A Solution In Search of a Problem

~ jtimothyhoward

On August 31, the Urban Institute posted an article by Laurie Goodman titled, “Squeaky-clean loans lead to near-zero borrower defaults—and that’s not a good thing.”

The article begins, “There’s something interesting and important going on in the mortgage market today: borrowers who took out mortgages in the past five years have rarely defaulted, making them better at paying their mortgages than any other group of mortgage borrowers in history.” After giving details on the credit quality and performance of the loans Fannie Mae and Freddie Mac have either purchased or guaranteed from 2011 through the first half of 2015—which she notes “are hardly defaulting at all”—Goodman states, “The performance of mortgages originated over the past few years…suggests that there is plenty of room to safely expand the credit box…Put simply, it’s time to lend again to borrowers with less-than-perfect credit.”

The data highlighted by Goodman on the credit quality and performance Fannie and Freddie’s recent books of business are no mystery; I’ve cited them frequently, most recently in explaining the dramatic improvement in the companies’ projected credit losses in the Dodd-Frank Severely Adverse stress test over the last two years. And I agree with Goodman’s recommendation that because of this credit performance, what she and others call the “credit box”—the product and borrower characteristics deemed to present acceptable risks to lenders or credit guarantors—can and should be opened up, to expand the range of borrowers served by the mortgage finance system. But there is a further critically important observation to be made about these credit data that is not in Goodman’s piece: their striking incongruity with the overwhelming consensus among mortgage reformers—most recently documented in the Urban Institute’s own series of essays submitted for its “Housing Finance Reform Incubator” series—that for the mortgage finance system to operate safely, Fannie and Freddie must be replaced. What Goodman’s article makes clear, without saying it directly, is that today’s mortgage market, with Fannie and Freddie at its center, is in fact too safe. The obvious question this raises is, “What, therefore, are we supposed to be reforming, and why?”

There is considerable irony here. To make the point about how “squeaky-clean” Fannie and Freddie’s 2011-2015 loans are, Goodman notes that the default rate on these loans “is tracking well below [the companies’] mortgages originated from 1999 to 2003, a period of reasonable underwriting standards and fairly low default rates.” So, what happened in 2004? Oh, yes; that was when private-label securities (PLS) surpassed Fannie, Freddie and Ginnie Mae securitization combined as the primary source of residential mortgage financing. PLS placed virtually no limit on the riskiness of the loans they would accept, and as a consequence underwriting standards collapsed throughout the industry. The 2005-2008 books of business of all lenders performed far worse than any years since the Great Depression, and Fannie and Freddie’s were no exception (although we now know that the loss rates on the companies’ mortgages from this period were one-third those of banks, and less than one-tenth those in PLS).

Even as the 2008 financial crisis raged, opponents of Fannie and Freddie ignored the role played by PLS and asserted that the companies were its cause. Treasury forced them into conservatorship in September 2008, and since then there have been constant calls for them to be wound down and replaced. Non-cash expenses booked by their conservator, FHFA, ballooned Fannie and Freddie’s losses and caused them to have to take $187 billion in senior preferred stock they didn’t need and weren’t allowed to repay. The only aspect of Fannie and Freddie’s business that has remained within their control following the conservatorship is the quality of the loans they purchase or guarantee. With the false claim that their lax underwriting caused the financial crisis, calls for them to be put out of business, and the huge financial losses unrelated to their business risks imposed upon them by their conservator, it’s no wonder that the companies tightened their credit standards so dramatically. What else could they have done to be responsive to the criticisms being made of them?

Fannie and Freddie also now have little control over the guaranty fees they charge, since those are based on notional capital guidelines set by FHFA. While FHFA does not disclose what its capital guidelines are or how they are determined, published data on the companies’ target guaranty fees by risk category are consistent with an average capital requirement of about 3.5 percent. Fannie and Freddie’s implied capital and guaranty fee pricing have remained relatively constant since 2013, when FHFA Acting Director Ed DeMarco required them to raise their guaranty fees by 10 basis points not because of the riskiness of their loans but to “encourage more private sector participation” and to “reduce [their] market share.” Mel Watt has not changed FHFA’s capital guidelines since he became Director in January 2014, and having to set guaranty fees consistent with an average capital requirement of 3.5 percent has caused Fannie and Freddie to price many lower-credit score and other higher-risk borrowers out of the market, exacerbating the effect of restrictive underwriting on the size of the credit box.

Ensuring the smooth workings of the mortgage finance system for as many potential homebuyers as possible should be the primary goal of mortgage reform. Yet that is frequently not the case. For a sizable majority of interested parties, since 2008 the term “mortgage reform” has been a code phrase for replacing Fannie and Freddie with some favored alternative. While pitched to the public as “the last major piece of unfinished business of the financial crisis” (to quote Senator Corker), this agenda-driven approach to “reform” has from day one been a solution in search of a problem. And as more time passes, that approach becomes harder to defend. Today, after eight years in which to assess and understand what actually did happen to cause the mortgage crisis, and nearly as long a period of unprecedented restrictiveness in credit conditions, it no longer is credible to claim that replacing Fannie and Freddie with an untested alternative, forcing them to do mandatory risk sharing (of what little credit risk there currently is) or requiring them to hold “bank-like” levels of capital could possibly fix what now ails the U.S. residential mortgage market.

As Goodman points out in her piece, the real problem with that market is the very small size of the credit box. Underwriting certainly has played a role in this, but more important, I believe, is the deliberate lack of guidance from regulators as to how to assess, capitalize and price mortgage credit risk. Prior to the crisis, Fannie and Freddie had defined capital standards—both risk-based and minimum—along with full control of their underwriting processes. With certainty about their required capital they were able to quote lenders a single guaranty fee that covered a diverse range of products, borrower types and risk characteristics, as determined by the lender. As long as lenders met Fannie and Freddie’s underwriting requirements—which could be confirmed using their automated underwriting tools—those loans would be accepted. The credit box was wide, full, and affordably priced.

The financial crisis revealed that all mortgage lenders were undercapitalized (and that private-label securitization, which relied on assessments of credit risk by rating agencies that had a financial incentive to underestimate it, was untenable). Banks have been given updated capital requirements by their regulators, but Fannie and Freddie have not. Their capital requirements are being held hostage to the politicized version of the “reform” debate. Initially, opponents of Fannie and Freddie insisted that they hold an absurdly high (10 percent) amount of capital to back any future credit guarantees they did. More recently, Treasury has used the companies’ absence of capital (almost all of which it has taken in the net worth sweep) as an excuse to avoid addressing the issue of what their capital should be. And FHFA, for its part, has played along with this charade by adding massive amounts of non-cash expenses to their Dodd-Frank Severely Adverse stress tests (as discussed in the last post) to create the impression that the companies would need tremendous amounts of capital to do even the “squeaky-clean” business they’re doing now.

This gamesmanship over Fannie and Freddie’s capital has had real-world consequences. The size of the credit box and risk-based capital are very closely linked. Until we can get the capital right, we won’t get credit box right. And the key to enlarging the credit box at Fannie and Freddie—really the only sure way to do it—is to give the companies true risk-based capital requirements, designed to strike a careful and deliberate balance (as determined by policymakers) between the cost and breadth of access to mortgages on the one hand and taxpayer protection on the other.

FHFA is in a perfect position to take the lead on this initiative, by running an honest stress test of the companies’ business by risk category. But to date Treasury has not permitted FHFA to do that, I believe because it knows that if Fannie and Freddie were given an updated and legitimate risk-based capital standard, Treasury and others would lose the ability to pretend that the companies need so much capital to operate safely that it is in everyone’s best interest to replace them.

This issue is so important to opponents of Fannie and Freddie that new attempts to muddle their capital situation continue to crop up. Most recent is the claim that because banks with more than $50 billion in assets must hold capital equal to 5 percent of their risk-weighted assets (about 3.5 percent of their total assets) after having absorbed losses from their Dodd-Frank stress test, Fannie and Freddie should be required to hold an equally large capital cushion after their stress tests have been run. But this assertion ignores a fundamental difference in the business models of banks versus Fannie and Freddie, as well as the experience of both sets of parties during the financial crisis.

What caused the near-failure of the banking system in 2008 was not that banks’ credit losses exceeded the amount of capital they had; it was the fact that at some banks—particularly the larger ones—losses rose so much so quickly that borrowers withdrew non-insured deposits and many investors refused to roll over short-term funds placed in those banks. Without the trillions of dollars made available by the Fed and the Treasury (on very favorable terms), the affected banks would have been forced to sell large amounts of assets at depressed prices, and that would have wiped out their capital. Banks are highly leveraged institutions, and in addition to non-insured deposits a typical bank has between 10 and 15 percent of its assets in short-term purchased funds. Both can flee quickly in times of stress. It is precisely to retain the confidence of non-insured depositors and investors who provide “hot” money that the Fed requires the banks it subjects to the Dodd-Frank stress tests to pass them with such a considerable margin of safety.

Credit guarantors such as Fannie or Freddie are in a completely different position. They have neither deposits nor hot money on their balance sheets subject to runs. (The short-term debt Fannie and Freddie have is associated with their portfolio businesses, which have had and should continue to have capital requirements different and separate from the credit guaranty business). And when large numbers of their mortgages do fail, it happens relatively slowly. Unlike a bank, if a credit guarantor has enough capital to cover its losses during a stress environment, it can stay in business. We saw that during the financial crisis, when Fannie and Freddie were able to remain profitable on an operating basis (that is, excluding the non-cash expenses added by FHFA) even after the spikes in their credit losses.

