Deferred Reform, and Deferred Taxes

The ruling by the U.S Court of Appeals for the D.C. Circuit on February 21 that the net worth sweep falls within the statutory powers granted to the Federal Housing Finance Agency (FHFA) by the Housing and Economic Recovery Act of 2008 removed any chance for quick administrative action on mortgage reform by the Mnuchin Treasury. A ruling remanding the sweep to the lower court for review, or reversing it, would have provided impetus for settlement negotiations between plaintiffs and the government, which is a requisite first step toward reforming and recapitalizing the companies. With the sweep effectively upheld by the D.C. court, however—and no developments in other courts posing any imminent threat to it—at the moment neither the government nor the plaintiffs has incentive to initiate settlement discussions. Thus, administrative mortgage reform is stalled.

Probably not coincidentally, two days after the appellate court decision Mnuchin publicly pushed back his timetable for dealing with Fannie and Freddie. Speaking on Fox Business, he reiterated his personal interest in resolving the eight-year impasse with the companies, saying, “Housing reform is a priority for me. It’s something I know a lot about; I’ve been involved in this business for a long period of time.” But he went on to say, “This is something that’s going to take us a little bit more time. It’s not something we’re going to deal with as quick as taxes, which is our number one priority, but we’re committed to a solution.” With tax reform first in the queue, and the amount of time it should take to agree on a reform package, most observers now believe housing reform won’t be taken up until this fall at the earliest.

Putting housing reform behind tax reform also adds a complication to the task of ultimately recapitalizing the companies, should that be what Mnuchin chooses to do (as I believe it will be). Reducing the corporate tax rate is a key objective of tax reform. A cut in the corporate tax rate is a long-run positive for Fannie and Freddie because it will lower the taxes they pay, but in the short run it will reduce the value of their deferred tax assets (DTAs). DTAs arise when a company pays taxes in cash to the IRS before it can expense them on its income statement. If the corporate tax rate is cut, a company with DTAs will have paid some (or perhaps a lot) of its taxes at what will turn out to be “too high” a rate, and will have to write off the difference between what it paid in cash and what it now can deduct on its books.

At December 31, 2016 Fannie had $33.5 billion in net DTAs (that is, deferred tax assets less deferred tax liabilities), while Freddie had $15.8 billion. Should those amounts remain unchanged, a cut in the corporate tax rate from 35 percent to 25 percent would cause Fannie to write off $9.6 billion of its DTAs, while Freddie would have to write off $4.5 billion. A cut to a 20 percent rate would result in write-offs of $14.4 billion and $6.8 billion, respectively.

Both companies might be able to absorb a DTA write-off from a cut in the corporate tax rate to 25 percent if Treasury and FHFA allow them to skip their scheduled net worth sweep payments to Treasury in March and June. But the opinion from the D.C. Circuit Court of Appeals last week makes that alternative much less likely. Even should he wish to, Secretary Mnuchin does not have a defensible public rationale for allowing Fannie and Freddie to retain funds that an appellate court has just opined belong to the government.

Still, there is a step the Mnuchin Treasury could take that would help the companies reduce their DTAs, and also increase their retained earnings to aid in an ultimate recapitalization. It could, and should, abandon the policy of the Obama Treasury of having FHFA manage Fannie and Freddie with the objective of weakening them to make it seem more feasible or desirable to wind them down and replace them. If Mnuchin is serious about using the companies as the basis of the future mortgage finance system, he should want them to be run in a way that maximizes their value as stand-alone entities, and should permit Fannie and Freddie’s management to make their own decisions on business matters, as well as accounting policies.

The size and composition of the companies’ DTAs are determined largely by their accounting choices. Since the conservatorship—and in Fannie’s case several years before that—those have been made not by company management, but by FHFA.

Because Fannie’s DTAs are more than twice the size of Freddie’s, it’s instructive to focus on the history of that company’s DTAs. In the 1990s, Fannie had a relatively simple business: it earned a spread between the yield on the mortgages in its portfolio and the cost of the debt it used to fund them, and earned fees on mortgages it guaranteed as mortgage-backed securities. It also had relatively simple accounting, and as a result the cash taxes it paid closely matched the liability for income taxes it recorded on its books. As of December 31, 2000, Fannie had no DTAs.

That changed in 2001, with the adoption of FAS 133, accounting for derivatives. FAS 133 required the company to put its “derivatives in loss positions” on its balance sheet, resulting in a net DTA of $3.8 billion that year. As Fannie’s use of derivatives to hedge its portfolio increased, so did its DTAs. By the time of Fannie’s 2003 annual report—the last one I prepared for the company—its derivatives-related DTAs had risen to $8.1 billion, pushing its total net deferred tax assets to $9.1 billion.

The next phase of Fannie’s DTAs began following the special examination of Fannie conducted by its then regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) in 2004. In that examination, OFHEO aggressively challenged a number of the accounting treatments Fannie was using, most prominently its application of FAS 133. After the chief accountant of the SEC agreed with OFHEO that Fannie had not applied FAS 133 correctly—and said that as a consequence it would have to restate its earnings—both Fannie’s CEO Frank Raines and I were asked to leave the company, and OFHEO gained enhanced regulatory control over it.

OFHEO’s charges of accounting improprieties subjected me to eight threatened or actual legal actions. While preparing for the defense of one of them (I don’t recall which), I was shown a copy of a memo the Director of OFHEO, Armando Falcon, had sent to his Chief Compliance Examiner, Chris Dickerson, recapping a meeting he’d had with the Chairman of the SEC, Bill Donaldson. In it, Falcon said he had told Donaldson that in the special examination he was going to require Fannie to comply not just with GAAP but with “the most conservative form of GAAP.” Accordingly, when Fannie’s restated earnings for 2002-2004 were published in December 2006 the company and its new auditor, Deloitte and Touche, had changed more than fifty of the accounting treatments used by previous management. (Fannie described all of these changes as “corrections of errors,” but in a subsequent deposition Deloitte declined to endorse that characterization.)

“The most conservative form of GAAP,” of course, is one that defers the recognition of income and accelerates the recognition expense by as much as the accounting standard setters permit. Deferral of revenue and acceleration of expense (relative to the time frames used by the IRS for required cash taxes) create deferred tax assets, and in the wake of Falcon’s accounting directive Fannie’s DTAs more than doubled, reaching $20.6 billion at June 30, 2008.

In conservatorship Fannie’s DTAs then tripled. OFHEO by that time had been replaced by FHFA and, in consultation with Treasury, FHFA added massive amounts of non-cash expenses to Fannie and Freddie’s books in the 2008-2011 period, with the intent of forcing the companies to take non-repayable senior preferred stock from Treasury on which they would be obligated to pay a 10 percent after-tax dividend in perpetuity. The large majority of these non-cash expenses fell outside the bounds set by the IRS for the deductibility of expenses for cash tax purposes. At the end of 2011, Fannie’s net DTAs were an astounding $64.5 billion, reflecting over $180 billion of accelerated expenses or deferred revenues.

Fannie’s net DTAs have been worked lower since that time, primarily because most of its non-cash expenses either reversed or became deductible for book purposes. Yet at $33.5 billion they remain extremely high. With a much smaller mortgage portfolio, only $3.0 billion of that total is due to “debt and derivatives instruments,” the category that made up almost all of Fannie’s DTAs before then-OFHEO now-FHFA began to dictate Fannie’s choice of accounting treatments. Today, Fannie’s two largest sources of DTAs are “Mortgages and mortgage-related assets” ($17.1 billion) and “Allowance for loan losses and basis in acquired property, net” ($9.5 billion).

In my view, excessively conservative accounting—deliberately chosen by FHFA (and Treasury) to make Fannie look less profitable than it truly is—is the reason for most of the company’s DTAs. Although I’ve been away from Fannie for over a dozen years now, I strongly suspect that it could lower its DTAs significantly by changing from “the most conservative form of GAAP” to more mainstream accounting treatments that better align with both the economic realities of the company’s business and the timings used by the IRS. Were I CFO of Fannie, I certainly would ask my accounting team to take a close look at this. The impending write-down of the company’s DTAs if and when tax reform is enacted puts a hard dollar cost on the accounting choices that drive those DTAs. Fannie and Freddie should try to reduce that cost by as much as they can by moving to what in their judgment are the best accounting treatments, not ones mandated by a conservator trying to make them look less profitable.

Fannie and Freddie would need Treasury and FHFA’s approval to make any changes in their accounting that lower their DTAs. But the companies have nothing to lose in asking for that approval, and I believe the Mnuchin Treasury would grant it. If it did, FHFA almost certainly would as well. And there would be deserved justice in this. The bulk of Fannie and Freddie’s DTAs stem not from their own accounting choices but from ones mandated by the government, so it is only fitting that the government permit them to try to reduce the adverse impact of tax reform on those DTAs.

Fannie and Freddie also should request of the Mnuchin Treasury more independence in making their business decisions. Both companies routinely state in their 10Ks that constraints imposed upon them by their conservator may have adverse effects on their business and financial results (as indeed they do). Easing or removing those constraints would increase their profitability, helping them to recapitalize both directly—through higher retained earnings—and indirectly, through the effect of higher earnings on their stock price, and thus their ability to raise capital efficiently once they are permitted to.

An early indication of whether Fannie and Freddie do have more independence in their business decision-making will be whether they continue their credit risk transfer programs. Again focusing just on Fannie, it currently pays an estimated $750 million per year in interest on Connecticut Avenue Securities (CAS) mezzanine tranches for which it will receive little if any benefit. If Fannie stops issuing CAS immediately, the dollar amount of its CAS interest payments should decline fairly rapidly, because prepayments on the collateral the CAS are “insuring” have averaged over 15 percent per year since the program’s inception, and the mezzanine tranches are beginning to pay down quickly.

Both Fannie’s CAS and Freddie’s STACRs are tremendously uneconomic and are significant drains on their earnings. While stopping CAS and STACR issuance won’t have the same near-term impact on the companies’ bottom lines as winding down their DTAs, over time the cumulative impact will be greater. The Mnuchin Treasury and FHFA must “remove their feet from the companies’ air hoses” and allow each of these benefits, and others, to assist Fannie and Freddie in preparing for an eventual release from conservatorship.

184 thoughts on “Deferred Reform, and Deferred Taxes

  1. Good Morning Gentleman
    I have a question for ROLG if he is around . So far the Perry case remains consolidated. But what would happen if the different plaintiffs decide to take different paths from now on? Is it possible?
    or they have to remain in a consolidated case?. My question is because some of them may want to appeal “en banc”, others directly to the SCOTUS and, others be remanded at once.
    Can they choose ” a la carte” ?

    Liked by 1 person

    1. @incidental powers

      like tim, i am going to keep my prediction hat in the closet for awhile. but you ask a good question, and my best response is to keep close watch on the hindes/jacobs case before judge sleet in delaware.

      @curiousgeorge, you should keep a close watch on the collins case in southern district texas.


      Liked by 1 person

      1. And we “may” watch also Washington Federal Vs US. – The irremovable case that someone called some time ago a “STEAMROLLER” waiting in the parking lot of the Court Of Federal Claims.
        The conservator “may” have to listen to them finally.

        Liked by 1 person

          1. Thanks, I also think that Hindes will be very fast related to WF . But, as you said, WF is going nowhere. Nowhere means not forward but not backward either. It remains there as a Damocles Sword for UST, because discovery in Sweeney’s Court, plus the Eton Park meeting, plus the contributions of forensic accountants, plus the unconstitutionality of FHFA, plus the fact that today it is “a fact” that the GSE did not need the bailout, etc, etc, are all starts that are getting lined up in favor of WF, and then, at the time of a settlement, someone will say : Hey !… lets not forget that we still have WF in queue! and someone will have to call them and ask them how much they want ? So.., even if they remain always stayed, they will have a word and a heavy one I suspect.
            WF has been always underestimated because it was supposed to be difficult to prove. However the facts are working for them. And, like Tim said, facts are stubborn things.


  2. Hey Tim, have you given any consideration to what the implications might be if the FHFA is ruled unconstitutional? I’m having trouble understanding what this might mean in the grand scheme of things.

    Liked by 1 person

    1. If FHFA were to be ruled unconstitutional because it is an agency headed by a single director removable only for “inefficiency, neglect of duty, or malfeasance in office,” the consequences for FHFA (and for Fannie and Freddie) would depend on what the judge determines is the proper remedy. It is possible that the net worth sweep would be overturned as a result of a ruling against FHFA’s single directorship, but there are other potential outcomes as well. Since my track record on predicting the results of legal cases affecting Fannie and Freddie has not been very good, I’m not confident I can predict this one either. We’ll just have to wait to see how it plays out.

      Liked by 1 person

  3. Do you know what “parking ticket” violations Hank Paulson is talking about in his book “On The Brink” that James Lockhart referenced to threaten Fannie Mae to go into conservatorship on 9/6/2008 ? I am doing some extensive research on the hostile takeover for a piece I’m working on any input would be greatly appreciated.

