The FHFA Letters Decoded

On July 7, a bipartisan group of six (out of twenty-two) members of the Senate Banking Committee wrote a letter to Federal Housing Finance Agency (FHFA) Director Mel Watt, encouraging him to “avoid taking any steps that may facilitate the release of the government sponsored enterprises, Fannie Mae and Freddie Mac, out of conservatorship without comprehensive reform.” The letter writers counseled Watt that “changes…to the existing structure…should come from housing reform legislation, not unilateral action by this or any future administration.”

The July 7 letter was the third policy-oriented communication Watt had received in less than a month. On June 8, five Washington D.C. trade associations—the American Bankers Association (ABA), the Mortgage Bankers Association (MBA), the National Association of Homebuilders (NAHB), the National Association of Realtors® (NAR) and the National Housing Conference (NHC)—wrote “to share our view that comprehensive reform to the secondary housing finance system must come through Congress.” Sandwiched in between this and the July 7 letter was one sent to Watt on June 22 by a group of 25 housing and community organizations—including the ABA, MBA, NAHB, NAR and NHC—requesting FHFA to direct Fannie and Freddie to lower their guaranty fees through the “reduction or elimination of loan-level price adjustments (LLPAs) charged by [the companies]”.

The pair of letters signed by the ABA, the NHC and the three lobbying powerhouses for the housing industry—the NAR, MBA and NAHB—had a notable inconsistency. On June 8 these organizations told Watt that, “policymakers and stakeholders need to continue to work together on important efforts to advance housing finance reform through a legislative solution.” Yet two weeks later the same organizations joined 20 others in urging Watt to unilaterally require Fannie and Freddie to lower their guaranty fees, without Congressional action on reform. The letter from the six Banking Committee senators (Republicans Corker, Crapo and Heller, and Democrats Warner, Tester and Heitkamp) also was curious; it went beyond the scope of the June 8 trade group letter not just to ask Watt to leave comprehensive mortgage reform to Congress but further to request him to take no steps that might hurt prospects for reform legislation. Conspicuously absent from the letter, however, was any hint of what steps the authors were concerned Watt might be considering, or how or why those steps might make it harder for Congress to act.

In my view there is a simple explanation for both the sudden flurry and perplexing content of this correspondence with FHFA. Recent developments in the court cases have led participants in the reform debate to realize that a status quo they had taken for granted and hoped would continue indefinitely—Treasury’s dominance of FHFA, and FHFA’s consequent management of Fannie and Freddie not to conserve their assets but to prepare them ultimately to be wound down—may not be sustainable, and the letter writers believe it is prudent to begin to try to influence a “potentially independent” Director to take actions that still would advance their interests.

An objective analysis of the transcript and motions in the appeal of the Perry Capital case does not bode well for the possibility that the appellate panel will uphold Judge Lamberth’s lower court ruling that the law permits FHFA and Treasury to do as they please with Fannie and Freddie in conservatorship, irrespective of the language in HERA. And if FHFA and Treasury do not prevail on the law, the facts will not support them either, as evidenced by the documents produced in discovery for the Federal Court of Claims cases and released from their protective orders by Judge Sweeney.

FHFA thus finds itself in a very awkward position. The stance its counsel has taken, and continues to take, in the court cases—that FHFA and Treasury are right on the law and right on the facts—constrains its ability to act independently of Treasury at the moment. Yet the Director and officials of FHFA must know that the odds of their legal stance prevailing are not high. They also know there is no ambiguity at all in the language governing FHFA’s independence as a conservator. Section 1145 (a) of HERA amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to read: “AGENCY NOT SUBJECT TO ANY OTHER FEDERAL AGENCY. —When acting as conservator or receiver, the Agency shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency.” HERA does not prohibit Treasury from telling FHFA what to do, but it does prohibit FHFA from doing it.

When viewed as being sent to, and read by, an FHFA Director aware that at some point in the not too distant future he may have to act independently of Treasury and in accordance with his duties and responsibilities as conservator of Fannie and Freddie, the purpose and content of the recent letters become more understandable. The sections below discuss the main requests made of the Director in that context.