In contrast to the arguments for excessive Fannie and Freddie capital requirements, the problems with the credit box are real. They are based on economics, and their resolution will depend on politics. Advocates for replacing Fannie and Freddie with mechanisms they favor will continue to cite stress tests padded with non-cash expenses, and liquidity cushions with no rationale in practice, as the basis for capital requirements that make the companies’ credit guarantees noncompetitive. Yet if policymakers fall prey to these ploys—and either replace Fannie and Freddie with a less efficient secondary market mechanism or force them to hold capital unrelated to the risks of mortgages they guarantee—we won’t solve our credit box problem. Instead, we’ll end up with a “reformed” mortgage system in which some financial institutions are more profitable, but large segments of the home-buying population remain underserved, and all segments pay more for their loans than they should. It’s a simple choice: we can solve the real mortgage problem, or one that’s been made up.

129 thoughts on “A Solution In Search of a Problem”

  1. Pingback: A Three-Year Retrospective -

    1. When I’ve spoken about this with some of the authors of the “Promising Road” proposal in the past, they’ve maintained that because they use a combination of (unspecified) risk-sharing transactions and non-cumulative preferred stock to capitalize their envisioned government corporation, they will be able to keep its guaranty obligations from being considered as debt of the federal government. I’m not so sure about that. Moreover, as I note in a comment below, I don’t believe their proposed capitalization scheme would work in practice, and if they have to change it their options for keeping the corporation’s obligations off the federal balance sheet are quite limited.

      Like

      Reply

      1. But the debt has to be on someone’s balance sheet. So whose balance sheets will it be on? It is a liability anyway we look at it. Also, what would be a financial benefit to the Treasury from the gov’t company vs a utility company? Will it make more money from this venture?

        Like

        Reply

        1. According to the Promising Road authors, the “debt” of the government corporation still would be on its balance sheet; it just wouldn’t be counted as part of the public debt. (I put the word “debt” in quotation marks to reflect the fact that the two types of Fannie’s and Freddie’s obligations– the notes and bonds they borrow in the debt markets, and their contingent liabilities for the mortgage-backed securities [MBS] they issue–have both been shown on their balance sheets since 2010, even though the MBS do not really reflect indebtedness. Prior to 2010, Fannie and Freddie’s MBS were recorded off-balance sheet.)

          And I don’t think Treasury sees any direct or even indirect financial benefit to having a government company replace Fannie and Freddie; it is just unalterably opposed to having the companies continue to operate in anything close to the form in which they did historically. That is why, in my view, Treasury insists on applying this undefined “reform” standard–meaning get rid of the old Fannie and Freddie–to any proposals made for the future of the secondary mortgage market.

          Like

          Reply

          1. I’m sorry to keep probing this topic but if the Treasury doesn’t see any direct or indirect financial benefit, then who does? Won’t this gov’t company generate profits, and assuming that it does, where do those profits go? I don’t see a point for them to make it a gov’t company if the gov’t doesn’t benefit directly, especially if the debt can be legally kept off the fed balance sheet, which I thought was never the case.

            So far, based on my reading of the Promising Road paper and your clarifications, it seems as if they are trying to make a gov’t company run like a private company – with private owners of preferred stock, with all debt off the gov’t balance sheet, but without commons. Outside of combining the GSEs, doesn’t this gov’t company title make it a word game more than anything else since the company will be run like a private entity (acknowledge by paper authors) with the exception of profits going to the gov’t?

            Also, assuming the legal cases are lost, who is going to invest in the preferred stock of a company that just wiped out preferred stock of the precedent entity?

            Like

          2. Alec: I’m probably not the best person to try to defend the “Promising Road” proposal, since I don’t support it and don’t believe it will work.

            I believe its authors think they can “de-risk” the government corporation by doing some form of risk transfer–whether before mortgages are acquired (so-called “front end” risk sharing) or after the fact (“back-end”)–for all of the risk it takes. I don’t believe the government corporation will be able to do that–for a variety of reasons it will end up keeping some of the risk, and perhaps a lot of it, particularly in bad times– but to the extent it does transfer credit risk the profits would go to the risk-sharing partners.

            I also agree with you about the infeasibility of selling only non-cumulative junior preferred stock in this company, and no common, even if the legal cases were to be won by the plaintiffs.

            Like

    1. I just saw, and read, this latest piece from the Urban Institute (“A More Promising Road to GSE Reform: Why it Leads to a Government Corporation.”) In it, the authors (the same five whose names are on the original “Promising Road” paper, published in March) compare five alternate models of “reformed” secondary mortgage market guarantors, one of which is the shareholder-owned utility model I proposed in my Urban Institute paper (“Fixing What Works”).

      Reading over the authors’ analysis of all five alternatives–and even allowing for the fact that they have their thumb on the scale for the government-owned model they’ve proposed previously–the utility model seems easily the best choice to me. It’s an improvement on something we already know works extremely well (the traditional Fannie/Freddie model), and it avoids having to grapple with the uncertainties the authors identify that are associated with the government-owned model. Also, the authors’ model still has the government using risk-sharing transactions to absorb the first 3.5 percent of credit losses for the government corporation (with preferred stock–and no common stock–taking the next 2.5 percent of loss), and based on my analysis of Fannie and Freddie’s current risk-sharing programs I believe this simply wouldn’t be workable.

      I also found this Urban Institute piece to have a close and interesting tie-in to my latest post, “A Solution in Search of a Problem.” In their concluding paragraphs, the authors summarize their evaluation of the utility model by saying, “the utility model faces a formidable issue with earnings and pricing volatility [which the authors greatly overstate; it’s no different from what Fannie and Freddie always have faced, just at a lower target return] and manage to avoid many of the issues faced by the other options primarily by offering the least reform.” Hmmm. What might they mean by by the term “reform”? The authors never identify a specific objective, so I suspect it’s the same “agenda-driven reform” I discuss in my piece: replacing Fannie and Freddie with a favored alternative, which would be worse for homebuyers.

      To answer your question about the Urban Institute proposal and the lawsuits, the two are independent. Congress would have to pass legislation to turn Fannie and Freddie into government-owned corporations. If the government wins the lawsuits, Congress could do that without having to pay any compensation to Fannie and Freddie shareholders; if it loses the lawsuits, it WILL have to pay compensation (either before the merger occurs or after the fact, depending on when a final legal decision is rendered, or a settlement occurs).

      Liked by 1 person

      Reply

      1. Thank you Tim. But what’s the likelihood that this plan will gather much support from the policy makers? I believe that there must be some backing for this to come to fruition with these follow-up papers, and looking at the profile of these authors cum ‘fellow Travelers’.

        Like

        Reply

        1. I suspect this idea is the leading candidate of those seeking a legislative replacement for Fannie and Freddie. Until after the election, however, it will very hard to say what the path to success for something like this looks like. And a ruling for the plaintiffs in the Perry capital appeal–whether a reversal or remand–would in my view significantly lengthen the odds for legislation of this nature.

          Liked by 1 person

          Reply

          1. Tim,
            I do not want to politicize your blog but I wish and hope in the next debate the moderator will include questions to HRC and Trump on their stand on housing policy with respect to the GSE,The issue is complicated because of political ideology that answering them in two minutes is not enough..However specific question, like their stand on availability of 30 year mortgage for middle class and for qualified and deserving minorities(affordable housing) to have opportunity to build capital nest ,can be asked.
            This is a wishful thinking but through your contact with Urban Institute and other stakeholders/ organization in the mortgage industry can you help initiate this?

            Like

          2. The utility concept isn’t new. In the late 90’s there was significant push within one GSE to de-couple from the implied guarantee and Congressional oversight. But Black-Scholes was too powerful an incentive for senior management stock options. They needed short-term gains. Not long-term sustainability. So they played-ball with whatever enabled them to keep the party going in the short-term. During the LTCB debacle the GSEs were the ONLY bid supporting market liquidity. At that point they became too important to systemically “reform”. Until they were needed as funding cover for TBTF banks and other USG Wall Street cronies. The NWS is simply the newest malfeasance is a long infamous history.

            The GSEs best hope for restitution is another housing crash. It’s coming. It exposes the ineptitude and dishonesty of those pulling the strings.

            Like

  5. http://www.bloomberg.com/news/articles/2016-09-26/perry-capital-closing-flagship-fund-after-almost-three-decades
    Tim,
    What do you think is the repercussions of the above news on “perry Appeal ” in terms of continuing the case if there is a remand. In the motion to compel, Judge Sweeney has also ordered defendant to answer why they should / should not pay fro the plaintiffs legal fees for the motion to compel.
    Do you have any way to infer on the impact of the perry appeal case and Perry capital closing flagship fund and their holdings on FNF?

    Like

    Reply

    1. I don’t believe there will be any impact on the Fannie and Freddie cases from the announced closure of Perry Capital’s flagship fund. He says he will wind down that fund’s investments over time, and according to the article in Bloomberg he says in the letter he wrote to his investors that, “some [investments], including its remaining preferred shares in Fannie Mae and Freddie Mac, ‘will take time, energy and capital to successfully realize an appropriate result.'” That doesn’t sound like he will be abandoning the case, assuming it’s remanded to the Lamberth court, as most expect. But even if he does, there are several other court cases filed under the same theories of law (violations by Treasury and FHFA of the Administrative Procedures Act, and contract law) that, upon remand of the Lamberth decision by the D.C. Circuit Court of Appeals, would be revived in other courts.

      Liked by 1 person

      Reply

  6. Hi Tim
    can you, please, provide a link to the “concluding remarks” that you authored for Urban Institute because I cannot find it .
    Thank you

    Like

    Reply

  7. Hi Tim,
    I read a report earlier in the year that Ginnie Mae has overtaken Freddie as the second biggest mortgage security platform.

    If you can help me understand:
    How does this impact GSEs business? Is the government intending to use Ginnie to replace the former two? What is the difference between Ginnie and the GSEs?

    Thank you so much for your help.

    Like

    Reply

    1. It’s not that Ginnie Mae is “the second biggest mortgage security platform;” it’s that so far this year, Ginnie has issued a greater volume of mortgage-backed securities (MBS) than Freddie Mac has.

