Solving the Wrong Problem

Nearly all of the nineteen essays solicited by the Urban Institute in its “Housing Finance Reform Incubator” series have been submitted. We have all ten on single-family financing, all three on multifamily, and five of the six on affordability and access. This post focuses on the essays on single-family and affordability and access. (Contributors to the multifamily essays seem to agree that Fannie and Freddie’s programs work well, and that while improvements can be made, reforms in multifamily are less extensive and less urgent than on the single-family side).

On the whole, I found the single-family essays to be disappointing. I began my own essay by stressing the need for each proposal to have a stated objective against which it could be measured. My objective focuses on the system: “to create a capital markets-based secondary market mechanism capable of financing at least $1 trillion of 30-year fixed-rate mortgages annually throughout the business cycle, at the lowest cost to homebuyers consistent with an agreed-upon standard of taxpayer protection.” In every other essay, to the extent there is a stated objective it is some version of “fixing the problems with Fannie Mae and Freddie Mac.” How those “fixed” systems would work in practice—particularly for the low- and moderate-income homebuyers Fannie and Freddie originally were chartered to serve—is not addressed in sufficient detail in any essay to permit evaluation on the merits.

On the positive side, all of the essayists except Alex Pollock either explicitly or implicitly reject the notion that Fannie and Freddie were the causes of the mortgage crisis. Andrew Davidson and Jim Millstein both recognize and discuss the true problems, while the “principles for reform” Pat Mosser articulates in her essay make clear she has a sophisticated understanding of what took place to trigger the crisis. Still, they along with the majority of the other essayists suggest sweeping changes to the form or structure of Fannie and Freddie, all requiring legislation.

Why? Of the four essayists (other than me) that give detailed reform proposals— Millstein, Davidson, Mosser and Mark Zandi—all cite some form of incentive problem at Fannie and Freddie. Millstein says, “there is an inherent conflict of interest between the GSEs’ obligation to promote access and affordability and the private market’s imperative to maximize shareholder value,” while Davidson says, “The GSEs placed shareholder gain over risk management and were severely undercapitalized.” Mosser does not give a specific criticism of the companies, but notes that her proposed change to mutualized ownership is “designed to address the first principle of incentive alignment.” Finally, Zandi states, “our reliance on this duopoly [Fannie and Freddie] created perverse incentives that ultimately led to too much risk taking, forcing taxpayers to shoulder the resulting cost.”

The remedies the four essayists propose differ, although they have features in common. Two—Mosser and Davidson—would convert Fannie and Freddie to mutual ownership. Zandi would “merge Fannie and Freddie to form a single government corporation.” Millstein would have the companies form new credit guaranty subsidiaries that ultimately could be spun out as stand-alone entities, either with or without government guarantees, depending on what Congress is willing to accept at the time the spin-offs occur. Zandi and Davidson would transfer all (Zandi) or most (Davidson) of the responsibility for grading, pricing and managing mortgage credit risk from Fannie and Freddie to third parties, principally capital markets investors. And with the possible exception of Millstein, all believe the guarantor should have an explicit line of credit from the government to cover catastrophic risk, which it would pay for.

I have reservations or concerns about many of these proposed changes, but my main criticism of the essays is not that; it’s that they spend most of their time solving the wrong problem. The biggest problem Fannie and Freddie had leading up to the crisis wasn’t their incentive structure—that was good enough to enable them to produce and maintain a level of credit quality that was far higher than all other sources of mortgages at the time—it was capital. And the four authors spend much too little time analyzing and discussing the amount of capital that should be required in the new system, how that amount should be determined, where it would come from, the implications of the recommended (or assumed) capital scheme on the mechanics of delivering credit guarantees to borrowers, and the consequent availability and affordability of mortgages, particularly for low- and moderate income homebuyers.

Two of the essays in the affordable housing category—one by John Taylor and the other by Mike Calhoun and Sarah Wolff—correctly focus on this omission. Taylor notes, “It’s unclear whether guarantors could raise sufficient capital to support [proposed] reform models…not to mention whether that type of capitalization requirement and the guarantee fees it implies would simply price many low- and moderate-income borrowers out of the conventional market altogether.” Calhoun and Wolff build on this point, adding, “Estimates of how structural changes will affect…the rates consumers pay on their mortgage…nearly all provide a combined estimate or estimate costs for a “typical” borrower. What is lacking is analysis of how costs will be distributed” [emphasis in original].

To be effective, a secondary mortgage market financing system for 30-year fixed-rate mortgages needs to be able to tap large volumes of funding from international capital markets investors reliably and consistently, then channel those funds to a wide range of homebuyers on terms they can afford. The key to the first is giving mortgage-backed security investors a credit guaranty they trust; the key to the second is keeping the cost of that guaranty low enough that a credit guarantor can use cross-subsidization to offer affordable guaranty fees to higher-risk borrowers without pushing fees on lower-risk business so high that it gets financed elsewhere, increasing the risk on the overall book. The Urban Institute essayists agree that an explicit government guarantee can accomplish the former; they are largely silent on how best to achieve the latter.

There is a telling table in the longer “Promising Road” paper that complements the Zandi essay, giving a build-up for the guaranty fees the authors say would result under their proposal, the current system, and three alternative financing systems. In all cases, the expected annual credit loss on the loans being guaranteed is 4 basis points, which to me seems reasonable and perhaps even high. Fannie’s average realized single-family credit loss rate during the fifteen years I was CFO was less than 4 basis points per year, and its current books of business are notably better than when I was there (more on that in a moment). The “Promising Road” authors put the average single-family guaranty fee under the current system at 70 basis points (Fannie and Freddie’s charged fee actually has been 60 basis points), then show that fee to be “only” 90 basis points under their proposal, compared with fees ranging from 106 to 136 basis points for the other three systems.

But here is where there needs to be a reality check. If you have to charge between 90 and 136 basis points basis to insure against a risk that has an expected cost of 4 basis points, you don’t have a workable business model. You will have priced your product so high that you won’t have enough customers to enable you to attract the amount of equity capital you need to get that business running in the first place. The fact that 90 basis points is lower than 136 is irrelevant; 90 itself is far too high.

Even today’s credit guaranty system—with Fannie and Freddie in conservatorship and charging an average of 60 basis points in guaranty fee (including the 10 basis point payroll tax fee imposed by Congress in 2012)—is operating at the fringe of effectiveness. As several of the authors in the Urban Institute series point out, the “credit box” today is much smaller than it was before the crisis, despite (or probably because of) the much higher average guaranty fees. This is particularly notable with credit scores. In the 2000-2002 period—before underwriting standards began to collapse—37 percent of the loans Fannie purchased or guaranteed had credit scores under 700, which are typical for affordable housing borrowers; in 2013-2015, just 17 percent of Fannie’s loans had sub-700 credit scores.