Allow Congress to determine the fate of Fannie and Freddie. Taken at face value, this request by the six members of the Senate Banking Committee in their July 7 letter and the five large trade groups (ABA, MBA, NAHB, NAR and NHC) in their June 8 letter is easy for FHFA to accommodate, by not opposing Congressional efforts at reform. But that’s not what the authors really are asking; they want FHFA to make legislative action easier by managing Fannie and Freddie in ways that make the companies less competitive, or (as discussed shortly) by keeping their guaranty fees artificially high. There is one sensible and straightforward way for Watt to react to this entreaty: by allowing Fannie and Freddie to manage themselves as efficiently and effectively as they can, and if Congress can come up with a secondary market mechanism that works better for all stakeholders, that should be the new system.

 Avoid taking steps that hurt prospects for reform. There can be little doubt that the primary unnamed “step” the Senate Banking Committee authors are worried FHFA might take is allowing, or requiring, Fannie and Freddie to build up capital buffers large enough to accommodate the quarterly volatility in their GAAP net income that results from their compulsory use of market value accounting for derivatives and other items on their balance sheets. The Third Amendment to the Senior Preferred Stock Agreement states that Treasury shall receive dividends under the net worth sweep “ratably, when, as and if declared by the Board of Directors, in its sole discretion….” Acting as a true conservator, FHFA would have little reason to decline to allow the boards of Fannie and Freddie to withhold net worth sweep payments to Treasury until they can accumulate capital cushions sufficient to absorb the amount of quarterly net income volatility each expects to experience.

It’s a poorly kept secret that Treasury deliberately engineered the terms of the net worth sweep to reduce the companies’ capital buffers to zero at the end of 2017, in order to make it likely that at some point quarterly accounting volatility at one or both will force a draw from Treasury, and that this in turn would allow Fannie and Freddie’s critics to orchestrate cries for Congressional action to legislate their “failed business model” out of existence. Yet because it is difficult for the Senate letter writers to come out and say they oppose allowing the companies to have a capital buffer—to most people that would be an entirely reasonable thing to permit—they are left with having to make vague references to “steps” harmful to future reform efforts. The disadvantage of vagueness, however, is that it is easy to ignore, and in this instance FHFA should do precisely that.

 Lower Fannie and Freddie’s guaranty fees. To me, this request of FHFA made by the same five large advocacy groups that earlier asked it to let Congress determine the course of housing reform epitomizes the current muddled state of the reform debate. The only plausible explanation for these contradictory pleadings is that the five groups equate “mortgage reform” with “eliminating Fannie and Freddie”—not with capital requirements, credit guaranty mechanisms, or the consequences of both for guaranty fees and affordability—and further that they don’t recognize, or have elected to ignore, that choices made on mortgage reform will be the overwhelmingly dominant factors that determine how guaranty fees are set in the future (whether by Fannie and Freddie or whatever mechanism is picked to replace them).

The basic premise of the letter on guaranty fees is one I agree with: that “the framework used to set [guaranty] fees and LLPAs should be transparent,” and “provide access to credit for a broad range of borrowers, and promote a ‘liquid and efficient housing market,’ while maintaining the safety and solvency of [Fannie and Freddie].” And while the letter writers’ focus on the LLPAs is misplaced—what’s important is the total guaranty fee, irrespective of whether it’s expressed as an annual amount or an up-front premium—they are correct that FHFA has given little justification for why Fannie and Freddie’s guaranty fees are set where they are.

In their letter, the authors note that the companies’ average charged fee on new business rose “from 22 basis points to 58 basis points between 2009 and 2014, while at the same time credit quality increased and regulations took effect that limits [sic] the risk to [Fannie and Freddie].” They might have added that the majority of the fee increases occurred in 2012 in two 10-basis point increments, both driven by external considerations. The first, in April 2012, was required to implement the Temporary Payroll Tax Cut Continuation Act passed by Congress in 2011 (with proceeds going to Treasury). Then, quoting FHFA, “Later in 2012, FHFA again directed the Enterprises to increase their guarantee fees by 10 basis points on average. This increase was intended to encourage more private sector participation, reduce the Enterprises’ market share, and more fully compensate taxpayers for bearing mortgage credit risk.” FHFA’s acting Director, Ed DeMarco, had been explicit about his intention to use guaranty fee increases to “crowd in” private capital, and by the time Watt became FHFA Director in the first quarter of 2014 Fannie’s average charged fee on new business was 63 basis points and Freddie’s was 56 basis points (both had been around 28 basis points in 2011).

