The Economics of Reform

Fannie and Freddie are in their tenth year of conservatorship, and while their long-term fates remain unresolved, two alternative paths to determining their futures now have emerged and been fleshed out. The first is legislative reform intended to replace or significantly restructure the companies, backed by the large banks and detailed in proposals this summer from the Mortgage Bankers Association (MBA) and the Milken Institute. The second is administrative reform intended to preserve and strengthen Fannie and Freddie, backed by the companies’ investors and community banks and detailed this fall in a proposal from Moelis & Company. Which path we end up taking will depend on the interaction of events and influences in three areas: political, legal and economic.

I view the politics in fairly simple terms. I believe the large banks have the political clout to get their way in any reform legislation, but that the divisions within and the dysfunction of the current Congress make legislation prior to the mid-term elections very unlikely. And on the legal front, it has long been my view that before Congress can pass legislation, some development or developments in one or more of the court cases favorable to the plaintiffs will provide a strong rationale for administrative reform. (I must confess, though, that each legal setback—and in the past eight days the dismissals of the Robinson appeal by judges in the Sixth Circuit and the Jacobs-Hindes case by Judge Sleet in Delaware have added two more to the list—diminishes my confidence in a boost to reform from the legal side.)

The economic aspects of reform—the facts about the plans and facts about the mortgage market—thankfully are less subjective. They also have been much less well publicized than the political claims and the legal news. Yet knowledge of them is critical to evaluating which plan will be better for the mortgage finance system, homebuyers and the economy, and which therefore merits the support of the public and the Trump administration.

 Unless you’ve been following it closely, I suspect you’ll be surprised to learn how greatly the profile of U.S. mortgage finance has changed since Fannie and Freddie were put into conservatorship. From the end of 2007 to the middle of this year (the latest period for which full comparable data are available), there has been a shift of almost $1.0 trillion in long-term fixed-rate mortgages from the books of Fannie and Freddie to the books of commercial banks, and the Federal Reserve has become a mammoth (but temporary) source of mortgage credit. Over the same period Fannie and Freddie credit guarantees actually have declined slightly, while government-guaranteed securities issued by Ginnie Mae nearly tripled. Here are the details:

 Changes in the sources of funding. At December 31, 2007 there were $11.27 trillion in single-family mortgages outstanding. Of these, Fannie and Freddie held $1.42 trillion in their combined portfolios, while commercial banks held $2.98 trillion ($2.02 trillion in whole loan form, and $963 billion in Fannie, Freddie, Ginnie or private-label mortgage-backed securities). The Federal Reserve owned no single-family mortgages in 2007.

At June 30, 2017 single-family mortgage debt outstanding was notably lower at $10.34 trillion, and the holdings of all three groups were considerably different. Under a mandate from Treasury to shrink their portfolios, Fannie and Freddie’s combined holdings of single-family mortgages were almost $1.0 trillion lower, at $454 billion. In contrast, banks’ single-family mortgage holdings were up by over $800 billion, to $3.81 trillion, or 37 percent of single-family mortgage debt outstanding. And at June 30, 2017 the Federal Reserve’s holdings of Fannie, Freddie and Ginnie single-family MBS no longer were zero; they were $1.77 trillion, or 17 percent of single-family mortgage debt outstanding.

There also were significant changes in the mix of bank mortgage holdings during this time. Banks’ $1.64 trillion in single-family MBS at June 30, 2017 constituted 43 percent of their total single-family mortgage holdings, up from 33 percent at the end of 2007. And within the MBS category, banks’ holdings of Fannie, Freddie and Ginnie MBS more than doubled—from $713 billion in December 2007 to $1.58 trillion in June 2017. (Banks’ holdings of private-label MBS were $212 billion lower). Nearly three-quarters of banks’ agency (Fannie, Freddie and Ginnie) MBS were pools of long-term fixed-rate mortgages, as opposed to shorter-term CMOs. Largely for that reason, 60 percent of the single-family mortgages and MBS banks held at June 30, 2017 (or $2.27 trillion) had long-term fixed rates, compared with just 45 percent (or $1.35 trillion) of such loans in December 2007. Since banks finance almost all of their mortgages with short-term consumer deposits and purchased funds, the movement of nearly $1.0 trillion in long-term fixed-rate mortgages and MBS from the books of Fannie and Freddie—who match-fund them—to commercial banks increased the interest rate risk of the mortgage finance system markedly.