The main reason for this dramatic difference almost certainly is pricing. In 2014, FHFA published a table that broke down Fannie and Freddie’s modeled and charged guaranty fees in the first quarter of that year by credit score and loan-to-value ratio. The companies’ average “fully priced” guaranty fee for loans with credit scores of 700 or higher was 61 basis points; for loans with sub-700 credit scores that fee was more than double, at 124 basis points. The companies dealt with this disparity primarily by not charging the fully priced fees. To attract at least some sub-700 credit score business, Fannie and Freddie charged only 76 basis points for it, not 124, and to avoid losing higher-quality business they cut those fees, too, from 61 basis points to 57 basis points. As a consequence, their average charged fee was only 60 basis points, 12 basis points less than the fully priced fee of 72 basis points. And even then, the companies still served a much narrower segment of the borrowing public than they had been able to do prior to the crisis.

This situation will not get any better under any of the current popular reform proposals. A credit guarantor operating under a binding capital standard that requires a 72 basis point fee to earn its target return will be much less willing to cut guaranty fees to attract business than Fannie and Freddie have been. That guarantor will face the alternative of trying to entice at least some lower-credit score business at a 124 basis point fee, or cutting this fee and having to make up for it by charging more than 61 basis points for higher-quality business (at the risk of losing it, and driving up the risk on their total book). Whichever the guarantor chooses, it will have an even lower percentage of lower-credit score business than Fannie and Freddie have now, and lower overall business volumes as well.

Given this current reality, mortgage reformers shouldn’t be trying to “fix Fannie and Freddie’s incentive structure” in a vacuum; they should be trying to figure out a way to make the secondary mortgage market finance system work in a post-crisis world.

The key is capital. Many reformers seem to have gotten off track on this in 2013, when they endorsed the Corker-Warner legislation with its capital requirement of 10 percent. Ten percent always was an arbitrary number—and it always was unreasonable and unworkable given the risks in the credit guaranty business—but with that as the starting point, it made the capital issue look too easy. Lowering capital requirements to 4 or 5 percent seemed like a huge concession, and all that needed to be done. It wasn’t, and isn’t. More capital is not better; what’s needed is the right amount of capital: enough so there is only a miniscule chance of triggering the government’s catastrophic risk guaranty, but not so much that the resulting guaranty fees have to be so high that the guarantor cannot produce a sufficiently large and diverse volume of business to attract the capital required to back it, while meeting expectations for breadth of service to affordable housing constituents.

So far, the Urban Institute’s essayists have done part of their task—coming up with ideas for the business structure of the guarantor—but they’ve done it out of context. Next, they should come back with their ideas on capital and pricing: how much capital credit guarantors should have and why that’s the right amount; the specific mechanism they envision for transmitting guaranty fees and mortgage rates consistently, efficiently and affordably to the populations Fannie and Freddie have traditionally served; and, if there is a significant transition from the current system to the envisioned one, how that transition would work in practice. As the authors go through this exercise, the correct structure for the guarantor should become apparent to them: it will be the one that makes the overall system work best for homebuyers and the government alike.

85 thoughts on “Solving the Wrong Problem

    1. I do not. This order by the Perry Capital appeals judges for supplemental briefs from class plaintiffs is at a level of legal esoterica that far exceeds my competence as a lawyer practicing without a license.

      Liked by 2 people

      1. not much there. some judge(s) just want to nail down subject matter jurisdiction and sovereign immunity waiver on the common law claims that the class action plaintiffs brought. re fhfa, well it is not the govt, as fhfa itself argues in fairholme, so no sovereign immunity issue. as to treasury, there should be sov. imm. waiver under APA.

        Liked by 1 person

        1. ruleoflawguy,

          The US Sovereign immunity doctrine was created by SCOTUS based on arcane English common law. Sovereign immunity doctrine is not in US constitution.

          UK abolished Sovereign immunity or crown immunity thru The Crown Proceedings Act 1947. Civil actions against the Crown to be brought in the same way as against any other party.

          Now, can some one petition SCOTUS to review its arcane ruling on US Sovereign immunity doctrine?


  1. Tim,

    Is this a legitimate or valid PC question?

    The “fellow travelers” want to destroy something that is already successful business model and then remake it.

    What does it take to or why not these “fellow travelers” start with their ideas from scratch and work hard to make it successful rather than try to remake something already successful?

    Let FnF run as a pre-conservatorship model and let “fellow travelers” invest and build what ever they want to try.

    Is this a viable option?

    Liked by 1 person

    1. The “fellow travelers” you refer to would never go along with what you’re suggesting. The primary reason the opposition to Fannie and Freddie is so vehement is that the companies WERE successful. If they were released from conservatorship they would be successful again, and whatever the “fellow travelers” came up with to compete with them would not get any traction. For that reason, the strategy of this group is to assert (counterfactually) that Fannie and Freddie are “fatally flawed” and must be replaced. With that as the predicate, the FTs will say that even though what they are offering is less effective and more costly than what Fannie and Freddie did previously, it’s the best that can be had.

      Liked by 3 people

      1. Tim,

        Thanks, Your answers are right on spot.

        It may be good strategy for pro FnF stakeholders to focus on these points and
        explain to all why current FnF models are the best compromise for multitude of stakeholders.

        Indiscriminate changes to this FnF model will upset the balance of best compromise for all these multitude of stakeholders. It will tilt the balance in favor of money lenders at the cost of vulnerable demographics. It may make payday lenders look like great philanthropists.

        “Fellow travelers” are frantically building utopian mortgage financial system on design board, even though they know very well that it may not last even for a fraction of a second in real world. But everlasting damage will be done to many vulnerable stakeholders like in 2008 crisis. This will far worsen the wide gap between haves and have-nots.

        FnF are two enormously important FIs. But FnF are not perfect like any other FIs.
        The best way to describe FnF are : FnF are the best work-in-progress business models evolving with market conditions to better serve multitude of stakeholders.

        Any changes in current FnF business model will upset and destabilize the financial system and also reverse enviable social and economic progress achieved in last many decades even though some of it was wiped out by 2008 crisis. It will cause irreparable damage to cause of most stakeholders.

        (BTW FnF were not the cause for 2008 crisis. In fact FnF were used to recover from it.)

        Liked by 1 person

      2. It sounds like the competition was and is jealous and resentful of a superior business model backed by an implied guarantee, some resentful due to their free market ideology, others wanting to take over the profitable mortgage guarantee business, not realizing the co-operative benefits the GSEs provide to those same competitors.