Guaranty fees have changed little in the past two and a half years. Keeping fees at levels designed to make Fannie and Freddie less competitive with other sources of funding—in the hope this might make it easier for Congress to come up with a way to replace the companies—may be consistent with Treasury’s objectives, but it’s not appropriate or defensible behavior for an independent conservator that also is a regulator. The 25 housing and community organizations are right to ask FHFA for more transparency on how Fannie and Freddie’s guaranty fees are set. FHFA should comply with their request, laying out in specific and understandable detail the methodologies the companies use to determine guaranty fees by risk category—including stress levels of loss and other relevant parameters and assumptions—for examination and comment by key stakeholders and policymakers.

These same organizations and others, however, also need to be much more responsible and informed in their public and private statements on housing finance reform. What are their true priorities? Are they as simple as getting rid of Fannie and Freddie, or is it more important to them to achieve consensus on a secondary market financing mechanism that makes the greatest amount of fixed-rate mortgages available to the widest variety of borrowers at the lowest possible cost? What if the former conflicts with the latter? Stakeholders must educate themselves about the real choices in mortgage reform, and not fall victim to the temptation to endorse courses of action advanced for undisclosed reasons by others, without fully understanding their implications or consequences.

42 thoughts on “The FHFA Letters Decoded

  1. Freddie Mac declaring $1.1 B comprehensive earnings and net income of $1B should awaken all haters of GSE that it is the only viable secondary MBS player and it is not a failed business model.

    Tim I know a lot of shareholders including yourself do not agree with the government exercising 80 percent warrant. What if the government exercises the warrants, amends the PSPA, returns all the excess money that were swept outside of the $187 B, release the twins from conservatorship, run it as it is reformed, and government sell by tranches to private investors until it has until it has only 15 percent shares, run as majority privately held company, remove implied government support and dividend of 15 percent shares goes to affordable housing.

    Such scheme with different details was presented by Ackman, sometime 2 or 3 years ago in a SONA conference.
    What is your take on this ?

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    1. As you’ve already noted, I don’t support Treasury’s exercise of the warrants to give itself 79.9% of Fannie’s and Freddie’s common stock, for two reasons. First, I believe Treasury’s granting itself the warrants in 2008 can and will be challenged successfully in court, and second, warrant exercise would cause a fourfold increase in shares outstanding at both companies, making it extremely difficult for them to raise through still more equity issues the significant amount of capital they will need to achieve adequate capitalization as newly private entities.

      If Treasury did exercise the warrants and sell (in blocks over time) the newly issued shares, it would eventually lead to private ownership of Fannie and Freddie–with Treasury getting cash from the proceeds of the sales. But I’m not sure what would motivate Treasury to give 15 percent of its shares to an affordable housing fund. As to returning all the excess money paid to it because of the sweep, I believe Treasury will be forced to do that by the courts, and that it will have no alternative but to repay these monies by retroactively paying down the balances of Fannie and Freddie senior preferred stock. With little or no remaining senior preferred outstanding (paying an annual 10 percent after-tax dividend), both companies would be able to retain the bulk if not all of their earnings, and thus be viable as stand-alone companies. At that point, FHFA could free them from conservatorship, whether Treasury agreed with that decision or not.

      Liked by 5 people

        1. Jason: It IS the same Fairholme, but I do not know why they would have sold that amount of Fannie Mae common stock in the second quarter (if indeed they did–I am not familiar with the source publication). I do not speak or communicate with the people at Fairholme about the specifics of their holdings in Fannie or Freddie common or preferred stock.