The Fed’s emergence as a huge holder of long-term fixed-rate agency MBS was not a positive development either. The Fed, too, short-funds its mortgage holdings; when it purchases mortgages (or other assets), it does so by creating reserves at the seller’s bank, and those reserves pay interest in line with short-term market rates. But the bigger problem is that the Fed is not a natural holder of mortgages. It began purchasing them in January of 2009 to support the market following the crisis, then increased those purchases as part of the “quantitative easing” phase of its monetary policy. Recently the Fed announced its intent to reduce its agency MBS holdings. We do not know how much of its $1.77 trillion it ultimately will sell or allow to run off, but whatever the amount the withdrawal of Fed support will put further stress on an already challenged mortgage system.

Changes in the sources of credit guarantees. During the time Fannie and Freddie have been in conservatorship there have been enormous changes in the sources of credit guarantees as well. Most obvious has been the virtual disappearance of guarantees provided through structured transactions, following the disastrous performance of private-label securitization during the crisis. Less well publicized is the pronounced shift from Fannie and Freddie guarantees of conventional mortgages to guarantees of FHA and VA mortgages in securities packaged and issued by Ginnie Mae.

At December 31, 2007 Fannie and Freddie guaranteed the credit risk on $4.78 trillion of single-family mortgages, either for the loans they held in portfolio or for MBS held by other investors. On that same date there were $637 billion in FHA and VA loans packaged in government-guaranteed Ginnie Mae MBS. At June 30, 2017 Fannie and Freddie’s $4.72 trillion in single-family credit guarantees were down somewhat from nine and a half years earlier (with a shift in their guaranty mix away from portfolio loans to MBS held by others), while over the same period Ginnie Mae securities financing FHA and VA loans rose by $1.21 trillion, to $1.84 trillion. This dramatic market share change was particularly ironic in light of the constant claims by Fannie and Freddie’s opponents and critics that legislative reform is essential to bring private capital into the mortgage market. Fannie and Freddie were backed by private shareholder capital, and would be again if recapitalized and released. Yet while they’ve been kept in conservatorship, more than all of the $1.14 trillion net increase in agency credit guarantees has come from a near tripling in the amount of guarantees backed not by private capital, but by the federal government.

All three of the negative developments detailed above—increased interest rate risk from the strong growth in bank holdings of long-term fixed-rate mortgages funded short, $1.77 trillion of the same types of mortgages now in relatively weak hands (the Fed’s), and the effective freezing of the conventional mortgage credit guaranty function coupled with the unsustainably rapid growth of government mortgage guarantees—are by-products of the decision by the Treasury to seize Fannie and Freddie in 2008, and the subsequent policies of Treasury and FHFA to decapitalize the companies and run them with a view to ultimately replacing or substantially restructuring them.

The single-family mortgage market has not fared well during the conservatorship period. From its overheated peak of $11.34 trillion in the first quarter of 2008, single-family mortgage debt outstanding fell by 13 percent to a low of $9.91 trillion in the second quarter of 2014 (a decline of 2.1 percent per year). Since then, though, it only has been able to rebound by 5.2 percent, or at a rate of 1.7 percent per year. That is a very tepid recovery, and the crippled state of the conventional secondary mortgage market almost certainly is a primary reason.

It is clear from the current state of our mortgage finance system that we need to make changes to it, but even more clear that we need to make the right changes. And that is where the two alternative paths to reform—the legislative proposals from the MBA or the Milken Institute, and the Moelis administrative proposal—differ so starkly. The Moelis administrative plan will benefit homebuyers, because it is designed to make Fannie and Freddie (and the secondary market) as efficient as possible to maximize the value of the companies for their existing shareholders, including Treasury as holder of warrants for 79.9 percent of Fannie and Freddie’s common stock. In contrast, the MBA and Milken plans, like all legislative reform plans to date, are deliberately engineered to make the secondary market less efficient, to benefit large banks.