  2. As someone already noted, your statements are expressed with real numbers, examples and experience and nobody has come out and said you are incorrect and backed that up with the same professional examples or numbers.

    That being the reality it seems to me that you would be considered one of if not the leading expert on the workings of a successful mortgage market operation of the largest scale, a business that seems to be accepted as approximately 20% of the USA economy and a major part of stability or lack thereof in this country to an extent it concerns the entire worlds stability.

    I’m wondering, has either presidential candidate vetted you for a position in their administration? If the question is not appropriate I apologize, I ask not to pry into your private matters but rather in the hope that one or both of the candidates or their staff have the intelligence to have asked the best person possible to assist them in moving forward in this long over due matter.


    1. A professor teaching engineering is different from an CEO running an engineering firm.

      Proving a product on paper is easier than selling the product to real people.

      Replacing a drywall requires more than screws. Sanding paper and painting brush too. How to choose paint to match old color?


      1. Mark2,

        Are you talking about “fellow travelers” ?
        Then there are no arguments.

        Otherwise FYI:
        Tim has probably most experience in mortgage finance than you can think of anybody else. Nobody thinks that Tim is selling his ideas to anybody. Tim is presenting his ideas, it is up to Gov to do what is good for all.

        Liked by 1 person

  3. Tim, there are some Congressmen (maybe 10 out of 535 ?) that keep repeating the slogan ” Public losses and private gains” . I know that the GSE by promoting housing not only mean well being for the American people but also generate billions in taxes and and a huge contribution to GDP and employment , so there is no way that they will cause “public losses” .
    But anyway I want to ask you: do you recall any time in the history of GSE that they caused a recorded real public loss?


    1. No; neither Fannie Mae nor Freddie Mac has ever caused a “public loss.” What they did was to allow the mortgage sector to survive the collapse of the thrift industry in the late 1980s with no discernible negative effects on either the housing market or the economy, for which their “reward” was to be taken over by the government under the pretext of a rescue during the financial crisis.

      I addressed the “public loss and private gain” argument in an earlier comment on this post (on June 9 at 9:20, if you’d like to scroll down to read it).

      Liked by 2 people

    1. I did. I agree with the points made by the author, and made many of the same points in my earlier piece on this site, “Risk Sharing, or Not.” I’d add, though, that the Urban Institute has a number of researchers and staff members, and they hold varying views on the value and role of structured risk-sharing transactions as a method of managing credit risk. So the phrase in the headline– “Urban Institute Says”– isn’t really accurate; the Urban Institute says many things on this topic, and they don’t all concur.


    1. Not at this point. I wrote “The Mortgage Wars” because there were many important facts about the development and unfolding of the mortgage and financial crises that were demonstrably true but not known or well publicized. In the current environment, that’s not as much of a problem: the key facts and realities are known or knowable; it’s just that many choose not to acknowledge them.


  4. Tim & Rule of Law, do you have any thoughts on the latest supplemental filing by FHFA?

    They’re saying that 4623(d) prevents the courts from nullifying the NWS because it in substance seeks to nullify Director 2008 Actions and would interfere with FHFA as a regulator designated by Congress. Since the regulator has full discretion over capital levels via director’s suspension of capital requirements in 2008, it evaluates the capital adequacy by reference to the amount of Treasury’s commitment (untapped amount). 4623(d) prevents the courts from interfering in their methodology/practice of keeping the GSE’s sound.

    To me, this seems like FHFA is attempting to tie the Director’s 2008 actions in suspending capital requirements to the NWS where all capital was taken out to be used immediately for other gov’t purposes. At the same time, Treasury effectively ‘has their back’ in case more capital is needed.

    I wonder if that link between the director’s actions and NWS is a plausible connection or if the judges should treat NWS completely separately from Director’s actions?


    1. In my view this filing is a pure matter of FHFA “running the clock” on this case. The relevance of section 4623(d) of HERA came up during oral argument in the Perry Capital appeal, and was convincingly rebutted by plaintiffs’ counsel in a supplemental filing. In summary, section 4623(d) deals with the supervisory duties and actions of the FHFA Director in his or her capacity as regulator of the companies; plaintiffs in the net worth sweep cases (including this one, filed in the U.S. District Court of the Northern District of Iowa) are challenging the duties and actions of FHFA as conservator of Fannie and Freddie. The former has nothing to do with the latter. FHFA surely knows this, but chose to file this motion anyway.

      Liked by 2 people

      1. Their reasoning that they can’t be challenged by anyone is consistent, but poor. They may feel that half a leg is better than no leg to stand on. Is there such a medical condition as an Omnipotence Complex or are they just having schizophrenic delusions of grandeur?


  5. Good evening Tim. Did you read the article of Professor Epstein ? According to him, the GSE were not obligated by the PSPA to pay dividends in cash, nor “in Kind” but simply defer the payment of dividends as many times as necessary. Also he says that the GSE were allowed by the PSPA to redeem the Senior preferred. I never heard that before. Or am I misunderstanding the article. Do you have an opinion?


    1. I did read the Epstein piece. On your first point, “defer[ring] the payment of dividends” and “payment in kind” are not alternatives; they’re the same thing. If FHFA, acting as conservator of Fannie and Freddie, did not wish to pay a 10 percent annual cash dividend on the amount of the companies’ outstanding senior preferred stock, it could instead have increased the liquidation preference (that is, the amount of senior preferred stock outstanding) at a 12 percent annual rate. That’s “deferring the dividend.” I think it’s a good thing that FHFA did not do that, because it would have made it even more difficult for Fannie and Freddie to ultimately get out from under the mountain of senior preferred stock Treasury and FHFA had piled on top of them.

      Which gets to your second point. Here, Epstein is misreading the Senior Preferred Stock Agreement. Section 3 of the SPSA, which he cites, says the companies “may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock, pro rata, in whole or in part, at any time…” but only “Following termination of the Commitment.” Treasury controls whether the commitment is terminated or not, so unless it allows the companies to pay off their senior preferred stock, they can’t. I think the reason this repayment clause is in the SPSA is not so that Treasury can allow the companies to pay off their senior preferred stock and go back to being shareholder-owned companies–Treasury always has been adamantly against that–it’s in case Treasury wants to put them into receivership (as part of a plan to replace them with some other secondary mortgage market mechanism). Were Treasury to do that, it needs to have a mechanism to get its “Liquidation Preference” first, before creditors and shareholders receive any remaining distributions. The repayment clause in Section 3 of the SPSA gives it that.


      1. Excerpt from :

        “Mr Reid (Treasury) reminded the Board that the government owning the preferred stock with punitive dividend terms provides incentive for the GSE’s to work its issues out as expeditiously as possible.”