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  2. Tim–With GSE earnings coming up this week, what’s your opinion on any F&F possible losses and what the reaction should be to same??

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    1. Tim,
      As additional question, can you anticipate the reasons for the losses if the twins post loss for this reporting period? Would continuous losses be a reason for FHFA to put FNF into receivership.If this happens what would become of the $5T MBS held by the GSE? Will that be in the Federal debt?

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      1. In response to the first question, my expectation is that neither Freddie Mac nor Fannie Mae will report a second quarter loss large enough to require a draw from Treasury.

        I have three reasons for thinking this. The first two have to do with what would be the likely cause of any losses at the two companies: mark-to-market losses in the floating-to-fixed interest rate swaps both use to manage their interest rate risk. When interest rates fall, the market values of these “pay-fixed” swaps decline as well. (On an economic basis, the swap losses are largely offset by increases in the value of fixed-rate mortgages that are funded by the swaps; the mortgages are not marked to market, however, so these gains are not reflected immediately– they show up over time as higher net interest income from the portfolio business.) In the first quarter of this year, 10-year Treasury rates fell by 48 basis points–from 2.27% to 1.79%–between December 31, 2015 and March 31, 2016, and as a consequence Fannie booked a pre-tax accounting loss of $2.7 billion on its derivative book and Freddie booked a pre-tax derivative loss of $2.1 billion. Between March 31 and June 30 of this year 10-year Treasuries fell another 30 basis points, to 1.49%. Based solely on the proportional difference in the magnitude of the second quarter versus the first quarter decline, one would expect Fannie to book about a $1.7 billion derivatives loss, and Freddie to book a derivative loss of about $1.3 billion–less than the first quarter losses, which did not trigger draws then. And there a second factor that will work in the companies’ favor. With Treasury rates now down by close to 100 basis points over the past year, both Fannie and Freddie will benefit from higher current-period portfolio income, as the interest income from their mortgages remains at its (higher) historical cost, while their derivative expense, having already been marked down, will be significantly lower.

        The third reason for thinking neither Fannie nor Freddie will take a draw this quarter is that if for some reason derivatives losses at either company are high enough to not just offset other operating income but also erode the capital each company still is allowed to retain, there are discretionary actions both could take that could produce enough income to keep from them from needing a draw. The most obvious is selling some mortgages held in portfolio at a gain (effectively “monetizing” the market value of these mortgages, thereby offsetting a portion of the market value losses on the derivatives that fund them). There are other book income-producing actions the companies could, and in my opinion, should consider taking as well, to avoid the need for a draw.

        If a draw at either company were to occur, however, it almost certainly would trigger an orchestrated outcry by critics of Fannie and Freddie that they required yet another “bailout,” and that Congress must act quickly to replace the companies’ “failed business model” with some other secondary market financing mechanism. But I wonder how effective such an outcry would be. Most participants in the mortgage reform debate now understand the game Treasury is playing by slowly draining all the companies’ capital through the net worth sweep, leaving them exposed to the consequences of accounting-driven net income volatility they have no effective means of offsetting (other than by holding capital). I suspect it will be hard to generate any sustained outrage with such a blatantly contrived crisis.

        Finally, I think FHFA putting Fannie and Freddie into receivership is out of the question, for the simple reason that there is nothing to replace them with. (That obvious fact, by the way, didn’t appear to be so obvious to then-Treasury Secretary Hank Paulson, whose first thought in the summer of 2008 was to do just that. He had to be reminded that putting the companies in receivership would leave the country without a functioning mortgage finance system in the middle of a housing meltdown; the fake “conservatorship” we have today was the fallback alternative he chose.)

        Liked by 5 people

        1. Thanks for your thoughts Mr. Howard! I like your comment “fake “conservatorship”” i would be interested in any comment you might have on the language in the Democrat platform though you would like state it is too general as well. Regards, Randal

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        2. Tim,

          Excellent Analysis. Finally you have called a spade a spade.
          Conservatorship was never needed.
          There were far superior alternatives to Conservatorship and SPSPA.