All recent proposals for legislative mortgage reform impose on credit guarantors a fixed “bank-like” capital ratio that is invariant to the risks of their guaranteed loans, and also provide for an explicit government guaranty on their securities. Coupled with an idiosyncrasy of the Basel III bank capital standards—they are based solely on credit risk and do not take into account differences in interest rate risk-taking—these two features of secondary market reform would produce a profit “superfecta” for banks: lower credit losses on the whole mortgages they keep in portfolio; a zero Basel III capital requirement on any MBS of Fannie and Freddie (or their successors) they own; wider funding spreads on both their MBS and whole mortgage holdings, and no capital penalty for the interest rate risk they take in funding long-term fixed-rate mortgages or MBS with short-term consumer deposits and purchased money.

Applying banks’ high, fixed-ratio capital standards to credit guarantors would lead to guaranty fee pricing that may be reasonable for lower-quality mortgages but would be far too high for better-quality loans. Banks thus would be able to hold down their single-family credit losses by keeping their best quality mortgages in portfolio as whole loans, while swapping their worst quality loans for government-guaranteed MBS, which they could either sell or keep in portfolio, as they wished. The zero Basel III risk-weight on guaranteed MBS, coupled with no Basel III capital consequences for short-funding long-term fixed-rate mortgages, would give banks a strong incentive to continue to add these loans in large quantities to their balance sheets. And the high average guaranty fees secondary market guarantors would be forced to charge because of unnecessarily high capital requirements would push up the interest rates on all mortgages, resulting in wider spreads on the mortgages and MBS banks fund with their FDIC-insured consumer deposits, whose costs are far lower than market-rate funding.

There is no mystery as to why the banks are advocating so strongly for the MBA or Milken legislative plans; they literally are crafted to give banks maximum profit benefit. But they do it by raising costs for homebuyers, reducing the availability of mortgage credit for low-and moderate income borrowers, and increasing the interest rate risk in the mortgage finance system with no governing regulatory mechanism to slow or compensate for it through higher required capital.

 It doesn’t have to be this way, and shouldn’t be. The U.S. economy has the enviable advantage of access to dual systems of financing: a strong deposit-based lending system alongside a robust capital markets-based securitization capability. The two complement each other, but they also compete. And if not properly monitored and regulated, that competition can become destructive.

There is useful history on this from the mortgage market. In the mid-1970s, nearly three-quarters of all single-family mortgages were made and held by depository institutions—thrifts or commercial banks. Two successive thrift crises, the first in the late 1970s and the second in the late 1980s, caused that system to collapse, with thrifts’ share of single-family mortgages financed plunging from 57 percent in 1975 to 17 percent in 1995. Fannie and Freddie’s ability to tap the international capital markets for prodigious amounts of fixed-rate funding allowed us to undergo a rapid and successful transition to a more balanced financing system. At the end of the 1990s, Fannie and Freddie either owned or guaranteed more than 40 percent of all single-family mortgages, up from less than 5 percent 25 years earlier.

Homebuyers benefitted from this development and were happy with it, but the large commercial banks were not. Fannie and Freddie’s standards in the secondary market placed limits on banks’ product offerings and pricing in the primary market. Banks did not wish to cede that control to Fannie and Freddie, and what I refer to as the “mortgage wars” began. In 1999 three large banks, one subprime lender and two private mortgage insurers (owned by GE and AIG) created a lobbying group called FM Watch, whose purposes were to put out misinformation depicting Fannie and Freddie in as negative a light as possible, and to lobby Congress for changes to the companies’ charters to raise the cost and restrict the scope of their business.

The deceptions about Fannie and Freddie that began with FM Watch have continued unabated since then. In fact, the insistence that Congress either replace or greatly restructure the companies through legislation has its origins in the earliest days of the reform dialogue, when their opponents succeeded in falsely blaming them for the 2008 mortgage and financial crises. Today, of course, we know this not to be true. Fannie and Freddie were not the worst sources of mortgage credit leading up to the crisis; they were by far the best. And they were not “rescued and bailed out;” they were “seized and decapitalized”—that is, taken over at the initiative of Treasury against the companies’ will and without statutory authority, then stripped of their capital by accounting entries booked by FHFA that temporarily or artificially ballooned their expenses and forced them to take huge amounts of unneeded but non-repayable senior preferred stock from Treasury.

While the appropriate response to a rescue and bailout might indeed be legislation to remedy the defects and weaknesses of the previous system, the correct remedy for the “seize and decap” of Fannie and Freddie that actually took place—and whose negative effects now constrict the provision of single-family mortgage credit—is the reverse, that is, “recap and release.” Bank supporters have turned recap and release into a taboo phrase, claiming it’s “not enough reform,” but the Moelis plan includes both actions, along with detailed steps to ensure the plan’s success.