    Liked by 1 person

    1. No, I do not. By the time of the takeover I had been out of Fannie Mae for almost four years, and because of pending litigation had been advised by counsel not to have contact with current Fannie Mae executives. I read about all of the goings-on at that time second hand, as most people did.

      Liked by 1 person

  4. Tim, if Treasury allows F&F to keep the sweep payment or take it by March 31st would we even know until the 2nd Q earnings? or would they make a statement about if they decide to let the companies keep it?

    Liked by 1 person

    1. The Fed’s original decision to begin paying banks interest on their reserves at the Fed–made in 2006 with an effective date of October 1, 2011, accelerated to October 1, 2008 when the financial crisis hit– might have been taken to help the banks financially, but in the wake of the Fed’s “quantitative easing” program begun at the end of 2008, paying interest on bank reserves now has a legitimate purpose in the conduct of monetary policy.

      Some numbers here might help. At the beginning of this month, banks were required to hold $173 billion in reserves at the Fed. Their actual reserve holdings were $2.3 trillion, meaning they held $2.13 trillion in excess reserves. Almost all of these were created in the wake of the Fed’s quantitative easing program, in which it bought long-term Treasury bonds and agency mortgage-backed securities in very large volumes in an attempt to bring long-term interest rates down (the Fed now holds $1.76 trillion in Fannie, Freddie and Ginnie Mae mortgage-backed securities, up from zero at the end of 2008).

      When the Fed buys Treasuries or agency MBS in the open market, it pays for them by crediting banks’ reserve accounts at the Fed. Prior to the quantitative easing program, the Fed would manage the one interest rate it controls– the federal funds rate, which is the rate banks pay when they buy or sell reserves from or to each other–by managing the amount of excess reserves in the system. The fewer the excess reserves, the more banks who found themselves short of their reserve requirements in any given week would be willing to pay for those reserves to the banks that had the excess. This approach to managing the fed funds rate, however, fell apart when excess reserves began to shoot higher after the implementation of quantitative easing. To enable the Fed to keep control over the funds rate, it had to began paying banks interest on their excess reserves at the same rate it was targeting for fed funds (otherwise the banks would have an incentive to sell their excess funds at a lower rate). Currently, the Fed pays the same interest rate on required reserves as it does on excess, although it could, if it wished, pay a lower rate, or no interest, on required reserves.

      So today, it’s not accurate to say that the Fed is paying interest on reserves to subsidize TBTF banks. And the reason it doesn’t pay interest on balances held at the Fed by Fannie and Freddie (who use the Fed as their fiscal agent) is because there are no reserves required by the Fed of Fannie and Freddie–all the balances the companies hold there are voluntary.

      Liked by 2 people

      1. I think I need a figure to understand all of this. Or a debit/credit ledger example of some sort. It seems complicated!



  5. Tim, With capital balances heading to zero by Jan 2018 and the additional risk of DTA write-down, some believe fnf will be placed in receivership. However, under a r-ship, wouldn’t the warrants become worthless as well? IF that is correct, then it would seem a r-ship will not occur and that the commons, just like the warrants, will have some value (even if diluted by 79.9% plus another ??% needed for recap). BTW, I’m not asking what the recap will look like, just would like to know if the warrants would be worthless in a r-ship. TIA, shadow

    (PS I tried to post this the other day but it showed up under some one else’s user name pending moderation. Not sure how/why that happened, but apologies for the confusion I was some how responsible).


    1. I’ve answered the receivership question before: Fannie and Freddie won’t be put into receivership by the government just because they have no capital (particularly given that it’s the government that’s taken the capital); they only would be put into receivership if the government had a workable plan to replace the billions of dollars of fixed-rate mortgage financing they do each month–which it’s nowhere close to having.

      As to the impact of receivership on the warrants, my policy is not to speculate on the how various hypothetical outcomes of the lawsuits, settlement of the lawsuits, or mortgage reform alternatives would affect the value of investments in Fannie and Freddie, whether preferred or common (including the warrants).

      Liked by 1 person

  6. Tim, going through the UI proposals, I’m trying to understand why its so hard for policy makers to accept the simplest and most sensible path for f&f: set capital requirements based on ’07 experience, limit shareholder returns to avoid perverse incentives, make government guarantee explicit, recap and release. Everyone wins, and most importantly, we don’t risk hurting a vital part of the economy. Why then is this so hard to accept for UI contributors? And whatever influence they are under that prevents them from accepting this, will it also affect Mnuchin, his team, and Watt? We all know f&f are political pariahs, but there seems to be more potent subterranean forces at play here. These contributors are not dumb or unreasonable people.

    Liked by 2 people

    1. I’ll begin by saying that I think it’s a significant positive that Secretary Mnuchin– who has experience with and a solid grasp of the fundamentals of mortgage finance–will be vetting the various proposals put forth for secondary market reform. This greatly reduces the chance of our making a serious policy error.

      I also am puzzled by why the Urban Institute is pressing so hard to advance a proposal that isn’t just flawed. but in my view unworkable. I’ll have more to say about this in my next post.

      Fannie and Freddie are “political pariahs” because their opponents have for two decades invested incalculable hours and untold dollars in a fact-free exercise of demonizing them in the eyes of the general public and Congress. I firmly believe that there is no way to “undo” that damage, which is why it’s so important that the reform process now has to funnel through Secretary Mnuchin, who will be able to sort through fact and fiction about the companies.

      I don’t, though, endorse your proposal for reforming them. If by “set capital requirements based on ’07 experience” you mean set a fixed capital requirement equal to the loss experience of Fannie’s 2007 book, that’s too severe, and would cripple the company’s business. I could possibly see setting capital requirements based on the loss experience of Fannie’s 2007 BOOK of business (which included, obviously, 2007, but also many other years), but I still advocate a true risk-based requirement–set by product, LTV and credit score categories, with an overall minimum. And I’m also not a big fan of an explicit government guaranty; I prefer a support agreement, where if either Fannie or Freddie ever come close to eroding their capital, Treasury agrees to make them short-term, cost-plus, repayable loans (as it did with the banks during the 2008 crisis) until they can recapitalize.

      Liked by 2 people

      1. “I prefer a support agreement, where if either Fannie or Freddie ever come close to eroding their capital, Treasury agrees to make them short-term, cost-plus, repayable loans (as it did with the banks during the 2008 crisis) until they can recapitalize.”



      2. Thanks Tim. You’re implying that its a matter of competence. Bethany Mclean has a maxim: “never underestimate the amount of incompetence in the world.” I hope its that simple, and I also hope you’re right to put faith in Mnuchin


        1. Just one point I’d like to add: I noticed JPM is listed as a major donor of UI. Jamie Dimon has previously called the gses “the biggest disasters of all time.” Perhaps this explains at least some of UI’s bias towards antigse proposals.


    2. With regard to FnF current business decisions, in your estimation has FnF strayed from their core business, i.e., Are they busy “giving away the farm” in a significant way, i.e., making bad or non sensible not easily reversible transactions? And, has Freddie strayed too but not as far as Fannie? I have nothing to base this question on other than “feel”. With a return to pre 2007 business practices can we expect better performing quarterly earnings? 50% better? Thank-you for all you do!


      1. With the obvious exception of actions Fannie and Freddie have been taking at the direction of FHFA and Treasury–the issuance of non-economic risk-transfer securities and, for Fannie, spending tens of millions of dollars to develop a common securitization platform that will reduce or eliminate a competitive advantage it currently has over Freddie–I don’t think the companies’ current business decisions are “giving away the store”.

        You may be reacting to an article posted on the CNN website yesterday by former St. Louis Fed president William Poole (a harsh critic of Fannie and Freddie for more than two decades), in which he took a statement from Freddie’s 2016 annual report–“Expanding access to affordable mortgage credit will continue to be a top priority in 2017”– and concluded that “[Fannie and Freddie] may be buying even weaker mortgages than before the financial crisis.” He goes on to say, “The GSEs are wrapping new subprime mortgages into the mortgage-backed securities they sell to the market. Fannie and Freddie guarantee those securities, and because the federal government stands behind the GSEs, there is little market discipline. Think about that: With regard to subprime mortgages we may now be in worse shape than before the financial crisis.”

        What? Poole gives no evidence, and cites no data, to back up his claims. Contrast that with an article published six and a half months ago by the Urban Institute that drew on actual delinquency and default data at Fannie and Freddie to note that loans purchased or guaranteed by the companies since 2011 are “hardly defaulting at all.” Calling those loans “squeaky clean,” the Urban Institute said, “The performance of mortgages originated over the past few years…suggests that there is plenty of room to expand the credit box….Put simply, it’s time to lend again again to borrowers with less-than-perfect credit.” The choice between a fact-free contention about Fannie and Freddie’s credit quality from a committed critic of the companies (Poole) and a data-based assessment of that same credit quality by the Urban Institute–with a conclusion opposite to Poole’s– shouldn’t be that hard to make.

        Still, I wouldn’t say that “a return to pre-2007 business practices” would lead to “better performing quarterly earnings.” The big difference between then and now is the size of Fannie’s and Freddie’s mortgage portfolios. At the end of 2007, their combined portfolios totaled $1.44 trillion; at the end of 2016 they were $570 billion. At an average net interest margin of 100 basis points (a conservative, meaning low, estimate) that’s close to $9 billion in combined earnings the companies now aren’t getting because their portfolios are so much smaller. Those earnings aren’t coming back, even under a “reform, recap and release” scenario.

        Liked by 1 person

  7. So I’m sure most know this already, but it would appear that the F&F money was obviously used/diverted to fund Obamacare. Does anyone know, if and to what extent, this may be relevant to ongoing litigations?


    1. Irrelevant what we funded. No way to tell once money hit the Tsy coffers anyway. All that matters is how they credit the 10% dividends and the sweep. That’s where the docs come into play.

      The docs the administrator will need to power through congressional gridlock are the same docs that’ll influence a decision regarding the warrants.


      1. Yeah, that’s what I was referring to. I don’t completely understand your response but it sounds like you said that “where” the money was spent is irrelevant. Could you elaborate on that? And does that article not specifically show that they can prove what it was used for?


        1. I’ve addressed this issue in response to previous comments, but I’ll briefly recap my views here.

          I would counsel people to be careful not to make more of the association between the net worth sweep and the funding of Obamacare than is actually there. I have read most of the major pieces on this subject, and there is no direct, or causative, connection between the decision to enter into the net worth sweep and a need to fund the subsidies in Obamacare. I know some people are speculating that such evidence may be found in the 11,000 documents still being withheld by the government, but so far nothing has been produced.

          The fact that net worth sweep payments were received by the government, and Obamacare subsidies were paid for by the government does not mean that dollars from the net worth sweep went directly to fund Obamacare. For one thing, money is fungible. For another, there is a significant timing difference: net worth payments in fiscal year 2013 were $130 billion, while the estimate of $130 billion in required Obamacare subsidies is over a 10-year period.

          The one thing we do know about this issue is that monies received from the net worth sweep went into the general fund (i.e., were not restricted to being spent for a specific purpose), and because of restrictions imposed by Congress monies spent on Obamacare subsidies were, for a while, also sourced from the general fund. That’s a commonality, but not (based on the lack of evidence produced so far) a causative connection.


        2. If away at school you had 100 dollars from your summer job, you took from your father an additional 100 dollars and then you spent 100 dollars on beer, whose money did you spend on beer? Once the money hit your pocket it’s indistinguishable.

          Secondly, if you stole the money from your father, would it matter whether you used it for beer or books? It’s irrelevant with respect to the fact it was stolen money. By analogy, whether O spent it on OCare or some cause both parties would support isn’t relevant.

          Lastly, what Tim said.


  8. tim

    i have a suspicion that capital levels for GSEs will be a contentious issue going forward.

    capital calculations seem reasonably straightforward in terms of balance sheet analysis, but it seems (at least to me) to be very ambiguous when these credit risk transfer deals are done (see eg

    you have posted an analysis that calls into question exactly how much credit risk is actually transferred in these deals. doesn’t the whole CRT program call into question a transparent analysis of GSE capital, what it is and where it needs to be going forward? i feel like the CRT program is another shell game where some hidden objective is being pursued, and the most important objective (building GSE capital) is being obfuscated.


    Liked by 1 person

    1. This IS an important topic, and one I’m planning on addressing in my next post (likely to come out some time next week).

      The Urban Institute, the Milken Institute and the Mortgage Bankers Association each have mortgage reform proposals (or in the MBA’s case, an outline) that rely either heavily or exclusively on risk sharing as a substitute for equity capital. None of them describe how their plans will actually work, however; they just assert that they will. And nobody seems to be bothered by that.