        I believe this shows that UST’s stated intent was to get paid back as soon as possible. I personally believe everyone involved from UST should be executed for treason, however, I can only show that the stated intent (actual intent or not) was for the SPSA to be repaid ASAP.


        1. I don’t agree with your analysis (or your opinion of employees of Treasury). I don’t know who “Mr. Reid (Treasury)” was or is, but he was either misinformed or being disingenuous. If your “stated intent [is] to get paid back as soon as possible,” you may wish to make your dividend terms punitive, but you certainly don’t make the indebtedness itself non-repayable, as Treasury did with Fannie and Freddie.


      2. But under HERA the FHFA, as conservator, cannot be controlled or influenced by Treasury or any other arm of government. And if FHFA and Treasury are essentially working together to force the “wind up” of the GSEs, that’s tantamount to a liquidation. Treasury and FHFA can’t have it both ways – force all payments to go to Treasury, in order to choke the GSEs to death (salt the earth – as Judge Ginsburg said) and not treat it as a liquidation with respect for the waterfall and preferences. So the fact is they have effectively liquidated the entities and should have been stopped out at par ($187b), plus accrued and unpaid interest, with the residual value to the junior preferreds and then to the equity (of which the govt owns 79.9%). Instead, the government turned their senior position into the whole shebang – hiding behind cloak of the commitment being in place, while the wind up…


  6. Risk sharing will not work because it goes against a human instinct : “The Flight To Safety”
    They want investors to take the first lost in loans which investors don’t know the criteria of underwriters. LOL Investors will demand very high yields.
    These guys of the promising road are trying to re-invent the wheel, I mean come with something more efficient than FnF .

    Liked by 1 person

    1. Yes, I do have some. First of all, I think it’s an improvement on the first “Promising Road” proposal, mainly because the authors have become less rigid about how their guarantor, the National Mortgage Reinsurance Corp (NMRC) would do risk sharing on the loans that come into it. Specifically, they note that what they call “transaction-based capital” (i.e., risk-sharing derivatives) would be more expensive and perhaps unavailable during times of stress, and allow the NMRC to temporarily hold the credit risk itself in response to that. I think this is an important nod to realism, and I welcome it.

      I still have criticisms and concerns about the new proposal, however, and I’ve passed the most significant ones on to the authors. These include the amount of loss protection they require of the NMRC. In my view, loss protection (or “capital equivalents”) of 8.5 percent is far more than the credit guarantor for the secondary mortgage market should be required to provide. As I write in my current post, more capital isn’t better, because it has a direct impact on the cost of the credit guaranty to the borrower, and, if the guaranty fee gets too high (and I think 91 basis points IS too high), also on the ability of lenders to use cross-subsidization effectively to serve a broader range of borrowers without ballooning risk. I think there is ample scope to develop structures and arguments that could be used to gain consensus around a much lower level of non-catastrophic risk protection that would meet policymakers’ demands for safety and at the same time allow the system to function much more effectively and affordably.

      I also think the authors need to rethink the capital structure in their proposal. I believe that in times of financial stress, it’s not just that transaction-based capital would become more expensive; it likely would not come close to being available on anything like the scale required to keep a $5 trillion market functioning. That would mean the NMRC would have to take LOTS of risk for a substantial period of time, and that exit from this risk position would be difficult (and expensive). If that’s the case, I question whether the way they’ve designed the NMRC’s capital structure is workable. The NMRC’s “first loss capital” comes from risk-sharing mechanisms; its only hard equity capital is 2.5 percent of fixed-dividend securities, that is, preferred stock. (The authors propose to use the NMRC’s retained earnings to build up a Mortgage Insurance Fund, which can only be tapped if total credit losses exceed 6 percent). But in times of stress, structured risk-sharing securities won’t be the NMRC’s “first loss capital”—that role will fall to its fixed-dividend securities, or preferred stock. Preferred stock works in a bank’s capital structure because it’s senior to common, and typically only about 10 percent of tier 1 equity. The NMRC has no common equity. For that reason, I have real doubts about whether there will be a market for perpetual equity securities that pay a 7 percent fixed dividend that is non-cumulative (meaning dividends missed when the NMRC is not profitable are never made up) and have no upside, but can be placed in a first-loss position for a significant period of time during episodes of market stress. If there isn’t, the authors’ proposed capital structure won’t work, and will need to be changed.


      1. Tim,

        Is there a binary decision making process (or flowchart) or criteria you can think of where alternative proposals have any chance of being successful to replace current FnF business model?

        The criteria can be :
        1. viable
        2. durable,
        3. meet public policy goals
        4. regulatory policies
        5. 30 year fixed rate affordable loans
        6. promote social and economic development
        7. burden on Gov/taxpayers, investors, borrowers
        8. mechanisms/systems required to resolve situations like 2008 crisis or 1940 depressions
        9. Provide liquidity to markets
        10. Provide stability to housing and finance markets
        11. Provide investment grade securities for investors and FIs
        12. mechanisms/systems required to implement monetary polices
        13. Impact on global and domestic capital markets and investment sentiments

        Some people are obsessed with reforming FnF (code word for kill FnF) for obvious self interest reasons..

        Is the current problem all are working on is one of
        1. only Reforming (killing) FnF
        2. only fixing FnF
        3. fixing the whole mortgage financial system consisting of all players
        4. fixing regulatory system

        It is well documented that the real problems have been items# 3 and #4.


    1. I’ve done a quick read of this article, and it’s essentially a primer on various types of risk-sharing transactions, both back-end (i.e., done after loans have been acquired by some guarantor or aggregator) and front-end (done before the loan comes in to the guarantor or aggregator). The author occasionally calls certain risk-sharing transactions “successful” or “very successful,” but when he does it’s in reference to the amount of risk that was transferred in a particular deal, rather than an assessment of its terms or potential for replication over time.

      I should be clear that I have no objection to risk-sharing transactions per se; my point in the pieces I’ve written about them is that they need to be evaluated against alternative means of managing the same risks being transferred in these deals. As a generalization, my concerns about back-end deals are their efficiency (they work best in transferring risks that are relatively remote, in which case the firm doing them gives up certain revenues to insure against unlikely, or highly unlikely, risks) and their reliability (they dry up or disappear in bad times, leaving entities that used them in good times with few options other than to hold on to the highest-risk loans themselves). My concern with front-end risk sharing is their cost (which often is not apparent because this form of risk-sharing typically is paid for directly by the borrower, before the loan gets to the guarantor–nonetheless it’s still a cost that needs to be assessed in determining the overall economics of the technique).