          They chose the worst alternatives so as to screw FnF and FnF shareholders, it did not matter what happens to economy and financial system. It is not even ideology or principles. It was all about benefiting themselves.

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        3. Tim,
          Thanks for this insightful reply. I hope you continue to reach out to major print media through letters to the editor so that public would be best informed on the need to keep a reformed FNF.

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  3. http://www.nationalmortgagenews.com/news/compliance-regulation/republican-platform-softens-stance-on-winding-down-fannie-freddie-1082759-1.html

    Tim ,
    What is your take on the Republican platform? If they are really for reform they must consider your paper which takes away the the perceived “subsidy” and the hated “advantage” that some of the Republicans think of FNF. I hope you have some contacts among Republican leaders to read and analyze your paper or be able to present this to Trump.
    I think that this an opportunity to have the FNF issue a part of the presidential election and be able to be included in the presidential debate
    Thanks and appreciate your insights.

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    1. Tim’s articles might have helped Republicans to understand the issue on hand.

      Probably Republicans will hep Democrats to understand the issue better.

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    2. The language in the Republican platform is so general that I don’t attach much significance to it.

      There remains a glaring difference in the approaches to mortgage reform taken by senate and house Republicans. Both want to replace or eliminate Fannie and Freddie. Senate Republicans would do so with a mechanism that requires very large amounts of capital or loss-sharing arrangements to “protect the taxpayer” and that includes an explicit government guaranty. House Republicans advocate a market-based system with no government guaranty. Legislative reform will require choosing between these two alternatives. In doing so I think it’s more likely that senate R’s adopt the position of their brethren in the House, but if that happens it will be more difficult to get D’s in both chambers on board. Handicapping this may change after the election, but I expect the same basic dynamic to persist.

      For this reason, I continue to think that administrative reform of the mortgage system is more likely–particularly should there be a ruling against the government in one or more of the court cases, as I expect there to be. Once the Democratic convention is over it should become apparent who the key players are in mortgage-related issues for both campaigns, and my intention is to look for “entry points” into each, with the goal of offering information, facts and analysis these players may not be aware of but that could be helpful to them in formulating their policies and positions.

      Liked by 1 person

      1. This is a variant of the proposal that Mr. Murin (a past President of Ginnie Mae appointed by G.W. Bush), whom I don’t know, wrote with a couple of others for the Urban Institute’s “Housing Finance Reform Incubator” series. My summary critique is that it is a poor idea, made worse by the fact that most of the details required to assess its potential workability either are left vague or assumed to be figured out by somebody else.

        The two concrete elements of Murin’s proposal are that Fannie and Freddie would be replaced by “a single, super GSE operated similar to Ginnie Mae,” and that the securities of this new entity would (like Ginnie Mae’s) have an explicit government guaranty.

        Of course, the existing Ginnie Mae does not take mortgage credit risk–it securitizes, and “wraps,” FHA or VA loans whose credit already is guaranteed by the government. As best as I can tell from this article, Murin’s proposed Ginnie Mae-like replacement for Fannie and Freddie wouldn’t take direct credit risk either, and thus it would not need to acquire expertise in credit risk assessment, pricing and management (which it does not now have). Murin suggests this by quoting from the website of the existing Ginnie Mae, which says, “issuers are financially responsible for their securities,” and “Ginnie Mae does not have a financial obligation to the MBS investor unless the issuer becomes insolvent.”

        If that’s how Murin’s proposed Fannie and Freddie replacement entity would work, it would push responsibility for ensuring adequate levels of credit protection for conventional mortgages back down to individual lenders. What standards those thousands of different lenders would be required to meet, and how those lenders would be monitored and regulated, is left unsaid. And smaller lenders would not be able to do these credit enhancements themselves; they would have to sell their mortgages to larger aggregators (at whatever price those aggregators choose to pay for them).

        A credit guaranty mechanism designed to favor large lenders, and that allows them to provide credit enhancements of their own choosing and then have the resulting securities wrapped by a Ginnie Mae-like entity, backed by a full faith and credit guaranty from the government, doesn’t sound too appealing to me. And it’s certainly not an improvement on the former credit guaranty system based on Fannie and Freddie.