      I’m doing an analysis now that starts with the assumption that all of the $2.53 trillion in single-family loans Fannie Mae had on its books at December 31, 2007 were covered by Connecticut Avenue Securities (CAS) credit risk transfer (CRT) securities, then looks at what percentage of the $84.5 billion in 2008-2016 loan losses from these books (2007 and earlier) would have been transferred to CAS M-2 and M-1 tranche holders, and what percentage would have been left with the company. I won’t spoil the ending, but the results make clear that you can’t come close to financing a $5 trillion secondary market with risk-transfer securities alone (and there are other interesting insights that emerge from this analysis as well). To be successful, any secondary market credit guaranty mechanism has to have a very large amount of upfront equity capital behind it. Full stop.

      And as soon as you introduce the (essential) element of equity capital, another question immediately pops up: under what conditions does it make sense to substitute CRTs for equity? Why not just do all equity? And if you do a CRT, how do you (or regulators) evaluate it as a dollar substitute for equity (what I refer to as an “equity equivalent”)? These are questions you HAVE to answer when you start proposing to use CRTs as a substitute for capital. So far none of the “reformers” have gone near any of them: they’re operating at the 36,000 foot level, apparently thinking that just because they can’t see any of the complex details on the ground they don’t matter. Well, they do.

      Liked by 3 people

      1. “To be successful, any secondary market credit guaranty mechanism has to have a very large amount of upfront equity capital behind it. Full stop.”

        and i would add that it has to be perceived by all mortgage finance participants and stakeholders that the capital backstop is there. equity capital is visible on the balance sheet. these CRT transactions are opaque.

        for the life of me, i cant believe that i) CRT transactions can provide any unambiguous assurance that credit support in some precise amount has been provided, and ii) one can rely upon capital market participants to buy CRT securities when the going gets tough, which is exactly when the need is great. if you have previously raised equity capital, it is there to absorb losses, and you dont have to go find some hedge fund to do some highly structured transaction at precisely the time that hedge fund is, shall we say, otherwise engaged.


        Liked by 1 person

      2. Hi Tim – It seems any capital levels above 5% begin to make GSEs less and less viable as businesses given their current earning power. For example a 5% capital level would drop the the Fannie Mae ROE to ~6%. If so, higher capital levels mean raising guarantee fees which starts to bump into GSEs “affordable housing’ mission. What are your thoughts on these “constraints”?


      1. the various US attorneys are criminal prosecutors. they have nothing to do with the defense of the GSE litigation.

        there are two near term issues in which one may look for some DOJ movement under trump. first, i expect collins to file a brief in southern district of texas regarding the unconstitutionality of fhfa configured with a single director removable only for cause (3/20). i expect the DOJ to file an amicus brief in phh en banc briefing before dc circuit which could very well side with collins P on this issue. this would leave only fhfa to defend itself on this claim in collins. second, i would hope that the DOJ would follow judge sweeney’s order for DOJ to produce documents without its previous level of resistance in fairholme, with DOJ to respond by mid-april.

        Liked by 3 people

  9. Tim

    Would you know if there is any legal precedent for the government ignoring a judges ruling? For instance what are the repercussions to the government if they simply do not turn over the documents and delay and then ignore in Sweneys court?

    Thanks for any insight you can provide!


  10. I want to share here the opinion of my neighbor , who is a retired judge and lawyer with 50 years in business litigation. He says that the whole thing in Perry comes down to this five minutes analysis and everything else is fabricated.
    Except as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or as a receiver.

    Then he says that only the powers as conservator should be analysed because FHFA never has been a receiver.

    12 USC 4617(b)(2) D . POWERS AS CONSERVATOR.
    The Agency may, as conservator, take such action as may be- (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and the property of the regulated entity.

    This means clearly that no court can take any action to stop FHFA from putting the regulated entities (FnF) in sound and solvent condition , or to stop FHFA from preserve and conserve the assets and property of the entities. But if FHFA is doing the opposite than preserving , then ANY court can stop FHFA actions.

    Then it comes an important, but not key, question: is the NWS good or bad for the companies ?
    The key question is: How could Lamberth know weather the NWS is good or bad without a trial?
    The fair thing to do was , and still is, stop the NWS on relief and proceed to trial.

    Liked by 5 people

      1. Yes and a rational person thinks that may means shall – may doesn’t open up the door to give the conservator all the money and act on the conservator’s behalf – you can’t say this is a ‘different’ kind of conservatorship and try to justify it that way but that’s what they did. Apparently the Judges think that the most convoluted way to rule was the best in this case – maybe it’s because Ginsburg has been in bed with the wrong people since 2008 – look it up – he was buddy buddy on panels with them specifically about GSE reform then. No Recusal – give me a freaking break.


        1. Let’s make this the last comment on the ruling of the appellate court for the D.C. Circuit. There are many, many opinions on why the majority ruled as it did, none of which will change the result (or affect the next judgment). It happened, so what’s now important is what may happen next.

          Liked by 5 people

      2. And Brown’s dissent clearly explained that it should not be an issue because the ‘may’ is merely acknowledgement that they ‘may’ still fail. You cannot command success.


  11. Today Tim Pagliara’s petition to have his law suit remanded to Delaware’s Court got granted.
    The Judge is Justice Sleet. He also presides Hindes -Jacobs Vs Us. Do you see more chances now that Hindes will be consulted with Delaware Supreme Court ?

    Liked by 2 people

    1. this is getting into some serious legal weeds, but here is my latest thought process, based upon judge sleet’s decision in pagliara:

      judge sleet in his decision to remand in pagliara has just indicated to the hindes/jacobs Ps that it’s direct claims that NWS breached Ps’ rights as preferred and common stockholders under delaware general corporation law (dgcl) are not preempted by HERA.

      now, the crucial claim that hindes/jacobs wishes to pursue is that the NWS is an invalid preferred stock under dgcl (cant have a preferred stock which owns all rights to equity). their initial strategy was to assert this claim as an APA claim, saying that the NWS violates the APA since it is invalid under state law. this would be precluded if judge sleet follows perry on HERA’s anti-injunction 4617(f). sleet hasnt addressed this point in pagliara.

      but in my view, hindes/jacobs should be able to assert that, in determining a proper remedy for breach of Ps’ shareholder rights, instead of resorting to the standard money damages remedy (which perry referred to), hindes/jacobs should be able to argue that because the NWS is invalid under dgcl, fhfa has unclean hands and a proper unjust enrichment remedy should be granted (which a delaware chancery court routinely grants), which would place Ps in position they were in before the invalid NWS was issued. this would have the effect of restoring the GSEs to the original terms of treasury’s preferred stock.

      this would get at the invalidation of the NWS as a remedy for a contractual breach by an instrument that was invalidly issued, as opposed as a direct claim under APA.

      this line of thinking would also apply to hume’s case in perry upon remand.


      Liked by 4 people

      1. Thank you ROLG . And do you think that the Delloitte case that was first brought to the Florida State Court , could now be remanded to the state Court instead of dismissed by the District Court ?

        Liked by 2 people

  12. Tim,

    Good morning. Mark Calabria, who Mike Pence hired as his chief economist, was quoted by CNBC yesterday saying “GSE reform is top priority. The taxpayer is more exposed now than ever”. That comment would lead one to believe that Calabria will be involved with GSE reform. I view this as a positive because Calabria will represent the conservative establishment during discussions. Alternatives in this scenario could have someone like Hensarling continuing to advocate for a wind down.

    How would you critique the “Making a Fannie and Freddie We Could Live With” article that Calabria and Pollock authored back in 2015?

    In addition, as you are aware, Calabria has a reform proposal alongside yours in the Urban Institute Housing Reform Incubator. Calabria advocates for turning the GSE charters into Bank Holding Companies, but allowing shareholders to maintain economic interests. What hurdles do you foresee in this plan of action?

    Thank you in advance!

    Liked by 1 person

    1. I’m sure Calabria would LIKE to be involved in mortgage reform efforts. His position as chief economist to Vice President Pence doesn’t give him an obvious seat at the table or even entree to the discussion, however (recognizing at the same time that policy formulation responsibilities typical of past administrations haven’t been a very reliable template for this one).

      As to Calabria’s past work, it is decidedly not Fannie and Freddie friendly. The first piece you cite, co-authored with Alex Pollock, is the standard list of “reform” recommendations made by the companies’ critics for decades: take away all of their charter benefits, make them hold “bank-like” capital (but without bank-like asset powers), and wish them good luck with their new lives. That’s not the reform the nation’s homebuyers need or deserve.

      Liked by 2 people

      1. just to amplify tim’s point, i see mnuchin managing the GSE reform effort on a two-track basis, i) seeking input from various stakeholders (this is the political aspect, respecting, or appearing to respect, thoughtful contribution from all sides), and ii) implementing a plan that he has already been worked on, by means of a disciplined inside team that maximizes whatever objectives mnuchin has established (mnuchin has said that he considers himself an expert on GSEs, and stated that he has a “team” working on GSE reform at treasury).

        this is a typical investment banking approach: smile and listen to outsiders (especially patrons), but organize a (usually small) disciplined team that identifies objectives and priorities, sets out to achieve these efficiently.

        so there would appear to be many people (such as calabria), both inside and outside the trump administration, who have a view and will express it to mnuchin (or on tv in order to try to have mnuchin hear it). indeed, we all hope that tim will be one of those people who mnuchin will find most helpful!

        but the real question is: who is on the team that mnuchin said he has established at treasury? i am thinking that cohn is on that team, but i wonder who else…


        Liked by 3 people

          1. likely phillips:

            “Craig Phillips, who joins the Treasury from BlackRock, where he served as Head of Financial Markets Advisory and Client Solutions. According to Phillips’ Treasury bio, while at BlackRock, he led a “broad-based practice which advised central banks, banking supervisors and multi-lateral organizations around the world, including the Federal Reserve Bank of New York.”

            Reuters reported back in September that Phillips planned to leave BlackRock for a potential “transition to the public sector.”

            Here’s a selection of that article that sheds more light on Phillips:

            A Wall Street veteran for decades, Phillips joined the company during the apex of the global financial crisis as the once-marginal bond-focused manager became the largest company of its kind globally and found new heft and demand for its counsel in the years during and since the global financial crisis.

            BlackRock marshaled the unit Phillips runs—Financial Markets Advisory, or FMA—in 2008 when the company was tapped by the Federal Reserve Bank of New York to help manage assets and keep the financial system running smoothly.

            “FMA has not only become a thriving business, it has contributed to BlackRock’s reputation in a way that truly sets us apart from other asset managers,” said the memo, which was signed by BlackRock Chief Executive Larry Fink and two of his senior deputies, Rob Kapito and Rob Goldstein.

            According to Phillips’ BlackRock bio, he joined the company in 2008. Previously, Phillips served as a managing director of Morgan Stanley from 1994 to 2006. While at Morgan Stanley, he worked in the company’s Fixed Income division, and was responsible for oversight of its global Securitized Products Group.

            At the Treasury, Phillips will work with Mnuchin on issues relating to “domestic finance, housing finance policy and regulatory reform,” the announcement said.”

            Liked by 1 person

    1. sweeney ordered the govt to follow the federal circuit’s decision affirming her decision with respect to all but 8 of the 56 docs, and examine all 11000 docs and provide Ps those docs that are consistent with the decision. my own view is that this affords govt too much discretion and Ps will be back at sweeney once govt produces what it produces. Ps wanted to “sneak peek” all docs for themselves, but sweeney wouldnt allow this.

      Liked by 2 people

      1. Whatever documents are held by Gov after April deadline will be viewed “in camera” anyway. Judge Sweeney will get to the bottom of the affair.

        Liked by 4 people

  13. Tim,

    Your post about Parrott exposes the ugly underbelly of this entire fiasco. Non-experts meeting with the Treasury to impose expert advice is frustrating. The Trump Administration would be doing a disservice to the American people by not consulting with you on Fannie & Freddie reform.

    I along with many others hope that you are front and center of a meeting with Mnuchin in the near future. I also hope that Laurie Goodman at the Urban Institute realizes that Jim Parrott is discrediting their discussions. If Mnuchin is in fact taking Parrott and DeMarco seriously, we are in ENORMOUS trouble.

    Staying constrained to this blog could spell a reckless US mortgage finance future. Godspeed to you, sir!

    Liked by 2 people

    1. I appreciate the encouragement you and others have offered in your comments, but also want to respond to the notion that I am in some way “constrained to this blog.”

      I began meeting, speaking and corresponding with policy analysts, Hill staff and plaintiffs in the lawsuits on matters related to mortgage reform shortly after my book “The Mortgage Wars” was published at the end of 2013. I’ve only been doing the blog since February 2016. (One of my reasons for starting it was that I found myself saying or writing the same things multiple times to different people or groups, and felt that putting my thoughts and analyses in a blog not only would be more efficient, but also reach more people.)