      Ginnie securitizes loans guaranteed by the Federal Housing Administration (FHA) and the Veterans Administration (VA), with most of the loans backing Ginnie securities being FHA loans.

      I think there are two things happening here. The first is that Freddie has fallen well behind Fannie in monthly MBS issuances; through the first half of this year, Fannie has almost a 60 percent share of the market between the two companies. Most people believe this has to do with the payment structure of Freddie’s securities versus Fannie’s (which the Common Securitization Platform is expected to eliminate). With its current security structure, Freddie has to offer lenders a lower guaranty fee to win business from Fannie. It is reluctant to do that on a large scale, leading Freddie to issue fewer securities. But having fewer securities outstanding makes Freddie MBS less liquid than Fannie MBS, which worsens the price differential problem and requires even more fee cuts to maintain market share. The potential for relieving this “pricing and issuance” spiral is the main reason Freddie is so happy with the Common Securitization Platform (and Fannie is not).

      But also–and more importantly–the FHA is getting a much higher share of lower down payment (or higher loan to value ratio) business than it had traditionally. And this, I believe is due to pricing. Both Fannie and Freddie are having to price their high LTV and low credit score business using arbitrary capital ratios given to them by FHFA, which I believe are higher than justified by the risk of the loans. As a consequence, the guaranty fees both companies charge for this business are not competitive with FHA’s, and for that reason FHA lending–and consequently Ginnie security issuance–has risen sharply in recent quarters, to the point that Ginnie has surpassed Freddie as the second largest monthly issuer of mortgage-backed securities, behind Fannie.

      Liked by 2 people

      Reply

      1. Tim,

        Does GNMA buy mortgage loans, securitize and then sell MBS like FnF?

        From GNMA website it appears that GNMA only guarantees loans/MBS issued, insured, guaranteed by FHA, VA, RD, HUD-PIH. Looks like most of these loans are originated, securitized and then sold by
        private FIs along with GNMA guarantees.

        The sad part is GNMA is making false statements on it website by saying that “Unlike the GSEs, Ginnie Mae is profitable”.

        Who are using GNMA for propaganda to promote GNMA against FnF?

        ——————————————————————————
        http://www.ginniemae.gov/about_us/who_we_are/Pages/funding_government_lending.aspx

        Unlike the GSEs, Ginnie Mae is profitable. We do not buy or sell loans or issue mortgage-backed securities (MBS). Therefore, our balance sheet doesn’t use derivatives to hedge or carry long term debt.

        What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture’s Rural Development (RD) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH).

        Ginnie Mae securities are the only MBS to carry the full faith and credit guaranty of the United States government, which means that even in difficult times, an investment in Ginnie Mae MBS is one of the safest an investor can make.
        ——————————————————————————-

        Liked by 1 person

        Reply

        1. Of the three paragraphs you quote from the Ginnie Mae website, the second two are accurate, but the first is not. Fannie and Freddie ARE profitable, they’re just not permitted to retain capital. And the reference in that paragraph to the use of derivatives and long-term debt might be misleading to some: Fannie and Freddie use debt and derivatives in their portfolio investment businesses, which today account for about a tenth of their total outstanding mortgages (the rest being MBS). Ginnie does not have a portfolio. And Fannie and Freddie each have credit guaranty businesses, where Ginnie doesn’t. It simply “wraps” loans–mainly FHA and VA–that already have a government guaranty.

          I’m surprised at the tone of the Ginnie website. In doing a quick internet search, it appears as if the current President of Ginnie Mae, Ted Tozer, has hired a PR firm to improve the image of both Ginnie and its executives. It seems that they’ve gone a bit astray with this effort, at least as far as the website is concerned.

          Liked by 2 people

          Reply

          1. Tim,

            Thanks for your unique expertise and public service to inform and educate all.

            Please analyze GNMA Model & Platform comparing with FnF Model & Platform.

            Some are promoting GNMA as a substitute for FnF.
            What are the pros/cons in universalizing GNMA Model & Platform in place of FnF?

            What is the role private FIs play in GNMA model?

            Like

          2. Ginnie Mae administers a securitization platform that issues securities backed by some other agency of the federal government–primarily the Federal Housing Administration (FHA) and the Veterans Administration (VA). Ginnie Mae has no infrastructure for, or expertise in, assessing, pricing or managing single-family mortgage credit risk, as Fannie and Freddie do. In my view, there is no reason to expect that Ginnie Mae would have an advantage over any other institution in putting together that infrastructure or acquiring that expertise, and several reasons to expect the opposite. For that reason, it surprises me that people continue to propose Ginnie as an “obvious substitute” for Fannie and Freddie. It is not. (In response to your last question, in the Ginnie Mae model private financial institutions originate loans and submit them to the FHA or the VA for a government guaranty; once the loans have that guaranty, the institutions ask Ginnie Mae to securitize them.)

            Like

      2. How appropriate it is for a Gov agency or Gov Corp.to advertise about its profitability when costs of using full Faith and Credit of US Gov and its burden on Gov liability are not accounted for?

        Is it appropriate for Gov agency or Corp to make profits and also compare itself with private companies?

        Like

        Reply

  8. Tim,
    Have you watched the latest tv interview of Berkowitz? He mentioned that FNF are utilities companies and said that it has history since 1938 that enables the US housing mortgage industry to work. He mentioned also it must not be used for political reason. He must have read your essay on “Fixing what works”.
    What do you think will be the next move by the Urban Institute on the housing reform policy essay?

    Liked by 1 person

    Reply

    1. No, I haven’t seen the Berkowitz TV interview. I am, however, familiar with his views on Fannie and Freddie, and we have spoken about them.

      I am not aware that the Urban Institute is planning any additional followups to their Housing Finance Reform Incubator series of essays. In July they published all of them together, along with several “concluding remarks” by some of the contributors (one of which was authored by me), but they have announced no further plans to do anything else with the submissions.

      Liked by 2 people

      Reply

    1. I outlined my version of the utility model in a paper I prepared this March for the Urban Institute’s “Housing Finance Reform Incubator” series. I called it “Fixing What Works.” You can access it on this site– it’s the first piece under the heading “Papers and Documents,” which you’ll find on the right as you scroll down from the top.

      Liked by 2 people

      Reply

  11. Hello Tim,
    In a past post you mentioned that you are for the reduction of the investment asset portfolio. Why is that? It seems like a good source of balance when the housing market is down.

    Tim M. Said “At its peak, we held about $900 billion of investment assets in our portfolio. Today, we have reduced our investment portfolio to less than $200 billion” My question is, what happened to the $700 billion? Seems like a big number to “reduce”.

    Heres the link
    http://www.fanniemae.com/portal/about-us/company-overview/our-progress.html

    Thanks,

    Liked by 1 person

    Reply

    1. In my proposal for mortgage reform, “Fixing What Works,” the “utility model” I outline includes “restrictions on the size and use of [Fannie and Freddie’s] mortgage portfolios (limited to 10 percent of outstanding credit guarantees, and to purposes ancillary to the credit guaranty business).”

      I put that provision in for several reasons. One is that effectively it has already happened. As part of the 2008 Preferred Stock Purchase Agreement, Treasury mandated that both Fannie and Freddie shrink their on-balance sheet portfolios by 10 percent per year (a shrinkage that later was accelerated to 15 percent per year). As a consequence of this directive, Fannie’s on-balance sheet portfolio at the end of June 2016 was just $316 billion–down from a high of $913 billion in the fall of 2004–or just over 11 percent of its $2.83 trillion in outstanding credit guarantees.

      Beyond that fact, however, there are substantive reasons why a smaller and more limited portfolio makes sense to me (in spite of the fact that when I was with the company, managing the portfolio and its interest rate risk was one of my primary responsibilities). Fannie and Freddie’s portfolio business always has been controversial, and putting that business back in play as a recommendation would make it difficult if not impossible to gain consensus on a “reformed” system with Fannie and Freddie at its center. More importantly, I believe that if Fannie and Freddie remain as central participants in the secondary mortgage market, their mortgage-backed securities (MBS) must have either an implicit or an explicit government guaranty, in order to keep the yields on their MBS low and mortgage rates down. In my view it will be much easier to get policymakers to agree on the wisdom of implicit or explicit guarantees for Fannie and Freddie’s MBS than to get them to agree to similar guarantees for the large amounts of the companies’ debt that would be required to run the portfolio business as a profit-making spread business, as it had been historically. And for Fannie and Freddie, funding implicitly or explicitly guaranteed MBS with debt that has a weaker, or no, guaranty would not be a successful business (remember, banks can hold Fannie and Freddie MBS on their balance sheets because they are able to fund them with federally insured deposits, at very low costs).

      As to your question about how Fannie’s portfolio shrinkage occurred, I have a couple of comments. First, I looked at the link you provided, and saw Mr. Mayopolous’ reference to Fannie’s investment portfolio being reduced to “less than $200 billion.” I don’t know what he’s referring to. As noted above, Fannie’s total portfolio as of June 2016 was $316 billion. Perhaps the “under $200 billion” number is just the unsecuritized single-family loans the company owns. For the overall portfolio, the reduction from over $900 billion to its current level has been accomplished in three ways: (a) by not replacing the mortgages or MBS that liquidate (mainly through prepayment, but also amortization) each year, (b) by selling some of the MBS the company owns, or (c) by securitizing whole loans on the balance sheet and then selling them. Of the three, the first has been most responsible for the portfolio shrinkage to date.

      Liked by 1 person

      Reply

  12. Hi Tim. excuse me for asking this. No one has been able to mention the individual who moves the entire conspiracy and is the coordinator of the destruction of corporations. however there is no doubt that the supreme master exists. I’m sure you know who that is. is a single individual the boss. I think I know who it is but I can not say. any comments on this.