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        1. Tim,

          Thanks for good analysis.

          The title of the article is a catchy slogan like Promising Road title.

          FnF business models are the win-win combination that has resulted from decades of natural progression of inventing and refining the wheel. FnF are end result of inventing and refining the wheels for the common people’s problems of mortgage finance. FnF were created as private companies to attract private capital without any direct costs/risks to taxpayers. Joseph’s proposal would change indirect costs/risks to taxpayer in to direct costs/risks to taxpayers.

          Obviously private lenders will run lending business so as to maximize their profits in good times and minimize the risks in bad times. During bad times private lenders will become bankrupt and taxpayers will hold the bags.

          The proposal will also lead to unpredictable involvement of Politicians and Gov bureaucrats in managing mortgage finance system. When Gov gets involved in this way, private lenders are exposed greater political risk and uncertainty about interpreting the rules/regulations of lending. Private lenders will follow path of least risk and the effect will be increased costs to borrowers, less availability and less affordability.

          Private investors knowing these facts, will accordingly adapt investment strategies, that will lead to highly volatile markets during both good and bad times.

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    1. I have no reason to think there is any connection between the net worth sweep and ACA funding. I believe the primary motivation for the sweep was to prevent Fannie and Freddie from building up capital (which was imminent, given the surge in earnings that was about to occur at both companies once Treasury and FHFA ran out of non-cash expenses to load onto their income statements). A build-up of capital would have removed the urgency, and indeed the main rationale, for legislation to eliminate the companies–a goal of Treasury for over two decades. A secondary consideration may have been the recognition that revenues from Fannie and Freddie would significantly postpone the date at which the administration ran out of borrowing authority because of the debt ceiling, but in my view the first reason was the primary driver of the sweep.

      Concerning the Joint Congressional Investigative Report you cite, I skimmed it and didn’t find any mention of Fannie or Freddie, or the net worth sweep, anywhere in there (perhaps I missed it). Whomever has suggested there is “correlation” between ACA funding and the net worth sweep may have evidence of it that I am unaware of, but I suspect this person or group is (a) just making a guess, and (b) confusing “source of funding” with “authorization for funding.” As far as I can tell, the Joint Investigative Report is about whether the Obama administration had legal authority to fund the cost-sharing component of the ACA (the authors obviously believe it didn’t). Nowhere in the report do I find anyone claiming that revenues from the sweep could be or were used to fund that; instead, they say the administration claimed that something called the “Premium Tax Credit (PTC) Account” could be used to pay for this program. My understanding is that payments from Fannie and Freddie under the net worth sweep were considered general revenues. But whether they were or not, I highly doubt that sweep payments went into the PTC Account, and absent that I don’t see how the sweep is relevant to the ACA issue. The mere fact that the sweep gave Treasury unexpected revenues doesn’t allow the administration to avoid the ACA authorization problem the authors spend 157 pages discussing.

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  4. Thank you Tim, you are the one person in this country whose opinion and analysis I trust on all things GSE. I still find it amazing that someone of your stature finds the time and desire to keep us (shareholders and patriots) informed. Thank you so much!

    Liked by 3 people

  5. Thank you for your continued unselfish efforts to educate those willing to listen Mr. Howard. Your blog and your book have removed more questions, for me anyways, than any other source.

    If I may ask, do you consider yourself “retired”? If an interesting offer were to present itself would you consider a public or private offer on the level of a Wells Fargo or FNMA type entity again?

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    1. The word “retirement” has a couple of meanings: one is to have stopped doing your job, which I have done, and the other is to have stopped working in your profession, which I would say I haven’t done, although the work I now do is voluntary and of a type and at a pace of my own choosing. I enjoy my current situation and circumstances and am not contemplating taking another job, but I also can’t say categorically that I never would, although I think it is unlikely.

      Liked by 3 people

  6. Many seem to have confused Housing Finance Reform to be one and the same as reforming FnF or try to focus on FnF reform as if FnF were the main cause of 2008 crisis.