      Liked by 2 people

  7. Tim, wondering if I could get your thoughts on this recent article by David Stevens.

    I’m aware he posted a comment on here before and probably monitors this site but is this for real? He says no capital buffer in F and F don’t create a near term financial risk? So it’s ok for them to keep getting bailed out, if need be, until this congress can fix this problem (of which they have had 8 years to do)? I mean this is just incredible and i feel like i am living in a bizarro world with this thinking.



    1. Tim will be kinder and more politic, but DS and the MBA have not been GSE friends for a few years now, despite their rhetoric.

      Actions speak louder than words and MBA’s support for Corker-Warner, later Johnson-Crapo, their letter last week opposing any recapitalization is volumes louder than their “of course we support F&F talk.”

      It’s big bank speak for, “Let’s cripple the GSEs any way we can so we can control the mortagge market and gain their revenues.”

      As with most quandaries, such as this one regarding MBA and bank motives, when in doubt, follow the money.

      Liked by 1 person

      1. It’s hard to disagree with Bill on this one. There are a couple of giveaways in Stevens’ commentary. First, he begins by repeating the now-obligatory refrain of Fannie and Freddie opponents that “recap and release” is on the table only because it is being pushed by “hedge funds” wishing to be rewarded for having bought the companies’ stock on the cheap. This demonization of hedge funds (and by the way, only two of the many plaintiffs in the net worth sweep lawsuits, Pershing Square Capital Management and Perry Capital, actually are hedge funds) has been extremely effective—particularly with Congress—in avoiding any discussion of the merits of recap and release for bringing about the “long-term, viable housing finance system that provides affordable access to credit by qualified borrowers” Stevens says he supports. Which brings me to the second giveaway in his commentary: while urging us not to give in to demands for recap and release (because it will reward hedge funds), but to hold out for “real reform,” Stevens never gets around to telling us what real reform entails. This stance aligns him solidly with those who equate “reform” with “getting rid of Fannie and Freddie” because their goal is not to create a system that benefits homebuyers, but to create a system that benefits themselves.

        Liked by 1 person

        1. Being CEO of mortgage bankers association, how can DS promote lawlessness?

          Are not banks subject to ethical code of conduct that prevents them being member of associations that promote lawlessness?

          Member Banks should investigate all such articles by office bearers of MBA and terminate office bearer’s job with MBA immediately.


      2. DS writes “lack of a capital buffer for these trillion-dollar institutions is not the problem Watt says it is” because TSY PSPA provides credit lines of up to $200 billion.

        1. Then why did FnF were forced to draw from TSY to maintain positive networth in the past?
        2. Then why will FnF be forced to draw from TSY to maintain positive networth in future?

        If this is the argument put forth to continue status quo of conservatorship and NWS, then where was the need for conservatorship and toxic PSPA. FnF had line of credit with Fed/Tsy and also FnF had large AAA loan assets. FnF could have borrowed Fed/Tsy/market or could have sold the loan assets in the market if FnF ever needed cash. In addition FnF never needed Gov bailout.


  8. The essayists have all worked on alternative (non GSE) MBS executions during their illustrious careers. Each has skin in that game. And would be at the front of the line profiteering from taking-on large pieces of GSE platform and IP. The only way they achieve their goal of creating a competitive non-GSE execution is to steal it from FnF shareholders and taxpayers and homebuyers. Cuz they can’t do it otherwise. They tried. And we got the subprime debacle and CDO-squared. js.

    Liked by 1 person

    1. We need debate and discussion. I’m concerned about higher rate borrowers would pay and impact on GDP among others. I don’t know if any bank will be willing to lend money to the people buying houses in poor neighborhood.


      1. Perhaps. There’re OTHERS too. Not as vocal. Then again. Mr. Howard has reputation and integrity on the line. And money likely. He OWNS his book. As do ALL who are shareholders. Those who once worked at the GSEs know the score. We know the kind of book FnF underwrote and purchased and securitized. We KNOW what was done to “save” TBTF cronies at the cost of the GSEs. Many decided it was prudent to flip sides. They followed the money. And power structure. One sees them all over DC these days. At places like Urban Institute. Same folks who led the charge toward riskier and riskier bets. You know who they are. They continue to carry the bags for gov’t malfeasance against shareholders. One may directly co-relate the unprecedented transfer of wealth to the 1% and US economic disintegration to THIS fraud and ongoing theft it has perpetrated and enabled.


  9. Hi Tim
    Since “The Promising Road” was published you have been pointing out the flaws of it and almost all other essays. All together 19 proposals. You also have warned about the “real risk” of sharing risk.
    You have made a constructive criticism and you have explained carefully the fundamentals of your points of view. In other words you have justified all of what you said with numbers and statistics.
    My question is this: did any one of these authors, whose proposals you analyzed, get back to you privately or publicly to defend their positions and /or tell you why you are wrong?


    1. Sue: I have had a couple of the other authors contact me, although it was more to explain their own proposals than to discuss mine. And this past week I met with the principal authors of the “Promising Road” proposal to try to understand it better, and to begin a dialogue in areas where I think it can be improved.

      One point worth bearing in mind is that most of the other authors of essays for the Urban Institute series made proposals that require legislation; mine, I believe, could be done administratively. The authors (and others) with whom I’ve spoken say that key members of Congress have “absolute” demands of what reform legislation must contain, which they feel they must incorporate in order to have their proposal taken seriously. I’m taking somewhat of a longer view on this, recognizing that the current Congress is too polarized to pass anything, and that by the time the legislative environment improves (assuming it does) it might be possible to convince those members that what they now insist are essential elements of mortgage reform really are not, and in fact will prevent the legislation they think they want from achieving the goals they profess to wish to achieve. And in the meantime–or in the alternative–I think we should keep trying to get the current administration interested in focusing on this issue, as well as begin laying the groundwork for progress with top policymakers in whichever will be the next administration.

      Liked by 1 person

      1. Thank you for your answer. When I said in the last part of my question ” why you are wrong”, I meant whether they said that you were wrong about their proposal, not about yours. I believe, after reading it several times, that your proposal has nothing wrong and the fact that so far nobody criticized it publicly, to me, means that they do not have ammunition to refute your position.
        I encourage you to put together the comparison chart. For example the first row can be:

        Howard’s , Promising, Millstein, Pollock, Mr X, Mr X1 , and so on……

        Without legislation YES NO NO NO NO NO
        Fully Tested YES NO NO NO NO NO
        Based on Facts YES NO NO NO NO NO
        Familiar to Markets YES NO NO NO NO NO
        Realistic Cap Funding YES NO NO NO NO NO
        Fair to Small Lenders YES NO NO NO NO NO

        And so on. This is the kind of chart that we need because there are dishonest guys in this business that are trying to put the things in “grey” rather than black and white.