    Like

    Reply

    1. My 35 years experience with Fannie Mae causes me to have a very different view about what you call the “conspiracy” from what you’re suggesting. For two decades, there has been broad institutional, ideological, competitive and political opposition to the role Fannie Mae and Freddie Mac were able to attain in the mid-1990s in the U.S. secondary mortgage market. (I wrote about this in my book, “The Mortgage Wars.”) Institutional opponents of Fannie and Freddie–which include the Federal Reserve and Treasury–found an opportunity during the 2008 financial crisis, which they took, to take control of the companies by putting them into a “conservatorship” they never intended them to be released from. In my view there is not and never has been a “single individual,” or any one set group of individuals, driving this behavior; it has been the collective objective of a very large number of people with similar interests in replacing Fannie and Freddie as the dominant actors in the mortgage market with institutions and mechanisms more sympathetic with or supportive of their particular interests, which I believe are primarily but not exclusively financial. At any one time, different individuals may appear to be taking the lead in anti-Fannie and Freddie actions or activities, but there are a large number of others working on a coordinated basis towards the same end. I wish it were as simple as just “one individual.”

      Liked by 2 people

      Reply

      1. Tim,
        Your comments,”In my view there is not and never has been a “single individual,” or any one set group of individuals, driving this behavior; it has been the collective objective of a very large number of people with similar interests in replacing Fannie and Freddie as the dominant actors in the mortgage market with institutions and mechanisms more sympathetic with or supportive of their particular interests, which I believe are primarily but not exclusively financial”.

        However I beg to disagree that there is not a single individual or any set of groups who in the course of driving this behavior went to the extent of breaking laws on GAAP (accounting and audit principles) and committed perjury. There is no need to enumerate those illegal actions and slowly but surely the discovery documents will unravel this. I believe you yourself believe on this. We all know who they are. There can be a healthy debate on a policy, but no one is above the law when it comes to support ones’ interest.

        Remember ” Watergate” and hopefully justice will be served on “Fanniegate”

        What do you think?

        Liked by 1 person

        Reply

        1. Tim speaks of no individual or *one* set group.

          You then posit, “However I beg to disagree that there is not a single individual or any set of groups.”

          Set of groups is plural. You’ve expanded the possibilities to such a degree that it’s no longer apples to apples.

          The point is, the GSEs have been loathed from many quarters and for varying reasons. It’s been more a general force, though indeed the effort might have been more organized toward the end. I don’t think, however, that Presidents Bush and Obama were working shared the motive, yet their general final goal might have been no different.

          It’s hard to simplify or rationalize wickedness. It’s not organized. It’s more a chaotic force that takes on form later, eventually culminating into something that unimaginable at first.

          Liked by 1 person

          Reply

          1. Yes. There has been long-term and diverse push-back against the GSEs over many years. Through many administrations. But the past nine years have shown earlier opponents to be pikers by comparison. Evil tends to expand over time. Yet the marginal utility of evil has a diminishing effect. We are experiencing PEAK-WICKEDNESS. And not only evidenced by gov’t takeover of GSEs.

            The GSEs were used by BOTH parties as a lever to reward special-interests or whipping-boy for crony-abuses. The GSEs were their own worst enemy. They “followed-the-money” into lines of business which often crossed Mission barriers. Like “tobacco bonds”. Or other similarly non-Mission business strategies aided and abetted by McKinsey and the Big-5. All the usual vampires draining blood from shareholders, homebuyers and taxpayers. Dubious GSE business activities drew the attention of non-wicked critics — like Gretchen Morgenson. Who famously said she was waiting for “bubbles” way before 2008. Had GSE management — ten years prior to the crisis — been more concerned with long-term stewardship. And less concerned with short-term pay-outs and bonuses. There would have been LOTS more champions and advocates in 2008 when Paulson and his Wall Street TBTF cronies made their move.

            The dam is breaking. This week we witnessed Wells Fargo taking hits MUCH MORE SIGNIFICANT than a few measly million in fines. No one truly believes WFC is the worst offender. Tip of the iceberg. The GSEs are part of the story of how USG and TBTF banks were able to steal and divert money from FnF, small business, taxpayers and consumers to fund the biggest transfer of wealth in US history.

            It doesn’t take much to smoke the hive…

            Like

        2. For the first commenter, we’re differing mainly in semantics. There is no single individual (e.g., “Fred Smith”) who has done or is doing all these things, and, yes, there are numerous identifiable individuals responsible for having initiated or taken actions that the courts may (and I believe will) judge to be improper or illegal. Hopefully the documents Judge Sweeney has required to the government to produce will reveal just who has been responsible for doing what.

          Liked by 1 person

          Reply

          1. Since Tim and I shared much of that history, I’ll buttress his core points by saying–while the GSE opponents were/are multitudinous–you could fit almost all of them into three generic groups, i.e. business opponents (which wanted and still want the GSEs’ income), Conservative/ideological/GOP opponents, who saw Fannie’s creation and then 1970 privatization as some type of Rooseveltian Frankenstein, and media, either hewing to the second group’s dogma or just confused by the unique “private company with a public purpose.”

            My hope, admittedly a long shot, is the more this Congress and policy makers view the big banks violative behavior (Wells and Deutsche Bank being just the most recent)–when/if they turn to the GSEs, the more virtue they will see in Tim’s suggestion of turning the GSEs into mortgage utilities, because of Fannie’s and Freddie’s ability–as the mortgage market arbiter/chokehold–to force the banks to originate conventional mortgages in a safe and sane manner or to carry their non-conforming loans on the banks’ own books.

            Liked by 1 person

      2. Tim,

        Organized opposition to FnF is more like tribal forces coming together to defeat a vulnerable prosperous kingdom so that they can share the plunder.

        Historically this is how, many prosperous empires have been destroyed by tribal forces coming together. These tribal forces use any principles of convenience to raid the vulnerable entities.

        Obviously few individuals standout. Hank, Tim, Ben, Ed, Fellow travelers.

        Liked by 1 person

        Reply

  13. As I discuss in a comment a bit further down, Judge Sweeney has said she will not remove the blanket protective order that covers all documents produced in discovery for the Federal Court of Claims case until she rules on whether her court has jurisdiction in this case, and that won’t be until sometime next year. She has, however, responded favorably to requests from plaintiffs’ counsel to remove selected documents from that order, and I suspect she will continue to do so. I agree with you that release of more documents indicating what Treasury and others were up to in their dealings with Fannie and Freddie will be grist for the media, and generate more publicity for this important story.

    Like

    Reply

  14. I just came across this information about the Senate Banking and Senate Appropriations committees introducing language to “mandate more or particular types” of risk-sharing deals with Fannie Mae and Freddie Mac. ://www.insidemortgagefinance.com/imfnews/1_942/daily/mortgage-trade-groups-fear-csp-may-be-given-to-private-sector-1000038309-1.html?ET=imfpubs:e8294:66961a:&st=email&s=imfnews
    I just thought this might be interesting to you since it is related to your article here.

    Like

    Reply

    1. I had heard about the possibility of opponents of Fannie and Freddie trying to insert language in a “must-pass” appropriations bill mandating more or different types of risk-sharing by the companies, and was glad to see that at least some of the trade groups have recognized this is a bad idea and are lodging objections to it.

      The two huge problems with making risk-sharing by Fannie and Freddie mandatory are that (a) it will be done whether it makes economic sense or not (and if it doesn’t, homebuyers will bear the extra cost) and (b) it gives all of the power for structuring and pricing the risk-sharing arrangements to the entities doing the “risk-sharing.” It was the latter that led to the ridiculous structures and pricing of Fannie’s recent CAS transactions that I discussed in my post “Far Less Than Meets the Eye,” which impose tremendous costs on the company and–because the CAS tranches are what I term “intentionally defective” structures–would provide very little transfer of risk away from Fannie even in a scenario in which credit losses soar.

      I very much hope that having groups like the Community Mortgage Lenders of America and the co-signers of their letter point out the negative consequences to homebuyers of a legislative provision mandating risk-sharing by the companies will cause legislators to realize that putting this provision in an appropriations bill is not the good thing the beneficiaries of the provision are claiming it to be.

      Liked by 1 person

      Reply

  16. Does anyone knows what means the number “270” ?
    Mrs Sweeney took her time but I am sure her opinion is “immaculate”.
    No room left for delays or tricks from the immoral lawyers at DOJ

    Liked by 1 person

    Reply

  17. Latest court filing: **SEALED** OPINION AND ORDER granting 270 Motion to Compel. By no later than October 14, 2016, defendant shall file a memorandum with the court explaining why the court should not require defendant to pay plaintiffs’ reasonable expenses incurred in making the motion, including attorney’s fees. Signed by Judge Margaret M. Sweeney. (sp) (Entered: 09/20/2016)

    Liked by 1 person

    Reply

          2. original Motion To Compel is granted and Defendants given until 10-14-16 to tell the court why they should NOT be responsible for plaintiff’s attorney costs in order to file/grant Motion To Compel

            Liked by 1 person

        1. Sorry to be so late to weigh in on this. (And this might be a good time to remind readers that this site is not the best place to get quick reactions to breaking news–at least from me. While I do spend a good deal of time thinking and writing about mortgage finance issues, it’s by no means a full time activity for me, and for that reason I often can be away from a computer for a considerable period of time, and there can be a significant lag between the time a comment is posted and I am able to respond to it.)

          From what I’ve been able to gather so far, this appears to be unalloyed good news for supporters of Fannie and Freddie. Judge Sweeney has granted Fairholme’s motion to compel the production of documents the government has been withholding in the case pending in the U.S. Court of Federal Claims (and, in yet another show of exasperation with the defense’s delaying tactics, she also is asking them to explain to her why they shouldn’t reimburse plaintiffs’ counsel for expenses and fees related to their having to file a motion to compel the production of documents she seems to believe were withheld from them frivolously).