In contrast, legislative reform as proposed by the MBA and the Milken Institute is an inequitable solution to an invented problem, and would exacerbate the weaknesses that have developed in our mortgage finance system over the last nine and a half years. With the Fed about to begin running off its mortgage holdings, we don’t need to drive more business onto bank balance sheets, where it will be leveraged, short-funded and not capitalized for interest rate risk. Instead we need to re-invigorate the conventional secondary market credit guaranty function to better enable it to attract low-cost capital from the international credit markets, whose investors can manage fixed mortgage interest rate risk far more safely than banks. The Moelis plan does that, and for that reason the Trump administration should embrace it.


64 thoughts on “The Economics of Reform

  1. Joe Light with a piece giving more details about Corker-Warner II:

    Joe Light was actually balanced enough to include a competing viewpoint from Andrew Davidson at the end. I believe it echoes what Tim has been saying: Fannie and Freddie’s main business is counter-cyclical, which is a very good thing in bad times. Competitors – and CRTs in place of up-front equity – are pro-cyclical, exacerbating the effects of any downturn.

    Liked by 2 people

    1. Bob–

      I plowed my way through this report by CBO. It’s heavy on assumptions and theory, but I don’t have a lot of disagreement with its basic conclusions. If I could summarize them, it’s that Fannie and Freddie’s credit risk transfer (CRT) securities, CAS and STACRs, aren’t economic for the companies to issue in normal credit environments–their interest costs exceed the credit losses transferred, for reasons I’ve discussed in previous blog posts–and while they would be economic in bad credit environments IF investors would buy them at anything close to current pricing spreads (or indeed at all), it’s uncertain (I would say highly unlikely) whether that would be the case.

      I would go back to the points I made about CRTs in my post titled “Risk Transfer and Reform.” Post-reform, a going-concern credit guarantor, and its regulator, are going to have to determine when, and at what “equity equivalency,” a guarantor can substitute contingent capital in the form of CRTs for real equity capital invested upfront. Hoping you can issue CRTs on the threshold of a downturn and then discovering you can’t would lead to disaster. For that reason, making CRT issuance mandatory in legislation, instead of leaving it to the guarantors and their regulator to do their own economic analysis to determine when and how to use them, would be a tremendous mistake.

      Liked by 2 people

  2. Don’t want to over read/interpret the facts, but the Doug Jones Alabama win–down the road–could help the “good guys” if the Senate ever moves against the GSEs.


  3. Tim

    Would you be willing to create a “Friends of Fannie” SuperPac? I recall Stephen Colbert doing a segment on this some years ago to show how ridiculously easy and low cost it was to do. I am sure it would get attention and donations and hopefully help create a needed voice inside the Beltway! Hope you would at least consider the idea or suggest someone that might.

    Many thanks again for all you do.

    Liked by 1 person

    1. This table—which compares the amounts, interest rates and repayment dates of different types of government assistance given to Fannie, Freddie, Goldman, Morgan Stanley and Citigroup during and after the financial crisis—seems accurate, although it needs some interpretation. The dollar amounts shown for Goldman, Morgan Stanley and Citi are the cumulative short-term assistance extended to these companies by the Federal Reserve under one of its liquidity programs (Section 13(3)); the numbers are so large because each individual extension of credit made under that program gets counted separately (i.e., a weekly loan of $10 billion, made for ten weeks, is reported as $100 billion). And both the March 2008 “beginning of lending or ‘assistance’” date and the February 2010 ending date are the dates the Fed’s Section 13(3) was used to help a large number of commercial and investment banks weather the crisis, not just the three named in the table. Finally, the interest rates seem accurate, but they just apply to the Section 13(3) loans; Citi also received a (repayable) $20 billion TARP bailout at a much higher 8 percent dividend rate.

      Yet the overall message conveyed by the table is accurate, and even understated. During the financial crisis numerous commercial or investment banks would have failed without the low-cost, repayable loans given to them by the Fed, or TARP monies granted by Treasury. The Fed’s loans came with very low short-term interest rates, and both the Fed’s and the Treasury’s assistance was repayable, and not accompanied by any punitive conditions, such as warrants for the recipients’ common stock. In contrast, Fannie and Freddie’s senior preferred stock was not needed by the companies to weather the crisis—they remained profitable throughout it on an operating basis—was forced upon them by Treasury and FHFA, carried an after-tax dividend of 10 percent, was not repayable, and included a grant to Treasury of warrants for 79.9 percent of the companies’ common stock at a negligible strike price.

