Tag Archives: Trump Administration

FHFA’s Strategic Plan for Fannie and Freddie

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The Federal Housing Finance Agency released its Strategic Plan for fiscal years 2018-2022 for public input. As discussed in yesterday’s post, Director Watt is very focused on maintaining the health of Fannie Mae and Freddie Mac. The Strategic Plan reiterates that focus:

As conservator of the Enterprises, FHFA will also promote stability by working to preserve and conserve the Enterprises’ assets and business operations. Additionally, FHFA will encourage the Enterprises and the housing industry to adopt standards and practices that promote market and stakeholder confidence. (8)

The Plan goes into depth to describe the FHFA’s role as conservator:

The Enterprises were placed into conservatorships in September 2008 in the midst of a severe financial crisis. Their ongoing participation in the housing finance market has been an important factor in maintaining market liquidity and stability. Conservatorship permitted the U.S. Government to take greater control over management of the Enterprises and gave investors in the Enterprises’ debt and MBS confidence that the Enterprises would have the capacity to honor their financial obligations. As conservator, FHFA establishes restrictions and expectations for the Enterprises’ boards and for their managements while authorizing them to conduct the Enterprises’ day-to-day operations.

As detailed earlier, FHFA’s authority as both regulator and conservator of the Enterprises is based upon statutory mandates. FHFA, acting as regulator and conservator, must follow the mandates assigned to it by statute and the missions assigned to the Enterprises by their charters. Congress may choose to revise the statutory mandates governing the Enterprises at any time.

*      *     *

The Enterprises are also parties to PSPAs with the Treasury Department. Under the PSPAs, the Enterprises are provided U.S. taxpayer backing with explicit dollar limits. The PSPA commitment still available to Fannie Mae is $117.6 billion and the commitment still available to Freddie Mac is $140.5 billion. Additional draws would reduce these commitments, and dividend payments do not replenish or increase the commitments under the terms of the PSPAs. Starting in 2013, the PSPAs provided each Enterprise with a capital buffer of $3 billion to protect each Enterprise against making additional draws of taxpayer support in the event of an operating loss in any quarter, and the PSPAs provide mandated declines of $600 million each year to these capital buffers. On January 1, 2017, each Enterprise’s capital buffer declined to $600 million and the capital buffer is scheduled to decline to zero on January 1, 2018.

FHFA continues to encourage Congress to complete the important work of housing finance reform. FHFA has reiterated the urgency of reform and that it is up to Congress to determine what future, if any, the Enterprises will have in the future housing finance system. (16-17)

Reading between the lines, I see the FHFA under Watt doing whatever it has to in order to maintain stability and liquidity in the mortgage markets. If Congress does not act, if the Treasury does not act, I think that Director Watt will go it alone and do what it takes to maintain Fannie and Freddie’s reputation with mortgage lenders and MBS investors.

United States v. CFPB

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United States Court of Appeals for the District of Columbia Circuit, E. Barrett Prettyman Federal Courthouse

The Trump Administration has filed an amicus brief in PHH Corp. v. CFPB. The case is schedule for an en banc hearing in May. The filing is particularly newsworthy because the Trump Administration is siding with PHH, a mortgage lender, against the CFPB, a federal agency. The Trump Administration summarizes its position as follows:

In 2010, Congress created the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Act, giving the CFPB authority to enforce U.S. consumer-protection laws that had previously been administered by seven different government agencies, as well as new provisions added by Dodd-Frank itself. See 12 U.S.C. § 5581(b). The CFPB is headed by a single Director who is appointed by the President, with the advice and consent of the Senate, for a term of five years, id. § 5491(b), (c)(1), and who may be removed by the President only for “inefficiency, neglect of duty, or malfeasance in office,” id. § 5491(c)(3).

The panel in this case held that this “for cause” removal provision violates the constitutional separation of powers. Op. 9-10. The panel explained—and neither party disputes—that, as a general matter, the President has “Article II authority to supervise, direct, and remove at will subordinate [principal] officers in the Executive Branch” in order to exercise his vested power and duty to faithfully execute the laws. Op. 4. The panel recognized as well that Humphrey’s Executor v. United States, 295 U.S. 602, 629 (1935), established an exception to that rule, holding that Congress may “forbid [the] removal except for cause” of members of the Federal Trade Commission (FTC)—a holding that has been understood to cover members of other multi-member regulatory commissions that share certain features and functions with the FTC. Op. 4.