          I have little doubt that there will be many, many documents produced pursuant to this order that will lay bare the government’s motives not just for the net worth sweep, but also for having taken the companies over in the first place, in 2008. In my view, Treasury and its allies always believed the conservatorship of Fannie and Freddie would be a “quick hit;” they would force them into conservatorship, with FHFA’s help pile non-cash losses on to their income statements and force them to take massive amounts of non-repayable senior preferred stock whose annual dividends would exceed what they ever could hope to earn in the future, and then Congress would pass legislation replacing them with some other secondary mortgage market mechanism before anyone figured out what had happened. Except this last step never occurred (largely, I believe, because there is no realistic and workable substitute for Fannie and Freddie for what they do). Then, when the non-cash expenses began to reverse in 2012, we got the net worth sweep. And then we got the lawsuits.

          But since Treasury and its compatriots always thought this would be an easy win, I don’t think anybody made much effort to cover their tracks. That’s why there were 11,000 documents over which the government has claimed privilege. Well, Sweeney figured out what the game is, and she isn’t going to let them play it. And plaintiffs counsel, in ALL of the court cases, are going to get to see all of the documents the government doesn’t want them to see.

          All of these documents, however, still will be covered by Sweeney’s protective order. That means nobody but plaintiffs counsel–and those working as consultants to plaintiffs’ counsel, who have been granted access to the documents by Sweeney–will see them. I won’t see them, you won’t see them, and even the principals of Fairholme won’t see them. But plaintiffs counsel in all of the court cases will, and they will be able to use them in pursuing their suits. I suspect there will be some VERY bad facts for the government in these documents, but we’re going to have to wait to learn what they are.

          Liked by 5 people

          Reply

          2. Tim,

            In early spring didn’t Judge Sweeney release seven protected documents on behalf of Perry and then like fifty at the request of Fairholme? What I’m not grasping is the rationale governing (a) the timing of these releases and (b) which documents shall be released.

            Presumably specific documents are being requested(?), but how would plaintiffs even know which documents among the many thousands might prove most useful? I’m too muddled on this matter even to form a proper question. Lisp to me if you would. Thx

            Like

          3. There are two separate issues here: (a) compelling production of documents plaintiffs know exist but that the government claims are covered by some type of privilege (usually deliberative process privilege), and (b) removing documents already produced by the government from the protective order that applies to all documents produced in the discovery process authorized by Judge Sweeney.

            Yesterday’s ruling was on the first issue: requiring the government to produce certain documents it previously had asserted were privileged but that Sweeney has ruled should not be. I’m still reviewing the legal documents, but it appears as if at this point Sweeney has required production of only some of the 11,000 documents over which the government had asserted privilege. The specific documents covered by Sweeney’s order, however, would be ones identified by plaintiffs counsel, based on what is called a “privilege log” compiled by the defense. In this log, the government cites all individual documents for which it is claiming privilege, and describes their general content (if they are emails, that would include sender, recipients, cc’s and a summary of the subject matter). From that privilege log, plaintiffs counsel can identify the documents they’re most interested in seeing. I’m sure those are the ones plaintiffs have asked to see first, and which Sweeney has ordered the government to produce.

            When these new documents ARE produced by the government, however, only plaintiffs counsel and their consultants will be able to see them, because they still will be covered by the protective order. You are correct that Sweeney has released some documents from that order, but the vast majority remain under it. She has said she will not consider releasing all documents produced in discovery from the protective order until some time after she has ruled on whether her court has jurisdiction over this case (people forget that all this discovery is intended to answer that threshold question first), which based on her own schedule will not be until sometime next year. In the meantime, plaintiffs can request, and have requested, that she release certain documents from the protective order, and I suspect they will continue to do that in the coming months (although I can’t predict which documents plaintiffs will ask to be made public, or when they might do so).

            Like

          4. Tim,

            Thanks for filling in the gaps. I’m clear now. What raised my questions is somebody, who happens to share your name :), wrote this: “Contrary to what is being said Judge Sweeney has never ordered the government to produce documents that were being withheld under privilege. This is the first time.”

            Like

    1. I wasn’t aware of it, and in checking the website of the House Financial Services Committee it appears as if the hearing–“Corporate Governance: Fostering a System that Promotes Capital Formation and Maximizes Shareholder Value”–won’t have anything to do with mortgage finance, Fannie or Freddie. What may be causing you to think it might is that the hearing is not at the full committee level, but in one of the subcommittees: Capital Markets and Government Sponsored Enterprises. Not all hearings in front of this subcommittee, however, deal with mortgage finance, and tomorrow’s looks as if it will be one of those that doesn’t.

      Liked by 2 people

      Reply

  19. Freddie Mac Starts Pilot Program With Looser Standards: There’s a definite trend in play perhaps it parlays with CSP..

    FHFA has established a pattern of initiatives within the Treasury’s frame work of “winding down.” IMO there isn’t the capital in the pvt mkt to sustain a 30 yr mtg..

    So, my question is, what do you think FHFA’s end game is. And is it viable, sustainable. I keep thinking if the end game is to keep the gov’t as a back stop then why the charade??

    Liked by 1 person

    Reply

    1. I continue to believe that Watt and FHFA feel boxed in by the posture their counsel have taken in their joint defense in the net worth sweep cases, and that until there is a ruling against that posture FHFA will keep behaving in a way that supports Treasury’s objective of winding down and replacing Fannie and Freddie. A verdict in the Perry Capital appeal in favor of the plaintiffs–be it reversal or remand–would send a clear signal to FHFA that it cannot do as it (or Treasury) pleases with the companies irrespective of the language in statute, and that to be in compliance with the law it will have to start acting to conserve Fannie’s and Freddie’s assets. What FHFA does then should give us a better clue as to what its “end game” may be; until then it’s anybody’s guess.

      Liked by 3 people

      Reply

  20. Thanks Tim for evaluating proposals from other “experts”.

    Their logic is strange. GSEs’ loan quality is too good. This is supposed to be good to the taxpayers. But someone sees a problem: Credit is too tight. If GSEs take more loans, someone else or even the same people would likely complain about lack of capital.

    Like

    Reply

  21. IT IS A CARDINAL PRINCIPLE OF OUR SYSTEM OF CRIMINAL LAW THAT THE FACTS ARE SETTLED BY THE TRIER OF FACT, BE IT A JURY OR A JUDGE, AND ARE NOT ORDINARILY TO BE DETERMINED BY A REVIEWING COURT.”
    —DOUGLAS GINSBURG

    Read more: Douglas Howard Ginsburg – Judge, Reagan, Court, and Justice – JRank Articles http://law.jrank.org/pages/7157/Ginsburg-Douglas-Howard.html#ixzz4KKtHQ4o

    Perry Appeal case is a civil case but i think the principle is the same as that of criminal case. Considering that there were facts that were not known in Lamberth decision but now known in discovery documents where do you think the appeal case will go?. Another question the panel asked, does the “sovereign immunity” of government actions apply in this case. Does Congress through HERA grant sovereign immunity to FHFA? Treasury? Who calls the shot between FHFA/Treasury?So many questions not answered by Lamberth decision. So many facts not taken into consideration.
    Your guess on the appeal opinion is as good as mine and others. But “if facts are not settled, then remand should settles the facts”. In closing allow me to remind you of above quote of Judge Douglas Ginsburg.

    Liked by 1 person

    Reply

  22. Tim can you comment on the 100 share lots drastically bringing down the preferred prices of both FNF and FRE since Monday? Do you think it’s the Obama Administration’s last attempt to scare shareholders into selling of their investment before a win in appeals?

    Like

    Reply

      1. Ethan: I don’t watch the short-term movements in Fannie’s and Freddie’s stock prices, common or preferred, nor do I make any attempt to explain them. Ultimately, the fundamentals will dictate the values of the shares, and in the companies’ case that’s the court cases. (I understand that if you’re hoping to make money on your investments in Fannie and Freddie you want to try and understand why the shares are doing what they’re doing; but that’s neither my personal focus nor the focus of this blog.)

        Like

        Reply

        1. Tim,

          It is well established fact that Gov bureaucrats actively manipulated FnF stock prices.
          Currently we do not know who are still manipulating the prices.

          Like

          Reply

  23. Tim,

    If we lose the appeal because the court agrees with Lamberth’s interpretation of HERA, I must think HERA will have to be contested. Allowing for what I believe to be the in vogue and strained reading of HERA, I don’t believe even the infamous Judge Lamberth would find it constitutional. I’m ok with HERA but I interpret it as Epstein and all others who think right. If it can be read reasonably in a way that doesn’t deny the constitution, then it should be read that way.

    This leaves me with a technical question. Can the appeals court agree with Lamberth’s interpretation of HERA as it relates both to judicial immunity and in perpetuity takings, yet still rule in spite of what they think Congress enacted (whether wittingly or unwittingly)? In other words, if they find HERA unconstitutional, is their only option to tell plaintiffs to file suit against the injustice of HERA or may they rule in favor of the plaintiffs and against the law of HERA as they interpret it. Did Lambeth have such latitude given his interpretation of HERA?

    Liked by 1 person

    Reply

    1. Ron: If the appellate court does agree with Lamberth–which I don’t anticipate it will– I’d need to know the basis of that ruling before opining on what options would remain either for the plaintiffs or other shareholders to contest FHFA’s behavior as conservator under the Administrative Procedures Act. But I’d add that a loss in Perry still would leave (and probably strengthen) the contention in the Federal Court of Claims that the net worth sweep was a taking of property that requires just compensation to be paid to the companies’ shareholders under the Fifth Amendment.

      As to your technical question, that’s well beyond the scope of my (limited) legal expertise to answer.