      I generally don’t talk about or publicize who I’m meeting or corresponding with, or what I say to them, because I think I can be more effective operating behind the scenes. But let me comment on two people whose names you’ve cited–Laurie Goodman of the Urban Institute, and Secretary Mnuchin.

      I have met and exchanged voluminous correspondence with Laurie. Prior to publishing my piece on Fannie’s CAS titled “Far Less Than Meets the Eye,” I shared my findings and analysis with both her and Mark Zandi (the written part of these exchanges ran to close to 10,000 words). Neither Laurie nor Mark found any fault with my analysis, but I couldn’t get them to agree to change the structure of the Urban Institute’s “Promising Road” proposal so that it was not reliant on “deliberately defective” risk-transfer securities, nor even to publicly state that all risk-transfer securities need to include an “equity equivalency” measure that equates a dollar of face value of a CRT with a dollar of upfront equity capital. I remain baffled by why Laurie and Mark continue to support a proposal that relies on a form of risk-sharing that they both know will transfer only a very small fraction of the credit risk it is advertised (and widely believed) to transfer, leaving the rest hidden to blow back on the issuer of these securities in a severe loss scenario. But it’s not that I haven’t tried my best to get them to come around.

      As for Secretary Mnuchin, although I’ve not yet met with him, it’s very likely that I will at some point. But when I do I won’t talk about it in this blog, or beyond a very small circle of people.

      My goal is to do what I can to help get to the right solution on mortgage reform. I understand that most of the readers of this blog also have a goal of getting maximum value for their investments in Fannie and Freddie, be they common or preferred, in a minimum period of time, and for that they’d like frequent reports on how the battle is going. For my purposes, though, sometimes it makes sense to give those, and sometimes it doesn’t. I hope people understand.

      Liked by 10 people

      1. Tim,

        I read through your post “Far Less Than Meets the Eye”, and think you may be understating the amount of risk transferred by the CAS securities.

        I agree that the results in the prospectus show minimal recoveries by Fannie, but the assumptions underlying those results do not reflect the reality of a stress scenario. In particular, the results assume that the Delinquency Test is satisfied for each Payment Date (outlined in the assumptions preceding the results). From the prospectus,

        The Delinquency Test for any Payment Date is a test that will be satisfied if:
        (a) the sum of the Distressed Principal Balance for the current Payment Date and each of the
        preceding five Payment Dates, divided by six, is less than
        (b) 40% of the excess of (i) the product of (x) the Subordinate Percentage and (y) the aggregate UPB of the Reference Obligations as of the preceding Payment Date over (ii) the Principal Loss Amount for the current Payment Date.

        If this test is not satisfied, as it would not be in a stress scenario, unscheduled principal is not allocated to the Notes. So, as long as sufficient delinquencies happen early in the term, there will be minimal amortization of the limit (or none, depending on the tranche). If you look at the table of Cumulative Credit Events in the prospectus, you will see that there are many scenarios which have more loss than the initial credit support for the Notes, so as long as the limit remains in place, there is opportunity for Fannie to get recoveries.


        1. Johnathan: You’re right about the assumptions; the loss sensitivity tables do state that the delinquency test is assumed to be satisfied. (I find that odd, since delinquencies are closely related to defaults, and it shouldn’t be hard to build the delinquency test into the default scenarios shown in the sensitivity tables; that’s what I figured they had done. Without that, Fannie is disclosing loss sensitivities that may be understated).

          The next question is: how much would incorporating the delinquency test affect the loss sensitivity results? Fannie doesn’t give any information about that, so I’ll need to try and estimate it myself.

          I’ll keep an open mind about the possible effect of the delinquency test, but the basic structural problem with CAS and STACRs remains: prepayments tend to be front-loaded, whereas delinquencies and losses happen later on. If Fannie and Freddie really wanted to have efficient loss-transfer securities they wouldn’t allow them to pay off; they would remain outstanding until losses either happened or they didn’t.

          Liked by 1 person

          1. I don’t think the structural problem with CAS/STACR is that much of an issue. You are of course right about the timing of prepayments, delinquencies, and losses, but the combined effect of the Minimum Credit Enhancement Test (which is set above the initial subordinate percentage, so can not be met for the first months of the term) and Delinquency Test essentially serve to keep most of the coverage in place in scenarios where it will be needed.

            To model the effect of the tests on the limit, the timing of the losses becomes very important. Realistically, for losses to get to the very remote 1M-1 tranche, delinquencies need to start increasing in the first year, to a point that would cause failure of the Delinquency Test. Because the 1M-1 tranche amortizes first, a scenario which only causes losses to the 1M-2 tranche would have additional time (until six months before the 1M-1 tranche fully amortizes) for the Delinquency Test to provide protection against the limit amortizing.

            You are also right that it would maximize the efficiency of CRT if the limits were fixed in place. Perhaps the idea is that by only allowing the limits to remain in place when needed (if the tests work as designed), Fannie/Freddie is able to pay less interest (as limits run off) and possibly lower rates as well (because investors expect a shorter duration in most scenarios).


          2. As I say, I would need to do some work on the delinquency test before making any observations (let alone drawing any conclusions) about how and under what circumstances it changes the results shown in the credit loss scenarios. (If I were still at Fannie, I would have my credit staff do the analysis, since there are fairly predictable relationships between delinquency rates and default curves.) One reason I think the delinquency test may not affect the loss transfer results all that much is that, if it did, Fannie’s disclosure tables would be misleading to investors (and understate their probable loss experience). If a loss sensitivity table isn’t really representative of what an investor’s actual losses might be, because of some omitted element or variable, it does not belong in a prospectus.


          3. Tim,

            Thanks very much for your replies, I appreciate your taking the time to read and respond.

            I have no idea why Fannie and their advisors thought that the loss exhibits should be included in the prospectus – I think they are extremely misleading and inappropriate.

            Aside from the Delinquency Test omission (of which I would encourage you to work through the numbers when you have a chance), there are other questionable elements of those exhibits.

            I’m looking at the CAS 2017-C01 prospectus, which covers 60-80 LTV loans, and the underlying assumptions state that the Principal Loss Amount is assumed to be equal to 25% of the Credit Event. From the investor presentation on Fannie’s website (, Slide 41 lists severity by year for 60-80 LTV loans, averaging 44.6% for originations between 1999 and 2015, and peaking at 51.1% for origination year 2006. Again here, the prospectus exhibits are materially understating the risk to the investor.


      2. tim

        ” I remain baffled by why Laurie and Mark continue to support a proposal…”

        recall what deep throat said: “follow the money”



      3. Tim,

        Thank you for your continued efforts with regards to getting to the right solution on mortgage reform and I appreciate your decision to report sparingly and when appropriate. When I consider the position you’re in, it makes perfect sense. I know you’ll pursue a solution that helps all involved, including shareholders and future homeowners alike.

        Keep up the good work!


      4. Hi Tim, I respect that if you met with Mr. Mnuchin you wouldn’t tell us what you discussed but would you at least tell us that you met?

        Thank you for all you do for us



    1. I saw that.

      Parrott’s piece might seem plausible and reasonable to someone who doesn’t know what actually happened to cause the 2008 mortgage crisis, and also doesn’t understand how the mortgage credit guaranty business works. Fortunately,Treasury Secretary Mnuchin, who will be playing a pivotal role in determining how mortgage reform gets accomplished, doesn’t fall into either category.

      I’ll mention just two things about the Parrott paper. First, he dismisses the Fannie and Freddie model simply by saying, “everyone in the market knew that we would bail [Fannie and Freddie] out if they ever stumbled. Their shareholders were thus incented to take excessive risk to chase greater profits, knowing that if their bets did not pay off, the taxpayer would step in to cover them. And that, of course, is precisely what happened.” No, it’s not. Mr. Parrott apparently wasn’t paying attention to our last four-year experiment in reliance on private sources of capital–unregulated, private-label securitization. But facts are stubborn things. Fannie and Freddie had the best, not the worst, credit loss performance of any source of mortgage credit prior to the crisis, and they were NOT bailed out, whereas the commercial banks (with much worse mortgage loan performance) were. You can’t take the best credit guaranty model out of the running just by making things up about it–you have to assess it on its merits, which Parrott declines to do.

      Second, all three of the “finalists” in Parrott’s mortgage reform bake-off–his Promising Road, the Milken Institute’s proposal, and the proposal from the MBA (which isn’t even out yet, at least not in detailed form)– rely on “credit investors” to take either the majority or all of the credit risk in what today is a $5 trillion conventional secondary market. The vehicle for doing this would be securitized credit risk transfers (CRTs), which I’ve written about at length. The primary forms of CRT in existence today are Fannie’s CAS and Freddie’s STACRs, and they only pretend to take risk. If we actually attempted to build a $5 trillion secondary mortgage market on a foundation of fake risk-transfer securities, the entity issuing them (one of Parrott’s variants on “government corporations”) would ultimately blow up, because it will have paid out huge amounts in interest payments on risk-sharing securities that will pay off before the credit losses can hit them, and have no equity capital itself to absorb those losses when they boomerang back on it. Seem like a good idea to you, Mr. Mnuchin?

      Liked by 6 people

      1. Well said, Tim. Would you mind commenting on the report that the Justice Department will be siding with phh in the CFPB constitutionality case? If I’m not mistaken, the structure of the CFPB is much like that of the FHFA. I saw where the Collins plaintiffs will be making a motion for summary judgement based on the argument that the FHFA is unconstitutional in structure. In your eyes, is this a Hail Mary or an argument with some teeth? Also, could the Justice Department stepping in be a political way out of the sweep for Mnuchin should the CFPB ultimately be ruled Unconstitutional? Thanks again for your time and shared knowledge.

        Liked by 1 person

        1. jeff d

          i havent seen any briefing for the dc circuit en banc hearing scheduled by DOJ, but i would think that cfpb will be representing itself as an independent agency, just as it did in the original appeal to to the dc circuit.


          Liked by 1 person

          1. jeff d

            i just saw the DOJ motion, 3/3/17, to file an amicus brief for the dc circuit en banc hearing.

            the motion states “At the request of the Office of the Solicitor General, the United States hereby seeks leave to file an amicus brief no later than March 17, 2017. (Any amicus briefs filed by the United States in the courts of appeals require authorization by the Solicitor General.) As this Court recognized in calling for the views of the United States on the question whether rehearing should be granted, the views of the United States on matters involving the President’s removal power are not always entirely congruent with the views of independent agencies.”

            i am not sure that we will know exactly what the DOJ (Trump) thinks about the cfpb unconstitutionality decision that is being reheard en banc until the amicus is filed 3/17.


            Liked by 1 person

          2. on 3/20 the collins Ps will file a consolidated brief on the constitutionality of the fhfa as a removable only for cause single director independent agency in the texas southern district, while we will see the DOJ (trump) views on the cfpb director’s similar structure on 3/17 in the dc circuit.

            this gives rise to the remarkable possibility that, if indeed the DOJ (trump) sides with phh, fhfa will not only be doing battle in collins all alone, but that the collins Ps can prominently cite DOJ’s position contra fhfa in their brief.

            one wonders whether the DOJ and fhfa may suffer additional friction or fissures in matters relevant to GSE litigation.

            in one sense, the unconstitutionality claim against fhfa is stronger than against cfpb since HERA does not have a severability clause. a judge may be less willing to cure the removal for cause only clause if the statute doesn’t have a severability clause that authorizes a judge to do so.

            Liked by 2 people

          3. ROLG
            do you expect Judge Ginsburg to answer in some way Prof Epstein’s article in Forbes?


          4. Rolg-
            Thanks for your clarification and insight. This is an interesting angle to say the least. I’m just a firefighter so it is nice to see some sort of validation from someone smarter than myself. Have a great day.