The principal constitutional question in this case is whether the exception to the President’s removal authority recognized in Humphrey’s Executor should be extended by this Court beyond multi-member regulatory commissions to an agency headed by a single Director. While we do not agree with all of the reasoning in the panel’s opinion, the United States agrees with the panel’s conclusion that single-headed agencies are meaningfully different from the type of multi-member regulatory commission addressed in Humphrey’s Executor.

The Supreme Court’s analysis in Humphrey’s Executor was premised on the nature of the FTC as a continuing deliberative body, composed of several members with staggered terms to maintain institutional expertise and promote a measure of stability that would not be immediately undermined by political vicissitudes. A single-headed agency, of course, lacks those critical structural attributes that have been thought to justify “independent” status for multi-member regulatory commissions. Moreover, because a single agency head is unchecked by the constraints of group decision-making among members appointed by different Presidents, there is a greater risk that an “independent” agency headed by a single person will engage in extreme departures from the President’s executive policy. And as the panel recognized, while multi-member regulatory commissions sharing the characteristics of the FTC discussed in Humphrey’s Executor have existed for over a century, limitations on the President’s authority to remove a single agency head are a recent development to which the Executive Branch has consistently objected.

We therefore urge the Court to decline to extend the exception recognized in Humphrey’s Executor in this case. (1-2)

This is of course an obscure argument about administrative law jurisprudence, but it also has serious real world consequences. I have previously argued that the panel reached the wrong result in this case and I think that the en banc Court will overturn it.

This amicus brief does not add too much to the reasoning in Judge Kavanaugh’s majority opinion in PHH v. CFPB, although it does flesh out one important argument that it made. The brief provides some support for the position that multi-member commissions are better suited to run independent agencies than single directors. But while it makes the case that single director agencies may not be the best choice for agency design, it does not make the case that it is an unconstitutional one.

 

Trump and The Housing Market

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photo by Gage Skidmore

President-Elect Trump

TheStreet.com quoted me in 5 Ways the Trump Administration Could Impact the 2017 U.S. Housing Market. It opens,

Yes, President-elect Donald Trump may have chosen Ben Carson to lead the Department of Housing and Urban Development, but as the U.S. housing market revs its engines as 2016 draws to a close, an army of homeowners, real estate professionals and economists are focused on cheering on a potentially rosy market in 2017.

And with good reason.

According to the S&P CoreLogic Case-Shiller Indices released on November 29, U.S. housing prices rose, on average, by 5.5% from September, 2015 to September, 2016. Some U.S. regions showed double-digit growth for the time period – Seattle, saw an 11.0% year-over-year price increase, followed by Portland, Ore. with 10.9% and Denver with an 8.7% increase, according to the index.

The data point to further growth next year, experts say.

“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance,” notes David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms — Miami, Tampa, Phoenix and Las Vegas — remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.”

But there are question marks heading into the new year for the housing market. The surprise election of Donald Trump as president has industry professionals openly wondering how a new Washington regime will impact the real estate sector, one way or another.

For instance, Dave Norris, chief revenue officer of loanDepot, a retail mortgage lender located in Orange County, Calif., says dismantling the Consumer Financial Protection Bureau, encouraging higher interest rates, and broadening consumer credit are potential scenario shifters for the housing market in the early stages of a Trump presidency.

Other experts contacted by TheStreet agree with Norris and say change is coming to the housing market, and it may be more radical than expected. To illustrate that point, here are five key takeaways from market experts on how a Trump presidency will shape the 2017 U.S. real estate sector.

Expect higher interest rates – The new administration will likely lead to higher interest rates, which will compress home and investment property values, says Allen Shayanfekr, chief executive officer of Sharestates, an online crowd-funding platform for real estate financing. “Specifically, loans are calculated through debt service coverage ratios and a borrower’s ability to make their payments,” Shayanfekr says. “Higher interest rates mean larger monthly payments and in turn, lower loan amount qualifications. If lenders tighten up, it will restrict the buyer market, causing either a plateau in market values or possibility a decrease depending on the margin of increased rates.”

Housing reform will also impact home purchase costs – Trump’s effect on interest rates will likely depress housing prices in some ways, says David Reiss, professor of law at Brooklyn Law School. “That’s because the higher the monthly cost of a mortgage, the lower the price that the seller can get,” he notes. Reiss cites housing reform as a good example. “Housing finance reform will increase interest rates,” he says. “Republicans have made it very clear that they want to reduce the role of the federal government in the housing market in order to reduce the likelihood that taxpayers will be on the hook for another bailout. If they succeed, this will likely raise interest rates because the federal government’s involvement in the mortgage market tends to push interest rates down.”