      Liked by 4 people

      Reply

      1. “But I’d add that a loss in Perry still would leave (and probably strengthen) the contention in the Federal Court of Claims that the net worth sweep was a taking of property that requires just compensation to be paid to the companies’ shareholders under the Fifth Amendment.”

        Yes, Tim. I’ve been convinced of that too. I’m just wondering whether the court can skip that step, should they strangely interpret HERA according to Lamberth yet still find NWS unconstitutional – hence my question. And, if yes, could Lamberth have broadened his lense had he considered NWS a takings?

        Hoping all good things.

        Like

        Reply

      2. Tim – Are both common and preferred shareholders currently in the Court of Claims, or just the Pfds? Also – the court of claims will take about 2-3 years, is that correct?

        Like

        Reply

        1. Since 2013 there have been over half a dozen lawsuits filed in the U.S. Court of Federal Claims challenging the 2012 net worth sweep, and one suit (Washington Federal) filed in 2013 also challenging the legality of the 2008 conservatorship. In all of these cases, the theory of law behind them is that the government’s actions constituted an illegal taking of property under the Fifth Amendment, requiring compensation to the companies’ stakeholders. Both common and preferred shareholders thus would benefit from a finding against the government in any of these cases, although the specific damages granted to any class of stakeholder is difficult to estimate at this point (and would be affected by what Judge Sweeney deems to be the facts and circumstances underpinning the case). I cannot make a reliable estimate of how long it might take for any of the cases to be decided (the net worth sweep cases will be addressed first, since Washington Fed has been stayed), and once Sweeney does decide one of more of them it/they almost certainly will be appealed.

          Like

          Reply

    2. Several federal courts have recently affirmed Lamberth’s decision on HERA’s anti-injunction provision and derivative claims (all powers of shareholders transferred to FHFA, as conservator). Not to say these couldn’t be overturned in the Perry appeal, just unlikely.

      This leaves Perry’s Class Plaintiffs direct claims still unresolved. Direct claims are contractual. For instance, preferred shareholders have a contract with the respective company and that contract has essentially been breached by the sweep.

      Government will argue that HERA succeeded all powers of shareholders to government, including the right to make direct claims. A hard case to make, in my opinion. Indirect claims on behalf of the companies, yes, but not direct claims on behalf of individual shareholders directly injured.

      Lamberth also ruled that direct claims weren’t “ripe” and would only be so in receivership if no subsequent amendments weren’t passed. If a common sense reading of the 3rd Amendment doesn’t disabuse anyone of this notion of what government’s purpose was and continues to be, then discovery should have accomplished that.

      Liked by 2 people

      Reply

      1. “Several federal courts have recently affirmed Lamberth’s decision on HERA’s anti-injunction provision and derivative claims (all powers of shareholders transferred to FHFA, as conservator). Not to say these couldn’t be overturned in the Perry appeal, just unlikely.”

        Just unlikely? I wouldn’t have imagined it legally possible that Perry could *directly* overturn decisions that were *based upon* Lamberth. Although it might cash out the same if those cases are appealed on the basis of Perry overturning Lamberth, but I wasn’t expecting them to be directly overturned if Lamberth is overturned.

        So, to be clear. Can the appeals court say, “yes, we agree with Lamberth’s rendering of HERA, but we think it’s unconstitutional and, therefore, we are ignoring the unlawful constraints…” Or, must they, if they agree with the rendering, limit themselves to direct contractual claims only?

        Like

        Reply

      2. Whaley: I agree that in the Perry Capital case plaintiffs derivative and direct claims will be decided based on different theories of law. I’ve always thought that the contractual (direct) claims in Perry were very strong, and likely to prevail even if the derivative claims fail (which I don’t think they will). If the Court of Appeals does find in favor of the plaintiffs on the contractural claims and for the government on the derivative claims, my understanding is that for Treasury to maintain the net worth sweep it would have to retroactively pay dividends to the preferred shareholders, beginning on the date Treasury received its first payment on the net worth sweep. I think the defense argument that the direct claims aren’t “ripe” is weak, and likely not to be sustained.

        Liked by 1 person

        Reply

  24. “The Federalist Society for Law and Public Policy Studies is a group of conservatives and libertarians interested in the current state of the legal order. It is founded on the principles that the state exists to preserve freedom, that the separation of governmental powers is central to our Constitution, and that it is emphatically the province and duty of the judiciary to say what the law is, not what it should be. The Society seeks both to promote an awareness of these principles and to further their application through its activities.”
    Judge Douglas Ginsburg, the lead judge in the Perry Appeal case could be the one to pen the decision in the Perry appeal case. He is known to be a conservative which means he is basically a “free market” advocate and less of government. If he based his decision on what the constitution say on illegal taking/5th amendment considering that FNF are publicly traded/private corporations then he will write for remand. If he interprets HERA the same as that of Lamberth he will concur with Lambert.
    No one knows what is on his mind but we hope he will not support “absolute power” to other branches executive/ congress that allowed conduct(illegal) without review of the judiciary.

    Liked by 2 people

    Reply

    1. Yesterday Judge Sleet denied the application of the plaintiffs in this case (David Jacobs and Gary Hindes) to certify a question to be posed directly to the state supreme courts of Delaware and Virginia regarding the legality, under their respective state laws, of the net worth sweep–specifically, its giving a single class of shareholder (Treasury) the right to cumulative dividends equal to the entire net worth of Fannie and Freddie in perpetuity. In Sleet’s (short) ruling, he said the plaintiffs’ request did not meet the standard for such certification that “there is an important and urgent reason for an immediate determination of such question or questions,” because, in his view, the issue is moot given the ruling by Judge Lamberth–which remains in effect–that HERA bars plaintiffs from suing FHFA for any reason.

      “Practicing [law] without a license,” I view Judge Sleet’s ruling yesterday the same as I did Judge Caldwell’s dismissal of the Robinson case last week: he knows Lamberth’s decision in the Perry Capital case in under appeal, and doesn’t want to issue a ruling contrary to that decision–no matter how unreasonable many of us feel it to have been–before the DC Circuit Court of Appeals rules on it.

      On its face, Sleet’s ruling is yet another setback for challenges to the net worth sweep. But it also may be helpful at the appeals level–whether in the DC Court or, ultimately, the U. S. Supreme Court. If the net worth sweep really IS illegal under Delaware and Virginia state law, that raises the stakes for upholding the notion that there could be any aspect of the language in HERA that permits FHFA to do something that clearly is illegal yet still be immune from judicial action. An appeals ruling in favor of that interpretation would mean that the drafters of HERA had hit upon some “magic language” that produces this result. Obviously, such language would be of great interest to drafters of future legislation wishing to grant powers to some entity while simultaneously insulating them from legal challenge no manner what they did in exercising those powers. Do we really want to go there?

      Liked by 2 people

      Reply

      1. Is Mr. Steele the lead lawyer for the plaintiffs (Jacobs/Hindes)? Do you have contact with Mr. Steele? What is his legal opinion on the the ruling of Mr. Sleet? Why did the plaintiffs lawyer ask for the certification? You have a good question/comment.
        ” If the net worth sweep really IS illegal under Delaware and Virginia state law( as well as under our constitution), that raises the stakes for upholding the notion that there could be any aspect of the language in HERA that permits FHFA to do something that clearly is illegal yet still be immune from judicial action”

        Like

        Reply

      3. Hi Tim,

        Why are there so many rulings (in a hurry it seems) while we are within touching distance of a verdict from Perry’s appeal? Someone speculated that maybe these judges had got wind of a negative verdict. Would you agree with this speculation?

        Like

        Reply

        1. Again, I’m not the legal expert, but I don’t believe the recent two rulings have been made because of a leak about the outcome of the Perry Capital appeal. If anything, it’s likely to be the opposite: the length of time it has taken the appellate court to rule makes it very probable that its decision will be to either remand or reverse Perry, so both Caldwell and Steele have made their rulings to take the pressure off themselves to be the first to make a pro-plaintiff lower court ruling after the decision of the DC Circuit Court of Appeals does come down (in the plaintiffs favor). I continue to believe that all these lower court judges are trying to say, “no, you go first,” to one another, because irrespective of the merits of the case none of them wants to be the one to tell the government it has to pay back over $100 billion to two companies Treasury doesn’t like.

          Liked by 2 people

          Reply

          1. I spoke with a seasoned trial lawyer, they said “courts always take the easy way out and let others do their work all the time” they also said, in their most recent court of appeals case, it took 7 months for a decision but it was a win” she is confident we will win Perry. Tim thanks for reaching out to small investors, it helps keep the faith.

            Like

    1. I don’t know why defense counsel in the Delaware case is opposing the issuance of the 8K requested by the plaintiffs, although I think I can make a pretty good guess.

      For those not following all the court cases that closely (a group in which I would include myself), on Wednesday, September 7, plaintiffs counsel in the Jacobs-Hindes lawsuit, before the U.S. District Court in Delaware, filed a request to amend their complaint by dismissing eight of the original counts (III though X) and adding two new ones (if accepted, the new III and IV). Not surprisingly, defense counsel did not object to plaintiffs dropping counts III through X, and did object to adding the two new ones (which are for “unjust enrichment.”) The odd stance, to me, was the objection of the defense to Fannie and Freddie issuing an 8K requested by the plaintiffs.

      Of the eight counts the plaintiffs have agreed to drop, six (III through VIII) are class action complaints, and two (IX and X) are so-called “derivative” complaints. In their filing, plaintiffs counsel note that for derivative claims, “[p]ursuant to rule 23.1(c) of the Federal Rules of Civil Procedure, ‘[n]otice of a proposed settlement, voluntary dismissal, or compromise must be given to shareholders or members in the manner that the court orders.'” Plaintiffs accordingly asked the defense to send out an 8K informing shareholders of the dismissal of counts IX and X, but the defense opposed that request. I suspect this is a simple matter of “running the clock”–which seems to be the government’s one consistent strategy in all the cases–in which, rather than agreeing to do something (sensible if not mandatory) that the plaintiffs have asked them to do, the defense will wait until the judge orders them to do it.