      And, yes, this disparate and unfair treatment IS an outrage. But Treasury and the Fed support the banks they regulate, and historically have opposed Fannie and Freddie. We’re not going to win the public opinion battle because the financial press repeats what the Financial Establishment says (which is a made-up story about Fannie and Freddie causing the financial crisis), and we’re also not going to get Congress on our side because the Financial Establishment makes large campaign contributions and homebuyers as a group do not. Our only real remedy is the courts, where the facts—which are not in dispute—should matter. But so far we haven’t been able to obtain a favorable ruling on the law to even GET to the facts. Hopefully that will change, however.

      Liked by 3 people

  4. Looks like some in Congress are trying to extend “Jumpstart” until 1/1/19 and also include a clause to put pressure on Mel Watt to pay the GSE dividend to Treasury by not allowing for contributions to the Housing Trust Fund while PFD stock dividends are not fully paid!!


    1. There is a huge amount of money at stake for the banks in wresting control of the conventional secondary market from Fannie and Freddie, and it certainly seems as if they’ve decided to make an all-out push to try to get that done before the mid-term elections–with this, the Corker-Warner bill being prepared in the Senate, and Henarling’s announced willingness to go along with what he admits is the “bad idea” of an explicit government guaranty in order to get rid of Fannie and Freddie (which it seems the new C-W doesn’t really do).

      Apparently the section Zimmer has included with his tweet–to extend the expiration of Corker’s “Jumpstart GSE” legislation from January 1, 2018 to January 1, 2019– is being proposed for inclusion in the spending bill now being drafted in the House. It still has to be accepted in that bill (which is going to be controversial enough even without this) and also by the Senate, so again, we’ll have to wait to see what actually happens here. At a minimum, though, the notion of a quiet year-end for mortgage reform has definitely gone out the window.

      Liked by 3 people

      1. Mr Howard

        All present reform proposals overlook the most fundamental question of all: How to make a MBS security as safe as treasury debt during stress time without a government garantee.With that question resolved everything else falls neatly in place or perhaps I missed it somewhere


  5. Hi Tim,

    From Light’s article it seems like Cork-Warner II wants to use Ginnie as the “utility” to guaranty & get paid G fees, why is the beltway enamored with Ginnie? Who stands to benefit from Ginnie increasing their revenues 100 fold? Ginnie has no stakeholders other than government, but seems like there is a group in the beltway that are trying to lift Ginnie big time.


    1. I think the primary attraction of using Ginnie Mae to provide an explicit government guaranty on conventional mortgages is that it already exists (unlike the cumbersome and bureaucratic Federal Mortgage Insurance Corporation in the original Corker-Warner legislation) and it is known to work well in its role of securitizing FHA and VA loans that already have government guarantees. The idea is to split the conventional credit guaranty function and the securitization function, and have Ginnie perform the latter.

      Ed DeMarco (former acting head of FHFA) and Michael Bright (former staffer to Senator Corker) incorporated this idea in the September 2016 reform proposal they did for the Milken Institute, “Toward a New Secondary Mortgage Market.” Since that time Bright has joined Ginnie Mae as its chief operating officer—and is rumored to be its next president—so he now has an additional reason to pursue the concept.

      Ginnie, by the way, would not “increase its revenues 100 fold” in the Milken Institute plan. The large majority of the guaranty fees paid by lenders still would go to the (private) conventional credit guarantors that provide the primary guaranty—and have to capitalize for it. As it does now, Ginnie would get a much smaller fee for “wrapping” the private guaranty with one from the government, and providing the operational and administrative activities for their securitization function.


      1. Thanks Tim!

        What are your thoughts regarding such a structure? Any notable pros and cons? Just curious to hear your opinion given your expertise…


        1. I would have to be convinced that there were benefits to separating the credit guarantor and issuer functions, as Ginnie Mae does. Today, Fannie and Freddie have direct responsibility for approving and monitoring the seller-servicers that sell to or swap loans for MBS with the companies, and Fannie and Freddie also are responsible for loss mitigation on non-performing loans in their MBS. In the Ginnie model, Ginnie, not the guarantor (FHA or VA,) approves the issuers of its MBS, and I believe the issuers (not Ginnie) do the loss mitigation.