The Housing Market Under Trump

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TheStreet.com quoted me in Interest Rates Likely to Rise Under Trump, Could Affect Confidence of Homebuyers. It opens,

Interest rates should increase gradually during the next four years under a Donald Trump administration, which could dampen growth in the housing industry, economists and housing experts predict.

The 10-year Treasury rose over the 2% threshold on Wednesday for the first time in several months, driving mortgage rates higher with the 30-year conventional rate rising to 3.73% according to Bankrate.com. Mortgage pricing is tied to the 10-year Treasury.

Housing demand will remain flat with a rise in interest rates as many first-time homebuyers will be saddled with more debt, said Peter Nigro, a finance professor at Bryant University in Smithfield, R.I.

“With first-time homebuyers more in debt due to student loans, I don’t expect much growth in home purchasing,” he said.

Interest rates will also be affected by the size of the fiscal stimulus since additional infrastructure spending and associated debt “could push interest rates up through the issuance of more government debt,” Nigro said.

Even if interest rates spike in the next year, banks will not benefit, because there is a lack of demand, said Peter Borish, chief strategist with Quad Group, a New York-based financial firm. The economy is slowing down, and consumers have already borrowed money at very “cheap” interest rates, he said.

The policies set forth by a Trump administration will lead to contractionary results and will not spur additional growth in the housing market.

“I prefer to listen to the markets,” Borish said. “This will put downward pressure on the prices in the market. Everyone complained about Dodd-Frank, but why is JPMorgan Chase’s stock at all time highs?”

An interest rate increase could still occur in December, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. With nearly five weeks before the December Federal Open Market Committee (FOMC) meeting, the market can contemplate the potential outcomes.

“While the market is now indicating a reduced probability of a short-term rate hike at that meeting, the Fed has repeatedly indicated that they would be data-driven in their decision,” he said in a written statement. “If the markets calm down and November employment data look solid on December 2, a rate hike could still happen. The market moves yesterday are already indicating that financial markets are pondering that the Trump effect could be positive for the economy.

“The Fed is likely to start increasing the federal funds rate at a “much faster pace starting next year,” said K.C. Sanjay, chief economist for Axiometrics, a Dallas-based apartment market and student housing research firm. “This will cause single-family mortgage rates to increase slightly, however they will remain well below the long-term average.”

Since Trump has remained mum on many topics, including housing, predicting a short-term outlook is challenging. One key factor is the future of Fannie Mae and Freddie Mac, who are the main players in the mortgage market, because they own or guarantee over $4 trillion in mortgages, remain in conservatorship and “play a critical role in keeping mortgage rates down through the now explicit subsidy or government backing which allows them to raise funds more cheaply,” Nigro said.

It is unlikely any changes will occur with them, because “Trump has not articulated a plan to deal with them and coming up with a plan to deal with these giants is unlikely,” he said.

Trump could attempt to take on government sponsored enterprises such as Fannie Mae and Freddie Mac, said Ralph McLaughlin, chief economist for Trulia, a San Francisco-based real estate website.

“If he does, it’s going to be a hairy endeavor for him, because he’ll need bipartisan support to do so,” he said.

Since he has alluded to ending government conservatorship and allowing government sponsored enterprises to “recapitalize by allowing retention of their own profits instead of passing them on to the Treasury,” the result is that banks could have their liquidity and lending activity increase, which could help boost demand for homes, McLaughlin said.

“We caution President-elect Trump that he would also need to simultaneously help address housing supply, which has been at a low point over the past few years,” he said. “The difficulty for him is that most of the impediments to new housing supply rest and the state and local levels, not the federal.”

Even on Trump’s campaign website, there is “next to nothing” about his ideas on housing, said David Reiss, a law professor at the Brooklyn Law School in New York. The platform of the Republican Party and Vice President-elect Mike Pence could mean that the federal government will have a smaller footprint in the mortgage market.

“There will be a reduction in the federal government’s guaranty of mortgages, and this will likely increase the interest rates charged on mortgages, but will reduce the likelihood of taxpayer bailouts,” he said. “Fannie and Freddie will likely have fewer ties to the federal government and the FHA is likely to be limited to the lower end of the mortgage market.”