          1. @anon

            you get full marks for legal research.

            doe is distinguishable insofar as it involves a pre-enforcement request for an injunction, wherein the standard of review is whether the district court abused its discretion in denying it at a very early stage of the case. you can rest assured that with judge kavanaugh (the author of the phh unconst opinion) joining the doe decision, doe is not so much a substantive ruling as it is a procedural ruling, saying that at this early stage of the joe proceeding, the lower court did not abuse its discretion.

            the whole question of whether a single agency director removal for cause is in fact unconst in case of cfpb, and whether this reasoning is applicable directly to the fhfa, has been muddied by the grant of en banc hearing by dc circuit in phh, which has the effect of vacating the unconst decision (though the mere granting of the en banc hearing does not discredit judge kavanugh’s analysis).

            but there are two important ways in which fhfa is different from cfpb that you should appreciate in the context of collins (and i expect which may crop up in other cases such as the hindes/jacobs case, which has been granted leave to file an amended complaint).

            the first, i have mentioned on tim’s blog here, that HERA does not have a severability clause, which may lead a judge to be less inclined to cure the statute if found to be unconst by excising the removal for cause clause (which is what judge kavanugh did, relying at least in part on the presence of a severability clause in the cfpb governing statute).

            the second i will address now, and it was, in my view, the reason the dc circuit granted en banc review. one concurring judge in phh dissented in part because she thought the dc circuit panel did not need to address the const question, because it unanimously found that the cfpb director incorrectly applied the substantive law in the case (relating to the ability of a finance company to tie one product to another). notions of judicial economy and avoiding a const analysis unless one is forced to do it would lead a court to uphold phh’s claim simply on basis that the cfpb director got the underlying law relating to tying wrong, and note that there is no need to address the more basic question as to whether the cfpb director is constitutionally authorized to act.

            this is not the case with fhfa. in collins, Ps will argue that fhfa violated HERA. perry circuit court said it didnt, though it noted the nws (as a lawful action under HERA) may have breached Ps contract rights. if collins court disagrees with perry on question as to whether fhfa director violated HERA, then all is good and like phh there would be no reason to go onto the more basic question of the constitutionality of the fhfa director’s authority.

            but if the collins court follows perry, then the collins court is being directly asked to go ahead and consider the const question, and i dont see how the collins court can avoid this analysis if it finds that fhfa director acted lawfully under HERA. the perry court was never asked by perry Ps to address this const question in the event the court found fhfa director actions under HERA appropriate under the terms of HERA (even though perry and phh’s counsel are the same…major lawyering oversight in my view)



          2. @rolg, and if the ct finds fhfa unconstitutional, following kavanaugh’s opinion, what is the remedy? does it necessarily void the nws?


      2. Tim

        Your patience and blood pressure must be rewarded! My question is really why would this Admin risk 20% or so of our GDP on a new model that hasn’t been tested vs what has been tried and true for years with an understanding of some simple facts. For the casual observer as myself it is difficult to get my mind wrapped around this saga and the obviousness of the situation. Is there really even a real alternative that you can see for this Admin?


        1. @ckl

          the collins court could simply excise the removal for cause clause, as kavanaugh did in phh, and uphold the nws.

          my own view is that this is certainly proper where the statute has a severability clause (as per phh), but questionable if as in HERA there is no such clause.

          this excision remedy to my mind transforms the court into a super-legislature, rewriting the statute, rather than simply judging the constitutional merits of its various sections. the presence of the severability clause is the legislature’s advance invitation to the court, if you will, for the court to excise if the court finds a provision unconst. the legislature is saying we are happy with the statute as passed, and the statute as amended if you the court need to amend to excise an unconst provision.

          but is the statute with the excised provision the statute the legislature passed where the legislature doesnt incorporate this court invitation by means of a severability clause? isnt the legislature saying by not including the severability clause that the full statute is the statute we passed, and if it is to be amended, it is to be amended only by us, the legislature?



      3. Tim,

        first of all thank you because your blog is a great source of food for thought.
        I remember that in December 2015 Senator Corker was able to put in the budget bill a “provision” whereby the government could do nothing with its senior preferred shares until january 2018 without a specific consent from the Congress.
        Do you think it could make sense for Mnuchin to work on a comprehensive reform during 2017 and act only in 2018 when these limitations expire?


  14. according to Rosner, Demarco and Parrott are scheduled to meet with UST to discuss housing policy. this seems concerning given these guys are architects of the nws and want f&f dead. im hopeful that the plaintiffs who “know Mnuchin quite well” hold stronger sway and can help Mnuchin see the weakness of Demarco and Parrott’s proposals.

    Liked by 1 person

    1. It’s not surprising to me that Mnuchin would meet with Parrott and DeMarco, since both have (similar) reform proposals that have received a fair amount of publicity and are supported by many who want to replace Fannie and Freddie.

      I wouldn’t worry too much about the meeting. It’s one Mnuchin needs to have, and we know what Parrot and DeMarco will propose (it’s what they’ve already written). Both recommend replacing upfront shareholders equity in a risk-bearing entity that guarantees credit risk with mandatory risk-sharing securities that allegedly spread risk among a large group of capital markets investors. That’s the theory, anyway. The reality is that no such risk-sharing securities exist in the real world–just the “deliberately defective” CAS and STACR securities issued by Fannie and Freddie, that are engineered to pay off before much if any risk can be transferred to them. I suspect Mnuchin already knows that. But if he doesn’t, the plaintiffs who know him will tell him, and if for some reason they don’t, I will. The “bad guys” might be able to fool members of Congress with fake risk-sharing securities, but they won’t be able to fool Mnuchin.

      Liked by 4 people

      1. Tim,

        We all know you want to wait / time any communication with Mnuchin, but it’s times like this that shareholders get very nervous and want to make sure someone of your caliber is at the table! Thanks for all your hard work!!


        Liked by 1 person

      2. Thank you for representing the little guy, Mr. Howard! I hope our President can find a place for you in his administration.


      3. Still, you could talk with Berkowitz. He may be very interested in introducing you to Mnuchin. No one knows GSE issues better than you in this country.


        1. I fully agree. Tim, by now, it shd be common knowledge by all that has a keen eye on fnf (frens and foes alike) that you are undeniably the one that has the fullest unbiased knowledge and there isn’t anybody who can be a better advisor for Munchin at this crucial juncture. In light of the biased judgement of even the courts system, who else better suited than yourself who can bring out the justice and most importantly the truth to light? There is simply too much ignorance on fnf by the general media and the bday guys are exploiting this to the fullest. We need heroes now, as absurd as it may seems to sound.

          Liked by 1 person

  15. hey tim;

    Thanks for your time. My question involves tax reform and how it will affect FNF. There are rumors that state and local taxes plus the mortgage deduction will be removed from federal taxes. Could you comment on how this might affect fnf long/short term and how they might adjust for it

    Liked by 1 person

    1. The inability to deduct state and local income taxes from federal taxable income–were that to be a component of tax reform– would have no effect on Fannie and Freddie because they are not subject to them (just property taxes). Loss of the mortgage interest deduction could have at least a temporary negative effect on the companies’ business volumes, and perhaps also a modest negative effect on their credit losses over the intermediate term. The reason is that the immediate removal of the deductibility of mortgage interest payments would have a negative effect on housing affordability, slowing the growth of new housing construction, new and existing home sales and home prices. The magnitude of these effects, however is difficult to predict, as is their duration. Supporters of the mortgage interest deduction (realtors, homebuilders, and mortgage bankers, among others) would put very large numbers on these effects; the estimates of fiscal conservatives would be at the other end of the spectrum. I don’t have a strong personal view, although if pressed my estimates probably would be closer to those of the fiscal conservatives than those of the “housers.”

      Liked by 1 person

  16. The following is final paragraph of Prof Epstein’s recent article. I printed a hard copy and mailed to AG Sessions. I hope everyone prints a copy and mails (NOT emails) it to his Rep and Senators in Congress.

    “In closing, there is a simple test by which to measure the probity of the combined actions of FHFA and Treasury. If FHFA were replaced by a private trustee, and Treasury were replaced by a private supplier of fresh debt or equity capital, both parties would end up in jail if they concocted a scheme that resembled the NWS. Everyone would cut through the various smokescreens to see that the excess dividends were a naked raid on the interests of the other shareholders as happened here. The great tragedy of the majority opinion is it follows the all-too-common practice of giving the government a free pass when its own motives are as corrupt, or more so, than comparable private parties in similar roles and with similar legal duties. From the time that I started to work on this issue, I always said that litigating against the government is like playing craps with loaded dice. So far the sorry performance in Perry Capital has validated that gloomy prediction. The time is running short, but there needs to be some serious judicial action either in the Circuit Court or Supreme Court to correct against the egregious statutory contortions and manifest injustice of sustaining the Net Worth Sweep.”

    Liked by 3 people

    1. A petition for en banc rehearing must be filed within 45 days after entry of judgment in a civil case in which the United States or its agency or officer is a party.


    2. I read the Epstein analysis, which I thought was excellent. What was new in it for me was his clear and detailed discussion of how the authors of the majority opinion– Judges Millett and Ginsburg–had to distort the actual language of HERA in order to justify an opinion they already seemed to have reached for non-legal reasons, whether ideological, political or otherwise.

      Epstein’s analysis reinforced and gave substance to the reaction I had upon reading the majority opinion when it first came out. Ginsburg went from making strong and defensible points at oral argument in April 2016 to making weak and indefensible ones in the February 2017 decision. That’s not a normal progression. The only explanation for it that made sense to me is that following the oral argument some individuals or groups with whom Ginsburg is politically or ideologically sympathetic went to him and said, “You can’t allow Fannie and Freddie to win on this,” so he began to look for a way to join what was going to be Millett’s dissent and turn it into the majority opinion. Until I read Epstein’s piece, though, I hadn’t realized what legal gymnastics were required to produce that result.

      This, unfortunately, is an all-too-common development in matters involving Fannie and Freddie. Rules, regulations, laws or behavioral standards that are applied consistently one way when they relate to almost any other company get applied differently to these two. And it’s been that way for decades.

      I had something very similar happen to me in Fannie’s so-called “accounting scandal” in 2004. FHFA’s predecessor agency, OFHEO, accused us of about a dozen accounting improprieties in its “Special Examination of Fannie Mae.” We responded with a 47-page submission to the SEC, discussing the rationale for each of the treatments we had chosen and explaining why we believed those treatments were preferable to the ones OFHEO contended we should have used. Our outside auditor, KPMG, endorsed our letter. This fact–along with the fact that other large financial companies were using the same accounting as we were– gave me total confidence the SEC’s chief accountant would agree with us. Except he didn’t. He told us, and the world, that we had applied FAS 133, the accounting for derivatives standard, “incorrectly.” But he didn’t say where or how. He did not address a single one of the specific issues we’d addressed in our submission; even when pressed by KPMG, all he would say was that we got the accounting wrong. I had exactly the same reaction to the SEC chief accountant’s ruling then as I did to the Court of Appeals for the D.C. Circuit’s ruling last month– one or more people (in my case, in the administration) went to him and said, “you’ve got to support OFHEO on this,” and that’s what he did.

      I don’t disagree with your suggestion that others send copies of Epstein’s article to their Senators and Representatives. But I can assure you that the plaintiffs in the lawsuits, and their counsel, know what’s going on here. That’s why it’s good to have this issue pending in so many different courts (District, Court of Federal Claims, and State of Delaware) and districts (Texas, Ohio, and Illinois). To borrow a phrase used by counsel for the class plaintiffs in the Perry Capital case, Hamish Hume, “We only have to win one of these; they have to win them all.”

      Liked by 7 people

      1. Tim,
        Another great option would be petitioning the State AGs to file cases against FHFA conservator.
        Since FnF are governed by State corporate laws, states like Delaware, Virginia, New York, etc have standing to file cases. Besides other states can file cases because FnF have offices in all states.
        Currently State AGs are filing cases against US to remove burdensome regulations.

        It will be battle of equals and Judges can not roll loaded dice.

        Liked by 1 person

      2. Tim, with all due respect, I have to disagree with you on Ginsberg. Its entirely possible that Ginsberg thought the NWS offensive and absurd, but reluctantly decided that hera enables such absurdities when read in a textualist manner, which he thought appropriate (in company of Millet and Lamberth). Judges want to avoid appearing as if they’re “legislating from the bench”, a point reinforced when majority opinion wrote, “we take [hera] at its word”. Also remember Lamberth specifically wrote that Ps did not ask the courts to question the constitutionality of hera. Epstein and Brown clearly are more biased by the absurdity of the result; indeed their disdain for the nws is almost palpable in their writings.

        I hope to see the ps push more on the constitutionality angle of hera. It seems Mnuchin will need all the legal help he can get to successfully push through political headwinds in his efforts at reforming the gses.


        1. CKL,

          Let us first recognize and acknowledge, close association of Judge with fellow travelers and think tanks that have been lobbying against FnF for decades. In addition Judge has participated in FnF reform (eliminate) conferences with fellow travelers and some of these conferences are during conservatorship. So it is fair to assume that Judge starts with prejudiced opinions developed during these anti-FnF conferences, and so for these Judges, facts and motives did not matter. How can any one understand anything without the context (facts and motives)?

          If those were his views, Judge should have been open about it during hearing just like Judge Millet. In addition Judge should have disclosed all his conflict of interest associations. With all his favorable opinions heard during hearing, now plaintiffs/shareholders feel that Judge ambushed their rights for a fair trial and justice.

          These judges do correct some of the pleadings of the defendants so as to rule in defendant’s favor, but they seem to go by “word” when it comes to plaintiffs. Plaintiffs did raise constitutional issues during oral arguments and Judge Brown does raise very serious issues about the conduct of conservatorship, but Majority Judges seem to conveniently ignore inconvenient facts.

          Besides why did they need almost 24 months (10 months after hearing) to rule on questions of law.