        1. When I clicked Post Comment all the spaces compressed and right now it doesn’t look like a chart .
          Please arrange it if you can edit . There are six columns with the name of authors and six rows with the advantages. I am sure that you can put a lot more advantages that your proposal have and the others lack. Mainly when it comes to benefit for the home buyers.


          1. Unfortunately, I’m not the best person to be doing anything but the easiest types of edits on this website, since I at best have entry-level technical skills. But I get the point of the table you’re talking about, and I think others will as well.

            The main criticism I’ve heard about my proposal is that even if Fannie and Freddie were released from conservatorship, they would be declared SIFIs (“Significantly Important Financial Institutions”) and forced to hold 5 percent capital. Were that to be the case, their credit guaranty business would have to charge guaranty fees so high that the companies would not be able to play their historical role of channelling affordable financing from the capital markets to homebuyers. I still have more work to do on this issue, but my research into it so far suggests that the Federal Reserve has substantial latitude as to how it determines the appropriate capitalization requirements for nonbank SIFIs (and I agree that Fannie and Freddie, in my recommendation, would be SIFIs), which does not rule out the sort of stress-test capitalization scheme I describe in my proposal.

            To your point about the table, it may make sense for someone to do something like that, but I don’t think I’m the right one to do it. I view my role as putting ideas into the mix, and discussing and defending them as vigorously as I can, but ultimately letting others–including policymakers– decide which have the most merit. This may just be my opinion, but I don’t think a self-serving comparison table would be of much help to me in that effort, and may have the opposite effect.


    1. I agree. I’ve been out for most of the day, but just finished answering your earlier question on this issue, below. I’ll be interested in your view as to whether this was a mistake, or a deliberate misrepresentation.


      1. when you are the US treasury and you make a misrepresentation in your field of expertise to a federal appeals court, it doesnt matter what the cause/reason for the misrepresentation is, in my view. Treasury should be held accountable.

        now i know that a DOJ lawyer signed the filing, but the party in interest is the US Treasury, as defendant. the buck stops with Treasury.

        as an attorney representing a client before a federal appeals court, even if the attorney is to blame, the shame rests with the client


  10. tim

    i wanted to alert you to the treasury’s reply to perry’s second motion for judicial notice.

    treasury states that it derived a 7.5% annual return on the net worth sweep. for some inexplicable reason, treasury doesn’t seem to assign any value to the preference of the preferred stock itself.

    just a quick and dirty calculation, that ignores that treasury reaped huge dividends early on in the investment. $245MM divided by 188MM=131% total return, divided by 7.75 years= 17% simple annual return.

    the 7.5% annual return cited by treasury is impossible to justify. why would you assume that the principal is worthless where fnma generate $11B per annum available for future dividends?

    indeed, the ability to reap all profits from fnma as it generates >$10B/annum, given current 10 year treasury rates at <2%, would imply that the preferred is worth at least par, and likely a premium to $188M

    i look forward to your reaction to this travesty of a filing, which only brings shame to the governmental agency in charge of federal finance.

    Liked by 1 person

    1. And that two dedicated, albeit indentured, work forces were maintaining a crucial systemic housing finance system as part of their “sentence” to the benefit of the American public and the national and international mortgages securities investment markets.

      Here, monetize that Jack Lew!!


    2. Rule of Law or Tim,
      I’m curious about your thoughts on the gov’t reply indicating that the newly released documents are taken out of context and should therefore be ignored as they distort the true narrative. Is this a workable argument for the judges given that the gov’t won’t release the rest of the documents that would fill their ‘out of context’ claim?


      1. I’ll give you my reaction. It’s not a workable strategy, for the reason you mention. The government made up a story about the net worth sweep in the case heard by Judge Lamberth, which it asserted was true. It has done everything in its power to withhold 11,000 documents even from plaintiffs’ counsel (in a related case), and to cover another 100,000 or so with a protective order. Now a few of those documents have been released by the other judge, and they do not conform to the story the government told Judge Lamberth. I don’t know how the government can claim with a straight face that these released documents are “taken out of context” when it is the entity that is refusing to let that full context be known.

        Liked by 1 person

      2. i think judges generally dont give full weight to any one side of a factual presentation, or narrative, especially when it comes out in drips and drabs. i believe that unless two judges come to conclusion that NWS cannot be a conservator act, inasmuch as it can never result in safe and sound, they will remand for full fact finding, because of this inclination to have a full examination of facts


    3. I read that filing this morning, and my immediate reaction was that the 7.5% return number was not a deliberate misrepresentation but instead a dumb mistake made by somebody on the defense team; they said, “At the end of 2011 Fannie and Freddie had $187 billion in senior preferred stock outstanding, and by the end of last year the companies had paid Treasury $245 billion, so that’s a 7.5% (simple– it’s 7.0% compound) annual return. Yes– if it includes repayment of principal. But as you point out, it doesn’t; Treasury retains its full liquidation preference of $187 billion. That makes the calculation dramatically wrong (as I’ll discuss in a minute).

      I may be wrong on this, but the reason I think this was a mistake is that I can’t imagine any rational reason why defense counsel would attempt to mislead the court on a return calculation in a suit against against a group of investment funds, who will be all over this. Making deliberately false statements to the court is never a winning legal strategy. I don’t know the rules that govern filings by the parties in an appeals process, but I have to think some avenue exists through which plaintiffs’ counsel can bring this gross error (or misrepresentation) to the court’s attention. If there is they will, and the government’s credibility and integrity will take a further hit.

      What in fact occurred is that Fannie and Freddie were forced to draw $151 billion to cover non-cash losses (created by FHFA, at the direction of Treasury); to date the companies have paid $245 million to Treasury, but they still owe $187 billion in liquidation preference (the $187 billion being the $151 Fannie and Freddie had to draw to cover losses, plus another $36 billion in draws made necessary by dividends owed on previous draws). I haven’t done the cash flows on that, but the return to Treasury is a large multiple of 7.5% per annum, and the amount Treasury earns will continue to grow, because unless (or more likely until) the net worth sweep is reversed, the companies can’t repay the principal and will continue to have to turn over all of their net income to Treasury in perpetuity.

      Liked by 1 person

        1. I get closer to 23 percent. You didn’t specify how you came up with your figures, but my method is relatively simple. Through the end of 2012, Fannie and Freddie had drawn $187.4 billion from Treasury, and paid a total of $50.2 billion in senior preferred stock dividends. Had they continued paying their 10 percent dividends on their $187.4 billion in outstanding senior preferred stock through December 31, 2015, they would have paid another $56.2 billion, for a total of $106.4 billion. Through that same date the companies in fact paid Treasury $242.2 billion. This is a slight oversimplification (because it doesn’t properly align time values, although it should be reasonably close), but if payments of $106.4 billion are a 10 percent return to Treasury, payments of $242.2 constitute a 22.8 percent return, or fairly close to it.