    Housing Finance subject is much bigger than FnF, and involves many more participants and stakeholders.

    You have written extensively about how to fix the existing FnF system and not much about bigger subject of Housing Finance.

    If one were to look at Housing Finance as a brand new subject without any constraints,
    1. What would be ideal new system for US without the constraints of transitioning to new system?
    2. What would be ideal new system for US with the constraints of transitioning to new system?

    May be a look at these new models will help us to better understand our current system and provide a blueprint for any future reforms.

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  7. Yes, Watt is in a tough spot. However, it’s hard for me to believe that he wasn’t aware of the spot he’d be in prior to taking the position. So much so, he is there to protect status quo. It’s part-n-parcel with his secret charter, which is no secret whatsoever. He won’t do anything on his own that would undermine the treasury. He wouldn’t be there if he had such gumption. P-U-P-P-E-T.

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  8. Tim,
    Thank you for this great analysis and insight. Overall, Your article is a must reading for everyone to counter Corker et al , in their ideology to ” wind down” FNF because doing so put the entire housing industry mat risk. Your detailed analysis shows a reformed FNF is what this country needs.
    I am now convinced there is no way to ” wind down ” FNF because such move will put the housing and the entire US economy at risk. Great reforms have been done by Watt and I agree with you that he needs to toe a fine line of separating FHFA from the clutches of Treasury. This is clearly FHFA mandate as per HERA.
    Great job!!

    Like

  9. Thanks for decoding the letters.
    Reasons why public need to decode the letters are very simple.
    It is the hidden agenda that the people on the other side do not want public to know.

    For those who do not understand the role, functioning and history of FnF in secondary housing markets, it is un-interesting and difficult to understand the coded language that the other side uses.

    During appeals court hearing, Judges made it clear that they understand the intentions of the other side even though other side does say it openly that way.

    FHFA conservator has a duty to be accountable and fair to all.

    Liked by 1 person

  10. Thank you Tim Howard,

    ” It’s a poorly kept secret that Treasury deliberately engineered the terms of the net worth sweep to reduce the companies’ capital buffers to zero at the end of 2017 .”
    This Fake / Manufactured Conservatorship needs to end !

    Liked by 1 person

  11. Great article, Tim. Can you please address one big mystery that’s still unknown – how did the Treasury and FHFA address the GSE securities held by the foreign governments? Do any of these groups who wrote the letters aware of, raise or inquire this issue? Thanks

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    1. I’m not sure what you’re referring to in the first sentence of your question. Are you talking about how Fannie and Freddie debt and MBS would be treated (not just for foreign holders, but for all investors) in a situation in which the companies were wound down? Or are you thinking of something else?

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  12. Do you think this is because Fannie or Freddie might need a draw in this or next quarter which might cause Watt to “go rogue” and start retaining capital after their draw? Also, what do you believe is likelihood of a draw this quarter? Thanks Tim

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    1. I haven’t attempted to analyze Fannie’s or Freddie’s derivative books to try to estimate whether either or both will post a loss this quarter large enough to require a draw. Prior to the vote on Brexit I wouldn’t have thought so, but 10-year Treasury rates fell about a quarter of a percent between the time the results of that vote were known and the end of the second quarter (they’ve since gone down further). Still,10-year Treasuries are only about 30 basis points below where they were on March 31, the last time the companies’ derivatives books were marked to market. That’s probably not enough of a drop to trigger a “draw-sized” loss, but, again, that’s without doing any detailed analysis.

      And I wouldn’t characterize any move by Watt to help the companies retain capital as “going rogue.” As I tried to explain in my piece, he’s in a tough spot. The institution he heads has been under the thumb of Treasury from long before the time he got there, and they’re now lashed together by virtue of the position they’ve jointly taken in their court battles. He’s got to find a way to walk the fine line between where FHFA is at present and where he probably believes it will need to be in the future. I hope he can figure out how to do that.

      Liked by 1 person

      1. I should have used a better term than “going rogue” for watt going and doing what he is mandated to do. I meant going rogue in terms of him not abiding by treasury anymore. Anyways thanks very much for the response.

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