      Liked by 2 people

      Reply

  27. Tim, have you seen the news about the Kentucky case being tossed out now? How is this possible? Judge even says that FHFA is allowed to do whatever it wants in regards to FNF. I’m really shocked at her ruling.

    Liked by 1 person

    Reply

    1. I just heard about it. But I’m not shocked. This was a case that originally was before Judge Thapar, who in July recused himself because he discovered that his wife owned 16 shares of Fannie Mae stock. The case then was given to Chief Judge Caldwell.

      My strong suspicion is that after (or perhaps even before) Judge Caldwell got the case, she realized that (a) a ruling on the same issue was currently on appeal from the DC District Court, and (b) it’s a hot potato, and she said to herself, “I’m not going to be the one to rule against the government on a $100 billion-plus lawsuit; I’m agreeing with Lamberth” (whose ruling is on appeal).

      But the Robinson decision (the Kentucky case) really doesn’t change anything. Lamberth’s interpretation of HERA– that it allows FHFA as conservator to do whatever it wants with Fannie and Freddie–is now before the DC District Court of Appeals. And as I note in my response to a comment below, if the appellate judges were going to uphold Lamberth they would have done so months ago. The fact that haven’t strongly suggests they either will reverse it, or remand it to the lower court for fact finding and subsequent adjudication.

      Yes, this is a defeat for Fannie and Freddie, but I don’t believe it is one of any significance.

      Liked by 2 people

      Reply

      1. I would say Caldwell does not have the time, inclination nor the resources to handle this case and she took the easy way out. This is a very complicated case which requires a lot of research. By simply concurring with lamberth she can get rid of this case quickly and not use up the courts resources. I would agree that it is not a big deal. The appeals case is what most everyone is waiting for.

        Liked by 1 person

        Reply

        1. That is not justice. That is only laziness or fear. It’s too bad its easier to make a judgement based off workload, instead of whats obviously fraud. What is the point of a judge anyway? I would put more faith in a coin flip. At least the odds of winning/losing would be fair and unbiased. A coin is not worried about work load or politics. Yes, at this point, a coin toss would have provided better justice, and saved us a bunch of time.

          Like

          Reply

      2. Thank you for shedding some light on this ruling Tim. Hope you keep this blog going. It’s fantastic and you’re a true friend to Fannie and Freddie.

        Like

        Reply

  28. Do you have any thoughts that the longer the DC Court of Appeals takes to rule, the more likely a remand or reversal is likely for the following reasons:
    1.  To affirm is a simple quick order to write;
    2.  To write a reversal of the Lamberth 50 pages ruling, with all of the issues involving different departments and agencies will take a long time;
    3.  Finally a remand make take a long time to write as well, because specific reasons and instructions will need to be issued regarding what may need to be discovered in the ‘new directions’ to the lower court?

    Liked by 1 person

    Reply

    1. Yes, I definitely agree with that. I believe the length of time it’s already taken the judges to rule virtually eliminates the possibility of an affirmation of the Lamberth decision. I used to think that the longer it took for a ruling to be made the more that tilted the odds towards an outright reversal–because the judges would want to write their opinion so as to minimize the possibility of having it overturned–but I now have come around to the position you’ve articulated, which is that it could take them equally long to give administrative guidance to the lower court upon remand. We’ll just have to wait and see which it is. I’d now be shocked if it were an affirmation, though.

      Liked by 3 people

      Reply

      1. I’ve been of the opinion that guidance would take longer than reversal, especially the needed guidance that would put Judge Lamberth in a straight jacket. Obviously Lamberth is challenged by the task of interpreting HERA in a prima facie manner and in a way that doesn’t undermine the Constitution. Accordingly, he needs much guidance, as I believe at least Judge Ginsburg recognizes.

        Liked by 1 person

        Reply

    1. A 1/4 to 1/2 percent rise in interest rates would likely have a very modest negative impact on both companies’ operating net income, but a fairly significant positive (short-term) impact on their GAAP net income.

      The reason for the modest negative impact on operating net income is that somewhat higher interest rates would likely have a dampening effect on housing activity. Lower levels of mortgage originations and therefore somewhat fewer new mortgages coming to the companies to be guaranteed would lead to modestly lower guaranty fee income in the coming quarters.

      More than offsetting this economic effect in the short run would be the fact that a 1/4 to 1/2 percent rise in mortgage rates would have a positive market value impact on both companies’ derivative books. Just as Fannie and Freddie’s derivative books take a temporary GAAP net income hit when interest rates fall, they benefit when rates rise. If rates then stabilize, however, there will be no further positive GAAP net income from the derivative books, and going forward the companies would be left with slightly lower guaranty fee income (because of having done slightly less new business).

      Liked by 1 person

      Reply

  30. Thanks Mr. Howard for the excellent write!

    “Even as the 2008 financial crisis raged, opponents of Fannie and Freddie ignored the role played by PLS and asserted that the companies were its cause.” Sounds like strong motivations within government to paint an untrue picture but why? 1) Was it for political gain. Elections due and if the public new the real cause i.e. government lack of over site? 2) Was it Republican hate for the GSE’s and the crisis gave opportunity to get rid of and give to TBTF? IMO all are true!

    Democrats too surprisingly jumped on board of the Republican narrative after Obama took office but for different reasons. Seems Obama #1 priority was the AHCA which Republicans hated with plans to restrict funding when they took control back of Congress in 2012. Now with battle lines drawn it seems Obama used the GSE’s false narrative to justify winding them down for no other reason but to steal the money for his own agenda’s.

    Why not! The Republicans were not going to give him what he wanted so he used the opportunity to steal tens of billions on a lie perpetrated by the Republicans which they would say nothing about, yet they would still be faced with dealing with the housing situation at some point down the road.

    Really a story of the fox “Obama” out smarting the fox “Republicans” at the expense of the American taxpayer, shareholder, and eventually housing if government does not soon get its act together. Now the courts must sort out! Shameful what government has done here!

    Liked by 1 person

    Reply

  31. “The Single Security should also reduce the trading value disparities between Fannie Mae and Freddie Mac TBA securities. ”

    This matters why?

    http://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Single-Security-Background.aspx

    “A Single Security/CSP Industry Advisory Group of stakeholders—
    including representatives from lenders, servicers, securities dealers, investors, consumer groups,
    and trade associations—has been created by the Enterprises and CSS to provide feedback and
    share information related to the development of the platform”

    I’ve yet to see the mentioned “investors” defined.

    Click to access CSP-Update-Final-9-15-2015.pdf

    Like

    Reply

    1. The phrase you mention–“the Single Security should also reduce the trading value disparities between Fannie Mae and Freddie Mac TBA securities”–matters to Freddie, because to offset investors’ valuation of those disparities Freddie has to quote lenders a lower guaranty fee on any particular pool of mortgages to be competitive with Fannie. With the Common Securitization Platform (CSP) and a single security, Freddie should be able to raise its guaranty fees.

      A good question to ask here is, when Freddie raises fees after the CSP, who pays for that? Surprisingly, it’s neither the borrower nor the lender; it’s the investor. Under Freddie’s current security structure, investors get paid earlier each month (compared with a Fannie security). In theory, a security that pays investors earlier has greater value, and should command a higher price. But investors never have been willing to pay that theoretical value, so to offset its “price spread” disadvantage, Freddie has had to cut fees to be competitive with Fannie. After the CSP, Freddie securities will have higher fees and a longer payment delay–and investors [seemingly] will be indifferent to that.

      As I’ve mentioned elsewhere, however, while it makes great sense for Freddie to be paying to change the structure of its security (with the CSP) to make it more competitive, it makes no sense at all for Fannie to be picking up half (or more) of the cost of that project, as FHFA is making it do now.

      Like

      Reply

  32. CSS was created by and is jointly owned by FNMA and FMCC as stated by FHFA.

    If the CSP software is “ready” then why absolutely no mention of what the “TBA” securities are, will be priced or how they are valued and who may participate in the “TBA” market for those securities. The list of “stakeholders” FHFA named during the creation of the CSS/CSP reads like a list of those with interests in seeing Fannie and Freddie destroyed, including their shareholders.

    “TBA” because the pending lawsuits or “TBA” because its gonna be as dirty as the false need for conservatorship, a fraud already known to many and hurting many, shareholders or not.

    Like

    Reply

    1. I don’t see any misbehavior here. “TBA” is simply a term used to describe the way lenders get commitments to deliver fixed-rate mortgages into mortgage-backed securities (MBS). As lenders are originating loans, they agree to deliver them at some date in the future–sometimes several months off, and typically before the loans have closed. That’s why, in selling them, they’re called “TBA”– their characteristics are not yet known, but “To Be Announced.” For the loans to be termed “good delivery” as TBA loans, they need to meet certain characteristics, but all lenders know what these are.

      Having this TBA feature greatly increases the efficiency (and lowers the cost) of the mortgage finance system. With it, lenders can manage what’s called their “fallout risk”–that risk that a potential borrower gets a better rate from a second lender, and doesn’t close on the first lender’s loan– by selling loans forward as TBA. If some particular loans don’t close, the lender can either deliver different loans, or cancel the forward sale (through what’s called a “pair off.”) All above board, and very efficient.

      Like

      Reply

  33. Tim,
    What do you think will happen to the GSE within the next 2 years?

    Will they be released from conservatorship after the next President sworn in?
    Will there be a breakthrough in court which force government to settle with plaintiffs?
    Will Congress eventually get their act together and pass a bill to eliminate GSEs?

    Thanks.