          1. I dont mean to get into a debate here, but whatever bias Ginsberg may have still doesnt explain Millett and Lamberth’s identical judgment. The point you’re not appreciating is many judges view their job as following the “plain text” reading of the law, without regard to their own personal views on the justness of the outcome. This is the “textualist” approach Ginsberg, Millett and Lamberth took. There is a case where Supreme Justice Clarence Thomas said as much as I dislike the outcome, I wasn’t there to create the law, and I must follow it. I think this is what Ginsberg and the other judges concluded, to varying degrees of personal discomfort.


          2. To ckl
            There is not even ‘textualist” approach here. The article of Prof Epstein shows clearly that it was a deliberated manipulation of the text of HERA. An exercise in deception that puts a stain in the American Justice

            Liked by 1 person

          3. C’mon CKL, read Epstein’s legal analysis more carefully. The “textualist” approach that Ginsburg and Millet took was deeply flawed. “Read the statute, read the statute, read the statute.” … And without skipping key sections of the statute.


          4. CKL,
            If all or some judges were to arrive “independently” with the same opinion then there is no problem and it is supposed to work that way.

            HERA text should have been read in the context of Constitution, other laws and English legal dictionary. But majority Judges say HERA stands on it own and there is no need for anything else including any other facts and motives. Then they use only 74 pages and only 24 months to write the majority opinion referring to many case laws of their choice to validate their ruling.

            Common sense says, laws should be interpreted as they are written in the context of Constitution, other laws, English legal dictionary, facts and motives.

            Majority opinion seems to be flawed because it is tainted with pre-judgment.


  17. Tim, I don’t want to clog your inbox, but I wanted to express my sincerest appreciation for the countless amazing insights and analyses you share, especially with private investors like myself who have owned FnF common before the cship and have watched in shock and disappointment over the past 8 years. Given the dearth of media coverage, or hit pieces like we saw from the WP, this blog is truly priceless. Cheers!

    Liked by 2 people

  18. Tim,
    I know this has been briefly pointed out as side notes in many posts but have you seriously thought about reaching out to Steve Mnuchin and company? With your extensive knowledge on inner workings and history of how things have transpired with Fannie, as well as options to clean things up and make it right, it just seems like a waste that you are not heard beyond this blog. I mean, it’s possible that your blog is being read by some powerful folks, but I highly doubt some of these government folks think outside the box and perform research by reading up on blogs like this. I think many would appreciate it if you sent out a formal offer to the appropriate people to see if there is anyway you could assist with the FnF dilemma. It possibly could help change the nasty narrative that has been going around the government for many years.

    In addition, avid readers of this blog could also due their part by tweeting to Steven Mnuchin to hook up with the real Tim Howard.

    Just seems like a lot of talented folks are not being heard outside of their own little ecosystem. I find it disheartening when other knowledgeable folks are advised of your blog they state that they were not aware of your blog or “insertname” website.

    Anyways, really enjoying reading the truth and your pragmatic approach to the resolution of this.

    Liked by 1 person

    1. I have not “seriously thought about reaching out to Steve Mnuchin and company,” for a couple of reasons. First, if by “…and company” you mean Trump administration cabinet members with interest in or some responsibility for financial policy, like Wilbur Ross or Mick Mulvaney, I don’t think that would be productive at this point. Both Ross and Mulvaney have strong views on Fannie and Freddie that I would not be likely to change. Second, I also don’t feel that at the moment I have a particularly good reason to ask to see Mnuchin. He has said publicly both that he knows the mortgage business well and that he has an idea for how to reform it. I’d rather not call in any chits by asking people I know for a meeting with him just to say, “I know the mortgage business even better than you do, and here are some things you may not know,” or, “I understand you have some ideas for reforming the system, but here are few ideas you might not have thought of.”

      I think it’s also an overstatement to say that I’m “not heard beyond this blog.” For one thing, I’ve got pretty good contacts with the key plaintiffs in the net worth sweep cases. They read the blog, and I also communicate with some of them directly. They are very familiar with my ideas and thinking, and many of them know Mnuchin quite well. Those personal relationships are important. In fact, I suspect Mnuchin will put more stock in something I’ve written about or said if he hears it from someone he knows and trusts, rather than from me directly.

      At some point, though, it may well make sense for me to try to get in to see Mnuchin myself. When that time comes, I doubt I’ll have any trouble getting access to him, and I won’t be shy about pursuing that access.

      Liked by 6 people

      1. I hope I’m not reaching too far here, but reading between the lines I’m understanding that lead plaintiffs know Mnuchin’s views on housing finance well and trust that he will do the right thing. If so, thats very comforting to know.

        Are you (or anyone else) aware of what Wilbur Ross’ views on the gses are?


  19. Tim,

    Good morning. Fairholme seems to be convinced that the utility model is the way Fannie & Freddie will end up. It has appeared in their shareholder updates on multiple occasions. Josh Rosner has a detailed utility model presentation and has been quoted alongside Fairholme in the Miami Herald. I know that this could potentially be possible with bipartisan support. The MBA also has similar sentiments with regard to a utility model.

    Do you support and/or see the utility model as feasible? Should one side of the political aisle not be on board, could Trump issue an Executive Order to move in this direction?


    Liked by 1 person

    1. Different people mean different things when they talk about a “utility model” for Fannie and Freddie. What I mean can be gleaned from my essay “Fixing What Works” and the post I did called “A Welcome Reset.” I believe the capital requirements in Josh Rosner’s proposal– which he also calls a utility model– are too high for a credit guarantor subject to it to be able to provide affordable financing to a broad range of borrower types, so I don’t support it. And the MBA has left a lot of the aspects of its recommendation (which also endorses what it refers to as a utility model) vague; it says it will make a detailed proposal next month, so we’ll have to wait and see what that looks like.

      Bottom line, then, just calling something a “utility model” isn’t enough– you have to look at the details of the proposal, and see how they affect the efficiency and effectiveness of a credit guarantor set up under that proposal.

      Liked by 1 person

  20. Tim,

    I believe the political hurdle is making a mountian out of a mole hill, because facts are, and have always been on our side.

    I think with a simple 5 page power point could disprove every lie thats been told against us, and can be disproved VERY quickly.

    Failed business model? Fnf loans out performed all others comparable loans by roughly 4 times.

    Fnf still owe the gove $189 bln?
    $250+ bln has already been paid back.

    Warrants? They were given as collateral IF fnf could not pay gov back. Again $250+>$189

    Fnf caused the crysis? Fnf don’t make loans, and PLM’s can be shown to be a much larger problem, and again, fnf outperformed the competitors.

    Fnf NEEDED the $189 bln bailout? The accounting fraud is obvious when you look at the year over year earnings. If anyone has questions, you could help explain the accounting shenanigans in more detal, as you already have, without even seeing the books.

    Death spiral? What about the “golden age of profitability” email, along with the ridiculous earnings.

    We are where we are today based 100% off lies. All the lies were told by people in positions of trust behind a wall of secrecy, all those same lies can just as easily be disproved by Watt or Mnuchin.

    In the last 9 years I have been following FnF, I have not heard 1 single good reason fnf should be eliminated or in conservatorship that holds any water.

    On the other hand, there are LOTS of good reasons to remove the conservatorship and net worth sweep, and reinstate the earnings. 20% of the economy, trillions of loans with no capital cushion, the rule of law, market confidence. Dropping dozzens of uselss time waisting – taxpayer funded – court cases. And it takes a load of steve and watts plates. let them work on real issues, not imaginary ones.

    The solution is, and always has been simple. Lets not complicate it.

    Liked by 4 people

    1. At this time, it is better to remove focus on political solutions since none has emerged over more than nine years. Conservatorship can be best solved through non-political administrative process based on objective, open, and expert assessment. BTW FnF are busness ventures and not political ventures.

      Probably Mnuchin’s plate is overflowing and it needs proactive initiatives from FHFA in solving Conservatorship issues. It should be the job of Mel Watt to lead by following up with Tsy, HUD, SEC, Fed, and other stakeholders on how best to resolve the FnF Conservatorship issue. It is almost a year that Mel Watt seems to have taken oath of silence on such an important issue.

      When Congress has given all the authorities to FHFA to deal with anything to do with FnF, there are no excuses for Mel Watt to not resolve the issue now, that too when there are so many positive hints from current administration in resolving the conservatorship issue.

      Liked by 1 person

      1. Watt and Mnuchin had good discussion. I bet both have one vision for FnF. They need a court defeat of government to start the release process. We need to talk with AG Sessions.


        1. Mark,
          DOJ’s attorneys and FHFA’s private attorneys continue to defend wrong decisions of previous administration with the new court filings and also holding back the thousands of documents (11000) from the FnF plaintiffs.

          Is it not hypocrisy to continue with the same wrong conservatorship decisions of previous administration and then expect defeat in courts to make rights decisions?


    2. The most powerful statement Mnuchin can make to any opponent before he releases FnF:
      Sir! Fannie and Freddie needed no help to survive the crisis! I have proof.


    3. Andy, spend a few years of your life trying to do this and tell me the result, when you finish?

      As someone who has spent nearly 35 years doing exactly this, first as a Fannie lobbyist and then as a private citizen and blogger, the results have not been super encouraging, although they’re improving.

      Recently the pro-GSE forces—unfortunately you can’t count 10 self-identified friends on Capitol Hill– have had books (Tim’s, Bethany McLean’s); well placed columns and articles by Gretchen Morgenson, Bethany McLean, George Will and many by financially seasoned other authors; superb plaintiffs’ lawyer’s documentation, shared widely among policy makers and Congress; Richard Epstein’s various papers; editorial board meetings as well as many constituent efforts with MoC’s and Senators; supportive blogs and more and more media stories favorable to the GSEs, their history, and more currently the call for “recap and release.”

      All are welcome, but as Tim has noted, the GSE foes, i.e. the “Financial Establishment,” built and reinforced a massive political and communications opposition, which now controls Capitol Hill and much media.

      Trust me, all of the above resources were made available, if not spoon fed to Judges Millett and Ginsburg, just to name an isolated example, and to the Washington Post and WSJ editorial boards. You’re familiar with the results.

      The Fannie Gate people, the smart guys at Investors Unite, and lots of us civilians have sent communication after communication to our own Senators and MoC’s plus the balance on the two Banking committees and Hill leadership.

      I’d like to report we are shredding the opposition, but by every standard I can measure we are not.

      We’ll maintain the effort and even surpass it and hope for a favorable court decision or even a Trump/Treasury initiative, but don’t underestimate the height and depth of that GSE crap wall and the forces that sustain it.

      As always, recruits are welcome—no formal invitation needed–and just do what comes naturally when you are trying to convince someone who may not know the GSE story or understand the issues.

      Welcome aboard!


      1. Bill Maloni , I know all what you said above happened, yet disappointments are inevitable but discouragement is a choice. Lets no be discouraged . Always something unexpected happens .
        God is in the details. The liars will be turned down .


  21. Mr. Howard, Thank you for this write up! The only area I disagree is I do not think public opinion would have any weight on recap and release if it were to happen sooner. Yes, many would bash anything this admin does but most would see this as draining the swamp. Getting rid of FHFA is a savings of $200M per year. Past lies both parties supported no longer stand up to the truth. The court’s resent decision can only stand on section 4617, the word “may” vs “shall”. Most people understand what is right and wrong and what is constitutional and not. I see release and recap as a great opportunity for the Trump Admin to open up discussion on the Financial Crisis and put it to rest. Especially the parts where the government lied to the American people for years to defer blame from government to the GSE’s. We all know yes they played a part but the bigger contributors were the government and other financial institutions. It is time this mess gets put behind us so this country can move forward.

    Liked by 4 people

    1. I guess that Judge Sweeney will decide what to do with the 11000 hidden documents soon. Both sides have submitted a join status report. A reasonable order would be : Give 100 to judge for in camera review, and the rest directly to the plaintiff.

      Liked by 1 person

  22. Tim, maybe you deleted as I know you do if you think it’s off topic but I don’t understand how Freddie is reinstating FAS133 and Fannie hasn’t when as I understand your last piece this would help them recapture DTA’s. How can one but not the other? Can you please explain so a layman can understand? Thanks again for all you do!

    Liked by 1 person

    1. I didn’t delete your earlier comment, but since this blog isn’t a “day job” for me–I do it voluntarily–I’m not always in front of a computer….

      Freddie didn’t “reinstate” FAS 133; FAS 133 is an accounting regulation, with which all companies need to conform to be in compliance with generally accepted accounting principles (GAAP). But FAS 133 gives companies some flexibility in how they apply it. One of these flexibilities is whether or not to use hedge accounting for various categories of assets.

      In its 2016 10K, Freddie said, “In the first quarter of 2017, the company began using hedge accounting for certain single-family mortgage loans,” and it went on to say that it did so with the intent “to partially reduce the interest-rate volatility in its GAAP earnings by eliminating a portion of the measurement differences between the company’s GAAP financial results and the underlying economics of its business.” Freddie didn’t define “certain mortgage loans,” nor quantify how many loans were involved in this transaction. And while I think adopting hedge accounting will reduce DTAs going forward, I don’t think it has much impact on the existing amount of DTA on the books right now.