  11. Why is everybody solving the wrong problem?
    My father used to say ” if the only tool that you have is a hammer, you see all the problems like a nail” There are no tools to solve the right problem (capital) other than restore Fannie and Freddie.
    That is why nobody is addressing the problem. But this peach is so ripe that it will fall by itself.

    Liked by 2 people

    1. In FnF case it very clear that it is not the problem of tools or techniques.
      Probably it is WS desire to covet the profitable FnF business supported by political ideology.


  12. “Policymakers need to continue to focus on the paramount objective of fixing the structural flaws that led to the breakdown of the housing finance system — the only outcome that will protect taxpayers, preserve access to credit, and ensure a stable housing finance system,” the letter said. “Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners.””
    This is part of the letter sent by Anerican Bankers Assiciation and other four groups opposing the recap of FNF by FHFA.
    Tim , the question is , is there really a stuctural flaw in the GSE model? Is it not the greed of wall st banker issuing ninja ( no income, no jobs, no assets )loans, robot signing , sub prime that caused the 2008 housing meltdown? Had greedy bank loans not done this then private label MBS wi continue and compete with FNF MBS. I know you have said that there is a built in advantage for FNF, but that is necessary so minorities, and the rest of the middle class will have access to housing. My take if we just continue ( release and recap) what is now reformed FNF and no more ninja and robo signing then housing will continue to flourish


    1. In answer to your question, “is there really a structural flaw in the [pre-crisis] GSE model,” I would say yes; it was the implicit government guaranty. That’s why almost all reformers now support some form of explicit government guaranty (although they do so at the risk of alienating Republicans in Congress in their quest for legislative change).

      But that’s different from the current objection to Fannie and Freddie, which is their allegedly flawed incentive structure– popularly labelled “private gains and public losses.” This is widely viewed as being true, but it’s so far off base as to defy rational explanation.

      Remember, this criticism of Fannie and Freddie is a relative one: Fannie and Freddie have an unfair advantage over other providers of mortgage finance because of their “special relationship” with the government, which allows them to make huge profits in good times and have the government take the losses in bad times. What just happened during and after the crisis? The loans Fannie and Freddie owned or guaranteed had delinquency rates and subsequent credit losses one-third the size of the loans financed by commercial banks, but Fannie and Freddie’s shareholders were virtually wiped out, their management was replaced, and the companies effectively were nationalized. Banks were extended unlimited amounts of repayable credit by the Fed and Treasury until the market values of their bad loans could recover from their depressed market prices, while the Federal Reserve dropped short-term interest rates to zero, lowering the banks’ cost of deposits (along with the interest income received by millions of savers) to help them return to profitability. So, which set of institutions are more deserving of the label “private gains and public losses,” or having questions raised about their incentive structure?

      I also can give you a personal perspective. I had a great deal of responsibility for the risk profile of Fannie Mae for over fifteen years. I can attest that neither I nor any of my senior management team felt any of the perverse incentives that supposedly abound at Fannie and Freddie. To the contrary. We knew we had a highly valuable franchise granted to us by Congress, and to preserve it–both so that we could continue to carry out our mission objectives (which almost everyone I worked with was committed to) and earn competitive returns for our shareholders– we had to manage our risks with a high degree of conservatism, so there was virtually no chance we could lose that franchise through poor financial performance. We felt a similar constraint on the balance between our shareholder objectives and our affordable housing mission. (Jim Millstein criticized this aspect of Fannie’s structure, but I don’t agree with him on this.) Fannie Mae was a creature of Congress; it made us shareholder-owned because it thought that structure would be most effective in helping us produce more and lower-cost financing for the homebuyers we were chartered to serve. We knew that if we ever skewed our objectives too far in the direction of shareholders, and away from the mission, Congress would amend our charter. I believe Fannie’s pre-crisis performance– both financially and on its affordable housing record–supports my view of Fannie’s incentive structure on both points.

      Liked by 2 people

      1. “In answer to your question, “is there really a structural flaw in the [pre-crisis] GSE model,” I would say yes; it was the implicit government guaranty.”

        Legally or technically speaking the definition of “implicit government guaranty” does not meet any accepted standards in case of FnF. However anyone expects Gov to step in to help the companies that were created by Gov to further its public policy goals.

        If anyone looks at how other financial establishments were given favored VIP treatments as mentioned in your very well written response ($16Trillion short term subsidized loans to other financial establishment as compared to $140Billion@10% investment+80%equity to FnF), it is the other financial establishments that had almost explicit guarantees with no public policy mandates.

        However it is beyond any doubts that even one considers “implicit government guaranty” as true, FnF are far superior business models compared to any other models and benefits far outweigh costs.

        Even while agreeing with FnF detractors, you prove your point beyond any doubts.

        Liked by 1 person

  13. thanks tim for this.

    cutting through the polemics, reforming GSEs is an art balancing burdens and risk. too much capital, too high a g-fee, insufficient demand. too low a g-fee, insufficient return to entice capital. how congress can purport to add value to this management issue is beyond me.

    Liked by 2 people

  14. John Carney is at it again.

    Housing and Banking Groups Announce Opposition to Fannie and Freddie Recap Plans

    The battle over the future of housing finance is heating up.

    Five major housing and finance trade groups on Wednesday sent a letter to Federal Housing Finance Agency Director Melvin Watt, urging him to reject recent calls for his agency to take actions to allow Fannie Mae and Freddie Mac to build capital. The FHFA is the regulator of Fannie and Freddie.

    “Our organizations are writing to share our view that comprehensive reform to the secondary housing finance system must come through Congress,” said the letter signed by the American Bankers Association, the National Association of Realtors, the National Association of Home Builders, the Mortgage Bankers Association and the National Housing Conference.

    Early this year, a letter from the Community Home Lenders Association, the Community Mortgage Lenders of America, and the Independent Community Bankers of America urged Mr. Watt to suspend the quarterly dividends both companies pay to Treasury during profitable quarters and allow them to build capital.

    “We are writing to you in your capacity as Fannie Mae and Freddie Mac’s conservator and safety and soundness regulator, to urge suspension of the payment of dividends on the senior preferred stock held by the U.S. Treasury,” those groups wrote in the the earlier letter.

    That puts those groups at odds with the five that signed Wednesday’s letter.