    Like

    Reply

    1. I wish I knew the answer to that. I believe the courts WILL rule in Fannie and Freddie’s favor in the net worth sweep cases, and that should have two effects. First, it will increase the cost of replacing them–since their existing shareholders will very likely need to be compensated–making it harder for opponents of the companies to allege that there are benefits from that replacement that would offset its costs and associated uncertainties. Second, a ruling against the government in one or more of the net worth sweep cases would highlight the factual record that underpinned the sweep–with Treasury having undertaken it with the objective not (as it claimed) to keep the companies from entering a “death spiral” of indebtedness, but to ensure that when the mountain of non-cash expenses it and FHFA had loaded onto Fannie and Freddie’s income statements (to force them to take an unnecessary $187 billion in senior preferred stock) were repaid, the proceeds would go to Treasury and not to Fannie and Freddie’s shareholders.

      As I mentioned in my post, there currently isn’t any obvious problem that would be solved by replacing Fannie and Freddie. And if the cost of replacing them is perceived to be higher (because you have to compensate their shareholders), and the motives of those advocating that replacement are called into question through the revelation that Treasury treated them unfairly and then lied about it, that SHOULD lower the odds of Congress taking action against them. But the forces aligned against the companies are very powerful–and a huge amount of money is at stake (the profits that would flow from control over a $10 trillion market)–so those forces won’t go down without a fight, and they still might prevail.

      Liked by 1 person

      Reply

      1. In general election, many choose not to vote. What this mean? Status quo is okay!

        Now many lawmakers say nothing about GSE. Again, status quo is okay!

        I have no doubt: home loan borrowers will win. And others on their fellow travelers.

        Like

        Reply

    1. The article cites the drop in both companies’ outstanding debt from the low $800 billion range in 2008 to the mid $300 billion range currently. That’s entirely due to the fact that, as part of the Senior Preferred Stock Agreement, Treasury insisted that Fannie and Freddie shrink their mortgage portfolios by 10 percent per year (a pace that was increased when the net worth sweep was adopted). If you shrink the portfolios, the debt will shrink as well.

      I originally was a critic of the mandate to shrink the portfolios. Interest rate risk from them did not play a role in the mortgage crisis– to the contrary, income from the portfolios was helping the companies offset credit losses from their guaranty books–and I knew Treasury was insisting on the shrinkage for unrelated reasons: it had always opposed Fannie and Freddie’s portfolio operations, and shrinking them would reduce the companies’ income (at the time, two-thirds of their revenues came from their portfolios, and one-third from the guaranty business), making it harder for them to offset the non-cash expenses Treasury and FHFA were intending to smother them with following the conservatorship. But I’ve since concluded that shrinking the portfolios is a good thing. In my opinion there isn’t any way for Fannie and Freddie to be in the portfolio investment business without an implicit government guaranty on their debt, and keeping that, post-conservatorship, isn’t in the cards.

      Liked by 4 people

      Reply

      1. Thanks your knowledge of the financials is invaluable to my understanding of the situlation. Kendall Baer’s article was not a complete look back at the previous 8 years of conservatorship, as she claims; your Amicus Curiae brief gives a much clearer and easier to read account of conservatorship actions during that time period, while she points to a few selective facts without explanation.
        I had read in Bethany McLean’s book, “All The Devils Are Here”, that Alan Greenspan, the Federal Reserve Chairman at the time, was concerned with GSE interest rate risk, but was blind to credit and derivative risk.
        The problem I see going forward, more so than credit or interest rate risk, is political risk. Even if Fannie and Freddie Mac are released and put back into capable hands, there is always the threat of political medling by certain self serving factions that could destabilize the mortgage market for their own narrow minded objectives. That is why I believe it may be best to set up the GSEs as public utilies independent of outside political control.

        Like

        Reply

  35. Tim,

    Thanks, Once again great article filled with unbiased analysis.

    How is it that these FnF opponents never directly respond to any questions that expose their schemes. These people only work on their talking points and their message consistently remains the same irrespective of any newly discovered facts. Hope these people will respond to your articles and justify their reform ideas or stop peddling the snake-oil remedies.

    Like

    Reply

  36. I would urge a bit of caution with regard to calls for “wider” credit guidelines. While some prudent further changes may be possible, I’m not one who sees a lot of running room before slipping back to imprudent practices (low/no doc, seller “gifts” for the down payment, etc). We should also not forget that FHA and VA have quite liberal credit standards, and their loan limits are quite high so many borrowers that cannot qualify for GSE credit can certainly get mortgage credit with government insurance programs.

    I think two possible additional drivers for the very low default rates in post-crisis GSE loans is (1) the robust recovery in home prices since around 2010, and (2) positive borrower self-selection. Borrowers willing and able to step forward and buy a home from 2010 to 2014 were probably some of the most resilient financially and must have been relatively confident about their own financial prospects when they stepped forward and bought their homes when memories of the crisis were still very fresh. These “vintage” effects work both ways, but we usually only remember the bad vintages that arise when times are booming and everyone wants to lend and borrow. Importantly, these recent vintages were overwhelmingly primary home buyers or rate/term refinancers, as opposed to speculative players such as investment and second home buyers.

    I’m just urging care because we may have a very good mortgage situation in our country that is affordable, quite accessible (especially when FHA and VA credit are factored in) resulting in less vulnerability to boom-bust cycles. I think that is kind of market we want, and most benefits the country and market participants that have a long-term view.

    Like

    Reply

    1. Adolfo–For the most part, I believe Tim was/is addressing the conventional, non-government insured or guaranteed mortgage efforts.

      I don’t know of anybody–and certainly not this blog’s host–suggesting going back to the “wild times’ associated with the PLS era, loans which the GSEs, today, could not buy or securitize.

      But, given the very high credit profiles associated with today’s conventional lending, there probably is a tranche of would be borrowers/buyers–especially with the support or deeper MI–who could qualify and maintain their mortgage obligations should the agencies, including the GSEs and the CFPB, seek to loosen that credit box.

      Like

      Reply

      1. Adolfo: As Bill says, it’s a matter of degree. I’m certainly not suggesting the return of low- or no-doc lending, but given the exceptionally low delinquency and default rates of Fannie and Freddie’s books of business over the last half-dozen years, I do think there is room for the companies to accept more risk–particularly for lower-income and lower-credit score borrowers–than they’re doing now.

        But I agree with you about some of the reasons for the superb performance of these loans. The 2011-2015 years will be seen, in retrospect, as exceptional vintages, because of the circumstances under which they were acquired: extremely diligent underwriting, a carefully screened set of borrowers, and home prices rising steadily after having fallen precipitously for four years. Even if Fannie and Freddie make no changes at all in their underwriting, their books from the next five years almost certainly won’t perform as well as the 2011-2015 loans are likely to. But we shouldn’t expect them to.

        And that gets me back to a different, but related point: Fannie and Freddie’s business model. Even before I learned that Fannie’s CAS securities have an “intentionally defective” structure and transfer very little credit risk, I was a critic of Fannie doing risk-sharing on loans from these most recent years because their credit quality was so high. As you know, a critical element of Fannie’s (and Freddie’s) credit risk management is the diversification of risk over time– you “bank” the excess returns from your best years of business, and make that capital available to comfortably cover your losses from the less good (and potentially very poor) years. When you pay investors to take remote levels of risk on very good business, you’re wasting capital you should be retaining for the less good years to come.

        Finally, while I did agree with Ms. Goodman that there is room to relax the “credit box,” that wasn’t the main point of my piece; it was to highlight the absurdity of “mortgage reformers” calling for the replacement of Fannie and Freddie as credit guarantors in order to make the system safer, while in the meantime, in the real world, mortgage credit risk–for Fannie, Freddie and most others–has virtually disappeared.

        Liked by 1 person

        Reply

    1. Lisa: Neither the Urban Institute nor I claim that Fannie and Freddie are “squeaky clean;” the Urban Institute used that phrase to describe their loans from 2011-2015, and I concur with that description. But both companies still have a sizable number of non-performing loans from the 2005-2008 period, as a carryover from the housing and mortgage market collapse. The recent sale by Fannie to which you refer is of those older loans.

      Liked by 4 people

      Reply

    2. Still selling vintage non performing loans could this be why conservatorship continues? Everyone’s fear overdone. FHFA will always do the right thing after all the wrong things have been tried first! Winston Churchill

      Like

      Reply

  38. Well written and very easy to understand. Just the title” A Solution In Search of a Problem” shows how some policy makers ( aka opponents of FNF) are approaching the reform of US mortgage industry. I can not help but cite your closing statement that emphasizes that they can not identify the problem but have a solution.
    ” In contrast to the arguments for excessive Fannie and Freddie capital requirements, the problems with the credit box are real. They are based on economics, and their resolution will depend on politics. Advocates for replacing Fannie and Freddie with mechanisms they favor will continue to cite stress tests padded with non-cash expenses, and liquidity cushions with no rationale in practice, as the basis for capital requirements that make the companies’ credit guarantees noncompetitive. Yet if policymakers fall prey to these ploys—and either replace Fannie and Freddie with a less efficient secondary market mechanism or force them to hold capital unrelated to the risks of mortgages they guarantee—we won’t solve our credit box problem. Instead, we’ll end up with a “reformed” mortgage system in which some financial institutions are more profitable, but large segments of the home-buying population remain underserved, and all segments pay more for their loans than they should. It’s a simple choice: we can solve the real mortgage problem, or one that’s been made up”.

    Like

    Reply

  39. “A solution in search of a problem” Excellent title!
    As they cannot find the problem they make it up : non cash losses and custom made stress tests .

    Like

    Reply

  41. It is absolutely criminal the tight underwriting guidelines that FHFA requires. Even Bernanke could not get financing on his home a few years ago. FHFA has run the housing economy into the ground for traditional owner occupied home buyers while enriching cash buyers and home rental companies seeking to purchase rental properties at rock bottom prices like colony financial, invitation homes, american residential, tricon and others..

    Liked by 2 people

    Reply

Leave a comment