the dollars through the Housing Trust Fund and the Capital Magnet Fund that should become available for the first time in the early months of 2016.
But there is much more work to be done on ensuring a level playing field in the new system, including a robust role for community banks and credit unions who know how best to serve their customers, and ensuring that all communities are served fairly, which can be most effectively achieved through a statutory duty to serve. Regrettably, the Committee could not agree upon such a provision during last year’s negotiations, and we will continue to fight for it. (3-4)
Much of these remarks are eminently reasonable but I have to say that the Obama Administration has not deployed much political capital on reforming the housing finance system. This has left the whole system in limbo and the longer it stays in limbo, the more likely it is that special interests will make inroads into the reform of the system, inroads that will not be in the public interest.
While the likelihood of reform coming out of the current Congress is incredibly small, the Administration should take all of the administrative steps it can to sketch out an outline of a housing finance system that can work for a broad range of borrowers through the credit cycle without putting excessive risk on taxpayers.
The Administration has taken some steps in the right direction, like off-loadling some risk from Fannie and Freddie to private investors. But there is a lot more work to be done if we are to have a system that provides the optimal amount of credit through the 21st century.

Better to Be a Banker or a Non-Banker?

Posted on by

 

The Community Home Lenders Association (CHLA) has prepared an interesting chart, Comparison of Consumer and Financial Regulation of Non-bank Mortgage Lenders vs. Banks.  The CHLA is a trade association that represents non-bank lenders, so the chart has to be read in that context. The side-by side-chart compares the regulation of non-banks to banks under a variety of statutes and regulations.  By way of example, the chart leads off with the following (click on the chart to see it better):

CLHA Chart

The chart emphasizes all the ways that non-banks are regulated where banks are exempt as well as all of the ways that they are regulated in the identical manner. Given that this is an advocacy document, it only mentions in passing the ways that banks are governed by various little things like “generic bank capital standards” and safety and soundness regulators. That being said, it is still good to look through the chart to see how non-bank regulation has been increasing since the passage of Dodd-Frank.

The Prime Crisis

Posted on by

Ben Franklin, Founder of the University of Pennsylvania

Fernando Ferreira and Joseph Gyourko, both at Penn’s Wharton School, have posted A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012 to SSRN. Unfortunately it is behind a National Bureau of Economic Research paywall. The paper makes the case for “a reinterpretation of the U.S. foreclosure crisis as more of a prime, rather than a subprime, borrower issue.” (1) The authors conclude,

The housing bust and its consequences are among the defining economic events of the past quarter century. Constructing and analyzing new and very large micro data spanning the cycle and all sectors of the mortgage market leads us to reinterpret the ensuing foreclosure crisis as something much more than a subprime sector issue. Many more homes were lost by prime mortgage borrowers, and their loss rates not only increased relatively early in the crisis, but stayed high through 2012. This new characterization of the crisis motivates a very different empirical strategy from previous research on this topic. Rather than focus solely on the subprime sector and subprime traits, we turn to the traditional home mortgage default literature that explains outcomes in terms of common factors such as negative equity and borrower illiquidity.

The key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of Prime borrowers compared to all Cash owners. This is true on average, over time (including the spike in their foreclosure rate beginning in 2009), and across metropolitan areas. Given the predominance of this group in terms of foreclosures and short sales, this is tantamount to explaining the crisis itself. We can explain much, but not all, of the variation in Subprime borrower outcomes in terms of negative equity or borrower illiquidity conditions, so something potentially ‘special’ about the subprime sector still is unaccounted for. That said, it also could be that a less noisy measure of borrower illiquidity would be able to account for this residual variation. That remains for future research.

None of the other ‘usual suspects’ raised by previous research or public commentators change this conclusion. Housing quality traits, household demographics (race or gender), buyer income, and speculator status do not have a material influence on outcomes across borrower types. Certain loan-related attributes such as initial LTV, whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter do have some independent influence, but they are much weaker than that of current LTV. (27)

I will have to leave it to other empiricists to evaluate whether this sure-to-be-controversial study is methodologically sound, but I sure did find their policy conclusion to be interesting:

We are not able to provide a definitive recommendation one way or another, but we can rule out one noteworthy reason offered for not aiding homeowners—namely, that the crisis was mostly about irresponsible subprime sector actors (both lenders and borrowers) who were undeserving of transfers. Of course, this is not to say that there was no such behavior. The evidence from other research and serious journalists is that there was. However, it is clear from the passage of time (and the accumulation and analysis of new data that provides) that the problem was much more widespread and systemic.  (28)

Hopefully, this is a lesson that we can take with us into the next (inevitable) housing crisis so we lay the foundation for policy solutions based on facts and not rely on moral judgments about borrowers that are built on shaky ground.

Wednesday’s Academic Roundup

Posted on by

Fannie/Freddie 2015 Scorecard

Posted on by

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.

Reiss on Privatization of Fannie and Freddie

Posted on by

BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,

Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?

Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:

“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.

However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”

In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.

Reiss on Who Should Be Providing Mortgage Credit to American Households?

Posted on by

I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress).  The abstract reads,

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).