      It seems from both the quantitative differences (Fannie had more than twice the dollar amount of DTAs that Freddie had as of December 31, 2016) and the qualitative differences (their DTAs are in different categories), Fannie and Freddie use many different accounting conventions. Because I’m not inside either company, I don’t know which accounting choices drive which categories of their DTAs, or to what extent these accounting choices could be changed to have a near-term impact on DTAs (although I note that FHFA was certainly able to run up Fannie’s DTAs quickly). The recommendation in my piece was that both companies’ accounting teams look closely at this, and if they find that more mainstream accounting treatments will lower their DTAs they should ask Treasury and FHFA for permission to adopt them.

      Liked by 2 people

      1. Troubled debt restructurings is an “in-the-weeds” subset of the DTAs that I decided not to get into in this post, because it’s very technical. But since you asked….(and here again, for simplicity’s sake I’ll use Fannie’s figures, but Freddie has a similar issue).

        One of the main ways FHFA and Treasury were able to run up Fannie and Freddie’s losses so much in the 2008-2011 period was through making mammoth additions to their loss reserves. At December 31, 2007, Fannie Mae had a single category of loss reserves totaling $3.4 billion. Four years later, at December 31, 2011, Fannie had five categories of loss reserves totaling $93.2 billion. Of this nearly $90 billion increase (every dollar of which resulted in the need to draw an equal amount of non-repayable senior preferred stock from Treasury), $63.2 billion were from actions that that required Fannie to designate the affected loans as Troubled Debt Restructurings (or TDRs). These TDR-related loss reserves fell into two categories: reserves on loans purchased from mortgage-backed securities pools ($16.3 billion), and reserves for loans the company modified ($46.9 billion).

        If a loan is designated as a TDR, a company is required to use a very conservative “life of loan” accounting treatment that locks up the loss reserve for the life of the loan even if the loan returns to performing status. In a case of a loan modification– which a company does in the hopes that the loan WILL return to paying status– it has to write off immediately not only its estimate of future losses but also the present value of foregone interest payments. If the loan becomes current again, the written-off amount will be brought back into income– either as foreclosed property income (if the write down was an estimated loss) or as net interest income (if it was foregone interest)– only as the loan amortizes (i.e., extremely slowly) or in a lump sum when the loan pays off.

        FHFA used TDR accounting very aggressively for Fannie during the 2008-2011 period. For example, the use of TDR accounting for the loans bought out of MBS pools ($16.3 billion as of December 31, 2011) was discretionary; GAAP did not require it–Fannie, that is FHFA, chose to do it. And the $46.9 billion in reserves for “individually impaired” modified loans was ballooned in two ways. First, Fannie (and Freddie) HAD to modify all loans that met the standards for Treasury’s Home Affordable Mortgage Program (HAMP), whereas banks could choose whether to modify HAMP-eligible loans or not. Second, Fannie’s write-downs on modified loans were far larger than other institutions’–an average of 27.5 percent of the loan balance, nearly triple the average 10.5 percent write-down of the largest bank modifier of single-family mortgages (Bank of America, whose loans were of much lower quality than Fannie’s).

        Even today, nine years after the crisis and five years after Fannie’s peak loss-reserve total, Fannie still has $28.5 billion in TDR-related loss reserves ($21.9 billion in individually impaired single-family loans, and $6.6 billion in fair value losses on loans bought out of MBS pools). The vast majority of these reserves are on loans that are now performing, but Fannie can’t get at the reserves until the loans amortize or pay off.

        FHFA (and Treasury) did a REALLY good job figuring out how to lock up for a very long period of time a substantial amount of what otherwise would have been Fannie Mae’s capital.

        It’s possible there are ways for Fannie and Freddie to unlock some of their TDR-related reserves, but I don’t know what those ways are. Perhaps their accountants do.

        Liked by 3 people

          1. Not if the loans were in mortgage-backed securities, or if they were pooled and sold as MBS; in both cases Fannie would retain the liability for the credit risk–and hence would have to maintain the loss reserves on the loans. Only if the loans that carried the “life of loan” loss reserves were whole loans (that is, unsecuritized) and also were sold as whole loans could Fannie recapture the corresponding loss reserve. I doubt that many of the company’s remaining loans that are associated with these reserves are whole loans, but I don’t know that for certain.

            If I were at Fannie, I also would look into whether some of the larger pools of MBS that have life-of-loan reserves could be unwound, and the underlying collateral sold as whole loans. For that to even be possible Fannie first would have to buy back the MBS– which could be expensive–but it might be worth considering (although not as long as the net worth sweep still is in effect, since Fannie wouldn’t be able to retain the capital from the reserve recapture).


          2. Tim

            Could fnma sell MBS to fmcc and have fmcc reinsure the credit risk associated with the guarantee associated therewith, and fmcc do likewise with fnma? I understand that this would be done only in connection with a post-nws capital building effort.


            Liked by 2 people

          3. Tim

            Another thought is if there is a substitution of rust holdings in the mbs docs. Pull out all all tdr assets and put in unequivocally higher credit worthy collateral. Get trustee satisfied with fairness opinion. Then sell tdr assets. I have to believe there is a way if there is a will here.


            Liked by 1 person

          4. I think both of your ideas are plausible, but more importantly I agree with your final point, “there [should be] a way if there is a will here.”

            IF Fannie and Freddie can get a green light from Treasury (an important if, and one I think they should try to obtain now), then I believe Fannie and Freddie should (a) begin to look at feasible alternative, GAAP-compliant accounting treatments that can work down as many of their DTAs as possible, before they are forced to write them down if and when tax reform is enacted, and (b) think creatively about ways to unlock as much of their TDR-related loss reserves as they can, without “pulling the trigger” on any on them until they know they will be able to retain the resulting book earnings as capital.

            Liked by 1 person

        1. Unlock TDR’s by Selling the Assets! – ta da!

          Also, if you read or listened to them describe their “loan loss reserves” they said at one point that effectively in a press release that … “we expect further reserves in the future (on the existing portfolio) but haven’t included them currently”…. well I knew instantly they were for shet because GAAP says to put up reserves when “known” ie probable and estimable which they were insinuating. So, obviously, they were picking and choosing. Not a good vibe.

          Further, if you rolled the loan loss reserves forward, including write offs and such, you’d have quickly seen the reserves were far greater than what was likely to be bad. Next, it became apparent, they were nearly writing off or reserving almost 100% of the loans, yet, as FML’s subject to some standards, everyone that has ever done loan loss work knows, that the land and home at some level had “value” meaning, they were totally ignoring the collateral.

          Finally, as you walked the loan tranches forward, it was anticipated that not all loans were going to go bad, that in fact, many written prior to 2003 on the books in 2009 probably were good, or had LTV’s that were now 60-65% so even if they went “bad” they’d not loose 100% of the unamortized value. And, on the newer loans, fact is while many would be delinquent; they’d not be total losses.

          It was very easy to see they were cooking the books as to loan loss provisions; remember, these weren’t commercial loans of or cash flow loans, auto loans or rolling stock that depreciate; these were FML’s that up until recently were underwritten with pretty good standards – they were many years ago anyway.

          So, to anyone with some history in financial statement analysis, loan loss work, and who bothered to understand the business, it was remarkably clear there was a snake in the grass.


  23. Tim,
    Pardon me for being naive, but one question I have is why isn’t there more pressure on the government for being a bad actor here? Enough documents have surfaced to show that the Obama administration cleary lied about the rationale for the net worth sweep. The purported “Death Spiral” was fake news. If fake news was the policy reason for instituting the NWS, and we know from the documents that the Death Spiral was a lie, why does Treasury need a reason other than “The Death Spiral was a lie” or “Obama Treasury officials lied under oath and we have a problem with that.” Why perpetuate a fraud when you know it’s a fraud?

    Liked by 1 person

    1. For an answer to “why isn’t there more pressure on the government for being a bad actor here,” you need look no further than Monday’s editorial in the Washington Post, “The demise (we hope) of an ugly lawsuit.” The Post, and virtually every other major newspaper or business or financial journal, continues to repeat the false story about Fannie and Freddie that you rightly point out and decry. The best chance of getting the real story made known is through the court cases, including discovery in the Court of Federal Claims, but that will only reach a select number of people. For the general public (and most of the media), the solid wall of misinformation about Fannie and Freddie that the “other side” has been erecting for many, many years realistically is not going to be possible to overcome.

      Liked by 2 people

      1. Given how pervasive and deeply entrenched the anti gse sentiment is in the media and in washington, do you think its even politically feasible to reform and reprivatize f&f without an exogenous forcing function (ie the courts)? Parrott was recently quoted as saying for many republicans in the congress, “the worst-case scenario here is re-privatizing them.” So even if Mnuchin wants to reform and reprivatize f&f and sees alternative “solutions” as fatally flawed, isn’t it possible that his hands are tied politically? I’m assuming any resolution will require congressional support, even if Mnuchin technically has the ability to end the nws administratively (is that a fair assumption?).


        1. A fortunate aspect of this situation is that Mnuchin CAN cancel the net worth sweep and bring Fannie and Freddie out of conservatorship administratively (just as the Obama administration put them into conservatorship and imposed the sweep). Those who would like to give the companies’ business to the large banks–of whom Mr. Parrott is one–will squawk, but they can’t block what Treasury decides to do; all they can do is see if they can propose and pass legislation that does something different.

          It WILL be politically challenging for Mnuchin to overrule what the “bankistas” want to do. And a court decision weakening or invalidating the net worth sweep definitely would help. But in the final analysis, the most important factor working in favor of Fannie and Freddie is that a system based on the way they are set up and the way they operate is in every way superior to what the companies’ opponents are offering. Here, Mnuchin’s deep knowledge of the mortgage finance system will serve him well. I’m confident that he’ll have the courage of his convictions to propose and fight for a reformed system that he thinks will succeed– and that system, in my view, will be built around Fannie and Freddie.

          Liked by 5 people

  24. Tim , thank you for your dedication to this cause. This is another very illustrative article indeed.

    I noticed that you are a little bit less optimistic than before the DC opinion. We all are. Lets keep in mind that “always something unexpected happens”. The next unexpected thing may be very positive.

    Liked by 2 people

    1. I think it’s important to be realistic about the impact of the D.C. Court of Appeals decision.

      It isn’t possible to have Fannie and Freddie be at the center of a reformed, private-market U.S. secondary market system without eliminating the net worth sweep. The easiest way of doing that would have been through a decision by the D.C. appellate judges that the net worth sweep was in violation of the Administrative Procedures Act, either reversing the sweep or remanding it to the Lamberth court for development of a full administrative record (which very likely would have shown that FHFA acted illegally in agreeing to the sweep). Instead, the statutory legality of the sweep was upheld in the D.C. Circuit by a 2-1 majority. Yes, the common law claim of breach of contract was remanded to Lamberth, but were the plaintiffs to prevail in this claim the remedy would be monetary damages, not a reversal of the sweep. The legal path to reversing the sweep is now longer and more difficult: victories in suits brought in other federal district courts challenging the legality of the sweep under the APA, an appeal to the D.C. court of appeals en banc, or an appeal to the Supreme Court.

      The other avenue to eliminating the sweep is for the Mnuchin Treasury to decide to reverse it (just as the Obama Treasury decided to impose it in the first place). But to do that he will need to have a sound rationale that he is prepared to defend against committed opposition (from those who want “reform” that favors the large banks) for giving up the proceeds from the sweep. He should get help from discovery in the Sweeney court, which I believe will make clear that the reasons given by the Obama Treasury for entering into the sweep were fabricated, and that the sweep was an improper taking of Fannie and Freddie’s assets. But he also will need to develop a specific plan for secondary market reform built around Fannie and Freddie that he can credibly argue is best for the financial system and the country, and that warrants giving up the sweep as part of the package (should another court not have ruled against the sweep prior to that time).

      Largely because the opponents of Fannie and Freddie do not have an alternative to them that comes close to the effectiveness and efficiency the companies have proven that they can provide, I still think that reformed versions of Fannie and Freddie will emerge from conservatorship and get recapitalized. But I can’t deny that last week’s appellate decision has lowered the odds of this outcome (from whatever they may have been before to whatever they are now) and also lengthened the time to get there, should it in fact be the end result.

      Liked by 2 people

      1. Tim,

        Couple of questions / thoughts….

        “The legal path to reversing the sweep is now longer and more difficult…”

        Do you find Sweeney’s court a torturous path?

        “The other avenue to eliminating the sweep is for the Mnuchin Treasury to decide to reverse… But to do that he will need to have a sound rationale that he is prepared to defend against committed opposition (from those who want “reform” that favors the large banks) for giving up the proceeds from the sweep.”