    Under the terms of their bailout agreements, Fannie and Freddie send nearly all their profits to Treasury following profitable quarters but owe nothing in quarters when they have a loss. Those agreements also require the companies to shrink their capital buffers until they reach zero by 2018.

    In a speech earlier this year, Mr. Watt said the reduced capital at Fannie and Freddie was a “serious risk.” Once their capital buffers go to zero, they would require additional funds from Treasury even in the event of a small loss.

    Congressman Mick Mulvaney (R., S.C.) introduced a bill in April that would end the dividends and release them from government control when Fannie’s and freddie’s capital reached 2.5% of assets. Several conservative groups signed a letter of support for the bill, despite some having misgivings about a provision of the bill that banned the government from charging Fannie and Freddie for the ongoing promise to provide hundreds of billions of dollars of additional support.

    So-called “comprehensive reform” legislation that would have replaced Fannie Mae and Freddie Mac with a new system of private capital backed by government support stalled in 2014.

    Wedensday’s letter is a call to renew efforts at comprehensive reform.

    “Policymakers need to continue to focus on the paramount objective of fixing the structural flaws that led to the breakdown of the housing finance system — the only outcome that will protect taxpayers, preserve access to credit, and ensure a stable housing finance system,” the letter said. “Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners.”

    Click to access GSEREFORMLETTER6816.pdf


  15. Please educate me if you could Tim…

    Why are these “essays” being proposed if the majority of them still want a government backed guarantee?
    Seems pointless and an expensive way to just get rid of Fannie and Freddie.


    1. Lisa: The essays were solicited by the Urban Institute, with the goal of getting a broad range of ideas on mortgage reform from, as the sponsors labeled them, “thoughtful people” with an interest and expertise in mortgage finance. I thought that was a good idea, and was happy to participate. As to the second half of your inquiry, which I’ll paraphrase– what’s the point of replacing Fannie and Freddie if what you replace them with has a government guaranty?–that’s an excellent question, and one to which I don’t really have an answer. But I can speculate about it. Immediately after the mortgage crisis, opponents of Fannie and Freddie labeled them as the primary cause. That claim, which was false, was repeated endlessly in the media and became widely accepted. In that environment, the term “mortgage reform” came to be equated with “replacing Fannie and Freddie.” Even though more people now know that Fannie and Freddie were NOT the causes of the crisis– to the contrary, they were the far and away the most disciplined sources of mortgage financing leading up to that crisis– the vast majority of those involved in reform efforts, who I think should know better, still believe you’re not really reforming the system if you don’t get rid of Fannie and Freddie. This disconnect between the real and the perceived problems in the mortgage finance system is why I called my post “Solving the Wrong Problem.” The real problem isn’t that Fannie and Freddie have to be replaced; it’s that we’re not able to use the secondary mortgage market to get affordable housing finance to people who need it. We need to figure out how to fix that, and that should be our priority.

      Liked by 1 person

  16. @anonymous
    As a real estate broker for over 10 years in a large, active and diverse market I can say without question 20% down would not work well, unless you are wealthy and want to either manage properties yourself or pay someone to do it for you. Requiring 20% down would crash the housing market in cities with median home prices above $300k. That is a lot of cities.


  17. Many people care only about only one goal: get rid of the government’s backup. Other issues are not ignored: how many people will not get a home loan, how much higher rate the “good” borrowers would pay, how much impact on GDP, etc,

    BTW, how many people still care about federal deficit nowadays?


  18. The title of this article is most appropriate.

    Thanks for taking the initiatives and efforts to analyze the different proposals and your keen interest in serving the public interest causes. Your articles stand out as most appropriate with correct understanding of longstanding public policy goals since 1940s.

    The reasons why many of the other authors are “Solving the Wrong Problems”, is for obvious ideological or self interest reasons or lack of in-depth perspectives. These authors start with ideology based public policy goals, then come up with solutions to dismantle a GSE system that was created as part of public policy goals, to tackle many complex problems – one of which is how to finance social and economic development with least burden on taxpayers. These solutions never discuss mechanisms/systems required to resolve situations like 2008 crisis or 1940 depressions. These authors are trying to fix public policy goals rather than housing finance problem. In a sense these authors are acting more like political advisers rather than technocrats.

    But in your case, you are right on track starting with right qualitative and quantitative objectives with no changes to longstanding public policy goals.


  19. Thanks for the rational and professional write! Your efforts are much appreciated. I see too much emphasis by most of the contributors to fix something that is broken based on past lies the GSE’s were the blame though they do not admit that now many are the same actors working off of this false pretense. We all know what works, worked for years, working now, and only needs to go back to being private companies who can make the necessary changes like all the other financial institutions that survived the crisis.

    Evidence is proving what needs to be fixed is the government who politic this 20% of the economy near election times to keep their greedy legacies going and willing to break their own laws to do it. This has been going on since the housing bubble started in the Clinton years to present. It is the one issue this country faces that is already reformed enough out of default. Government needs to now start tackling much bigger harder to fix issues and put aside their petty politics. It is their dysfunction the country is in trouble now on so many other fronts.

    Liked by 1 person

  20. It is clear that the so called “experts” (actually paid lobbyists ) have a lot of home work to do yet.
    I would love to see a public debate between them and Tim Howard.


  21. Why not just go old school and require 20% or more down. No credit score or documents required. The 20% down worked fine in the past and should be the standard for the future.


    1. I don’t believe you need to limit borrowers to 20 percent down payments to have a safe and sound mortgage finance system, and doing so would significantly restrict access for lower-income homebuyers. One of the (many) reasons I favor an entity-based guarantor system, like Fannie and Freddie, over structured finance alternatives is that if you have an entity involved with skin in the game, people at that entity have an incentive to use data and analytics to determine how to combine product, borrower and property features on a loan that, when properly capitalized and priced, make it a good investment for the company at the same time as it is helping someone afford to buy (and stay in) a home.

      Liked by 2 people

      1. Tim,
        Can capital requirements be tied to weighted quality of loans?
        Does your proposal take care of capital requirements be tied to quality of loans?


        1. My proposal has both a risk-based capital standard and a minimum level of capital (2 percent). The risk-based standard would be applied by loan product and “risk bucket,” at a minimum combinations of credit scores and loan-to-value ratios, but preferably with still finer cuts, provided the number of buckets remains manageable. Each risk bucket would have its own associated capital requirement, which would be determined by using historical data to estimate the capital required to survive a defined level of stress loss, taking into account the guaranty fee income that would be generated over the stress period.


          1. Tim,
            Thanks, This is perfect. This is adaptive and continuous risk management.
            Risk management based on static models (fixed percentages like 10%) become outdated very quickly.


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