        I have never been under the impression that many favor the banks stepping into the GSE role. Sure, there are guys like Corker, but aren’t they a minority?

        As for giving up the proceeds, wouldn’t that be a necessary consequence of something everyone wants, which is that the government remove themselves from the risk of having to pay a draw to the GSEs? Yet to avoid that risk would require that the GSEs be allowed to raise capital. But what’s the realistic alternative? Seen in that light, wouldn’t the forgoing of proceeds cash out as the only possible way of reducing government risk? To boot, in exchange for the proceeds they can try to steal through warrants, right?

        Although things got a lot murkier of late, I don’t see that the path has changed all that much. It’s just harder to see maybe? Maybe it might just take longer to figure that out for those inclined to nay saying?

        Liked by 2 people

        1. Judge Sweeney’s court cannot reverse the net worth sweep. If she agrees her court has jurisdiction (as I believe she will) it will be on the basis of a regulatory taking, for which the remedy is monetary damages.

          The banks favor the banks stepping into Fannie and Freddie’s role, and they have powerful lobbies and many powerful supporters in Congress.

          As I’ve said elsewhere, I still do believe that reforming, recapitalizing and releasing Fannie and Freddie (which will involve giving up the net worth sweep) is the most probable outcome, but it is by no means a sure thing and if it does happen it will take longer that it would have had the D.C. Court of Appeals not ruled as it did last Tuesday.

          Liked by 1 person

          1. Thanks, Tim.

            Regarding Sweeney court I thought ROLG said something contrary to you, but after listening to Hamish in the car today I think you must be right. I must have misunderstood ROLG.


          2. Even if Sweeney orders only monetary compensation, the the two sides can still settle on any term they agree to. For example, void NWS. Realistically, fed does not have 30B to give to shareholders.


  25. Though I agree that the DC decision will likely result in delay in settlement, i think it’s possible that the DTA issue could force a concurrent attempt at tax and GSE reform. No? I also think that letting the GSEs build capital by letting them keep the March payment is still a possibility.. The Secretary could do this on his own, and the justification would be “soundness” and avoidance of a possible future draw from DTA write down (from tax reform) or otherwise.. Any additional thoughts on that?

    Liked by 1 person

    1. Mnuchin certainly could allow Fannie and Freddie to forego their March sweep payments, but my bet is that he will not, for fear that political blowback from the companies’ opponents (“why are you giving these bad actors the government’s money?”) will make it harder for him to get to the ultimate solution on mortgage reform he envisions. Also remember that most of the senior career officials at Treasury view draws from the companies as a good thing, because, since they’re non-repayable, they increase Treasury’s liquidation preference.

      Liked by 1 person

      1. i understand. But, the political blowback for a draw is real too – the public will not like that. And the retained cash would not be payable to the “bad guys” (good guys), but rather would enhance the solvency of the GSEs… i guess we shall see… Your more likely right, than wrong..

        Liked by 1 person

        1. I think it’s politically expedient not to kick the can farther down the road for three reasons.

          1. It begins to remove government from of their current risk position.

          2. Foregoing the sweep could be the catalyst he needs to speed up a partisan solution to whatever fabricated problem they end up deciding needs regulating / fixing.

          3. He’s going to get political push back from some no matter when he decides to end the sweep. Taking the sweep doesn’t so much avoid political backlash. It simply prolongues it. Why not forge a definitive path now rather than look indecisive by changing course next quarter or thereafter?


          1. Good points, Ron. What I liked most about yesterday’s comments made by Secretary Mnuchin on FBN, was that when he was talking about getting things done now, he stated….”well, we need to deal with the things we can control.” Hopefully, he believes — and I think he does — he controls (administratively), along with Mel Watt, the NWS. I still think there’s a good chance he declines the upcoming March 31st sweep payments to Treasury so the GSEs can start retaining some capital, to protect taxpayers. I guess the beauty is we won’t have to wait very long — unlike most GSE issues — to find out.


          2. GB,

            I like that he met with Watt. Indifferent on his meeting with Hensarling though I can interpret that in a prudential light too.


      2. Hi Tim-
        Further to our discussion in these comments regarding the forbearance of the March sweep, I assume you saw and read Gretchen Morgenson’s article this weekend. Seems she agrees that the tax issue (impact of the DTA values) keeps the possibility of letting capital build up on the table – the possibility of a draw provides the necessary cover…

        Liked by 1 person

  26. Tim, would you be able to elaborate on the various types of Deferred Tax Assets?

    You say “DTAs arise when a company pays taxes in cash to the IRS before it can expense them on its income statement.” Does this imply that revenues that generate those taxes are also pushed out into the future? Why would the expense be taken upfront?

    What about Net Operating Losses (NOLs) – are these different from the DTAs you describe in this article, and did Fannie every have any NOLs it used to offset taxes?


    Liked by 1 person

    1. There are numerous categories or types of transactions that can give rise to deferred tax assets (DTAs). NOLs are different from DTAs, but they can give rise to them. The specific details on these are complex and not really productive to go into. The point I was trying to make in the post is that many, if not most, of Fannie’s DTAs arise from decisions on how to account for certain transactions, activities or products that result in recognition of these on Fannie’s books at a different time than the IRS deems them to be income or expense for tax purposes. In Fannie’s case, it has many types of revenue that the IRS says are taxable before Fannie recognizes them on its books, and many expenses that Fannie recognizes on its books before the IRS allows them as deductions for tax purposes. I believe Fannie should be able to reduce these timing mismatches, and therefore its DTAs, by going back to accounting treatments it used before FHFA began telling it what accounting to use.

      Liked by 1 person

  27. Hi Tim,

    Great article. I was hoping you could expound on a couple things.

    One; I don’t understand the view that the court decision complicates ending the NWS. Just because it was argued to be legal when it was implemented and thru its duration doesn’t argue for the merits of continuing it going forward. What was once ostensibly needed could be argued to be detrimental now. Does the complication stem from a possible settlement (or lack thereof)? I’m missing something here.

    Two; could you explain a little of the mechanics on how increasing earnings (as put forth in this article) can increase retained earnings vs just having those earnings end up funneled via the NWS back to the government? It seems you’re suggesting increasing earnings potential of the GSEs before ending the NWS so I imagine this increase could somehow be retained by the companies.

    Many thanks.


    1. On your first point, in order to reform Fannie and Freddie, recapitalize them and bring them out of conservatorship the government will have to settle the lawsuits. Settlement of the suits would have been considerably easier for Mnuchin had the DC Court of Appeals ruled that FHFA may have violated the Administrative Procedures Act by agreeing to the net worth sweep, and remanded that issue to the Lamberth court for development of a full administrative record. In that case, Mnuchin could have asserted that the net worth sweep will likely need to be unwound at some point (based on a legal decision) so agreeing to give it up now is not that big a concession. But with the statutory legality of the sweep having been upheld (for the moment), unwinding the sweep could be seen not only as giving all of Fannie and Freddie’s earnings that now go to the government back to the companies “voluntarily,” but also as renouncing a $189 billion liquidation preference should they be put in receivership. That’s the “complication,” and I think it will prevent Mnuchin from doing anything until he has a more favorable context to work with– either a different decision in one of the other lawsuits, or a specific plan for Fannie and Freddie going forward that he’s prepared to announce and defend, and that includes eliminating the sweep.

      On your second question, if the net worth sweep stays in place it won’t matter (to the companies) what Fannie and Freddie’s earnings are. But if the sweep ultimately is either reversed or given up, then payments in excess of the 10 percent senior preferred stock dividend will be credited back to the companies as retained earnings (although they may have gone to Treasury first as sweep payments).

      Liked by 2 people

  28. Hey Tim, thank you again for your continued guidance through these matters. I understand your point about the court ruling making it difficult for Mnuchin to find justification to end the NWS. But yesterday and today two articles from Infowars came out linking the NWS to Obamacare. Supposedly the information was leaked directly from the White House…

    I know this is probably outside your realm but the timing of these articles, albeit on a fairly unknown news site, seem just in time to justify a change to the NWS? If the NWS is tied to illegal use of private shareholder funds, wouldn’t the new administration want to stop that immediately?

    This may be a reach and I understand that, just curious what your thoughts are?

    Liked by 1 person

    1. I’ve looked at these two articles, and see only a loose connection between the proceeds from the net worth sweep and the alleged funding of the Affordable Care Act (Obamacare). It appears as if payments under the net worth sweep are classified as “outside of the federal government for budgetary purposes.” That means the administration can use the funds for whatever it wants. The fact that some of these sweep payments may have been used to fund the ACA after a judge ruled on May 12, 2016 (in response to a suit filed by the House of Representatives) that the administration’s current source of funding for ACA subsidies was not legal isn’t an argument against the sweep: one certainly can’t claim that a decision made in August 2012 (to enter into the net worth sweep) contemplated a legal decision in May 2016 that resulted in sweep payments being used for the ACA. Money is fungible; if the sweep payments are “outside of the federal government for budgetary purposes” and people don’t like that, the solution is to try to get the sweep proceeds INTO the budgetary process.

      As much as I might like to, I don’t see the ACA issue as being an effective argument against the sweep itself.


      1. Tim – I think you misunderstand the temporal issue of the decision (possibly the articles are unclear on this point). The court ruled on May 12, 2016, but the court’s decision didn’t just prevent future transfers, it found past transfers unconstitutional. For instance, page 13 of the decision says “Paying out Section 1402 reimbursements without an appropriation thus violates the Constitution. Congress authorized reduced cost sharing but did not appropriate monies for it, ***in the FY 2014 budget or since***. Congress is the only source for such an appropriation, and no public money can be spent without one.” Federal budget starts on Oct. 1, so FY 2014 began on Oct. 1, 2013.


        1. I hadn’t been aware of the full scope of the May 2016 ruling, but it doesn’t change my view on the broader question of the link between the net worth sweep and Obamacare. I don’t think it’s reasonable to claim that the net worth sweep in August 2012 was done in contemplation of an eventual need to use the proceeds to fund Obamacare. I have heard of no direct evidence for that, and moreover there are other much more evident .reasons for the sweep–the main one being that Treasury knew large amounts of non-cash expenses put on Fannie and Freddie’s books by FHFA in the 2008-2011 period were about to revert to the companies as income, which if not swept would allow them to significantly rebuild their capital, something Treasury did not want to have happen.

          Liked by 1 person

  29. “The ruling by the U.S Court of Appeals for the D.C. Circuit on February 21 that the net worth sweep falls within the statutory powers granted to the Federal Housing Finance Agency (FHFA) by the Housing and Economic Recovery Act of 2008…”

    Did court specifically rule this way?
    It appears the court refused to review legal challenges citing judicial bar on review.

    Liked by 1 person

    1. The majority ruling in the appellate decision was that HERA was written in such a way as to give FHFA unconstrained discretion as to how it managed Fannie and Freddie in conservatorship, and that its decisions–including agreeing to the net worth sweep–could not be challenged. The DC Circuit did find that the Lamberth court erred in dismissing the common law claims of breach of contract by FHFA, and remanded that issue to Lanberth for rehearing.

      Unless the DC Circuit decision is appealed (or contradicted by a ruling in one of the other outstanding cases in different district courts), the net worth sweep cannot be unwound via legal challenge. The remedy for breach of contract is monetary damages, not unwinding the sweep.

      Liked by 2 people

  30. What Tim failed to note, because he is consistently modest, is that the identical FAS 133 approach he applied to Fannie’s books–which Falcon and later SEC said was flawed and used as an excuse to get rid of Raines and Howard–was exactly the methodology all the post 2005 remaining auditing and accounting firms firms employed to measure their client’s FAS 133 obligations. No complaints then from SEC.

    Liked by 4 people

    1. Thank you for your post Mr. Maloni. I would also like to add the investigation of Fannie Mae accounting and then current CFO J. Timothy Howard, led by Armando Falcon resulted in Mr. Howard being found innocent of all charges.

      Liked by 1 person

  31. Tim –

    It looks like others are hearing your position on CRTs:

    “The FHFA must reverse its trend towards risk-based pricing in its loan guarantee fees and loan-level price adjustments. It also should prevent risk-based pricing in front-end credit risk transfers, including deeper mortgage insurance. Pricing structures are important, as they can incentivize lending that only serves those with the least risky credit profiles.

    Instead, our system should continue to pool credit risk. This would encourage conventional lenders to make loans to potential mortgage buyers of color and low-income whites, ensuring that all creditworthy families have access to their American dreams.”

    Liked by 1 person

    1. Unfortunately, the American Banker editorial doesn’t criticize securitized risk transfers (it’s referring to, and being critical of, risk-based pricing on front-end risk-sharing, specifically private mortgage insurance). To the contrary, it indirectly endorses the securitized risk transfers that don’t transfer risk; when it says, “Our system should continue to pool credit risk,” that’s what it’s referring to.

      Liked by 1 person

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