          I do not know how the Milken plan proposes to allocate or divide lender approval and monitoring responsibilities between and among Ginnie and the multitude of private credit guarantors they envision having, but this is something you have to get right in order to control risk in the system. And I also don’t know how Milken allocates loss mitigation responsibilities (which, when done by the credit guarantor, allows it to price based on how it anticipates handling non-performing loans).

          In all of these proposals for replacing the current conventional credit guaranty system, “the devil is in the details.” And until I see the details of a proposed new system, I really can’t critique it.


          1. Thanks Tim! That helps paint some light. If any other thoughts come to mind, let us know! Truly value your contributions here.


      2. Someone asked, “Who stands to benefit…”

        When I was at Deloitte, prior to moving to Freddie Mac, Deloitte had (and likely still does) the Ginnie Mae “staff aug” contract.

        Ginnie Mae likes to tout that they guaranty the same amount in mortgages as Fannie or Freddie with a fraction of the staff, but that is not true, at all.

        The “staff aug” contracts basically have entire teams of contractors doing the work for one government employed manager. Its an end-around the hiring freezes and budget restrictions.

        Liked by 2 people

      3. “Under the Corker Warner Plan preferred shareholders of Fannie and Freddie could be made whole or close to it, but common shareholders may not fare as well,” said people familiar with the matter. Tim, do you have a view on the impact of the Plan on stakeholders? On the mortgage market?


        1. No. Until they publish at least a summary of the new C-W bill, there is no way to tell how their proposed new system would work–or even whether it would work–or to handicap its prospects for becoming law. And it’s also possible that if the summary leaves out critical details it still may not be possible to evaluate it comprehensively.

          Liked by 1 person

  6. Corker and Warner flipped sides…

    Via Lorraine at Politico:

    It’s happening: Senate #GSE reform proposal preserves Fannie and Freddie (in smaller form) and builds on existing system. #housing Only on @POLITICOPro

    Liked by 1 person

    1. Today we seem to have been transported into “opposite land,” with reports of Corker and Warner now wanting to preserve Fannie and Freddie and Hensarling saying he supports a government guaranty on conventional mortgages. We’ll need to see the details on both of these shifts–if indeed they are being reported accurately–before speculating on what they might mean for the prospects for legislation to end the companies’ conservatorships (for better or worse).

      Liked by 2 people

        1. Light’s piece, along with Lorraine Woellert’s Politico article (which someone sent to me, but I’m not able to link) does give a decent indication of what Corker and Warner’s (and Hensarling’s) intent is. They are responding to the criticism of the earlier Corker-Warner and Johnson-Crapo proposals–that transition from Fannie and Freddie’s proven system to their untested ones was too risky– by saying, essentially, “Okay, we’ll keep Fannie and Freddie alive (and under FHFA and Treasury’s control in conservatorship) for long enough to change their operations and create competitors to them, so that when we’re done they’ll no longer pose any threat to what the banks want to do in the $10 trillion residential mortgage market.” That’s clever, but they still have to satisfy the affordable housing groups, who won’t like the fact that a crippled conventional secondary mortgage market (which is the banks’ goal) will greatly raise the cost and restrict the availability of mortgages for this segment of borrowers.

          As I noted earlier, we’ll need to see the details of the draft Senate bill, but we now have a decent idea of where they’re headed. And given Hensarling’s astounding about-face on government guarantees, I’d have to say that the odds of something actually getting through Congress seem better today than they did yesterday.

          Liked by 1 person

      1. It seams that every hearing and committe in Washington discussing housing only includes the destroy Fannie alumni. WHERE ARE THE FANNIE SUPPORTERS? What does it take to get a seat at the table?


        1. You can count today’s “Fannie fans”—willing to stand up and testify to that fact–on one hand and could have a finger or two left over.

          Think about doing that exercise and please share the names/institutions you believe fit that description?

          As I reminded Tim, offline, most people in DC buy the FM Watch lie about the GSEs being responsible for the 2008 financial debacle and displaying no redeeming value, despite decades of doing just that before Conservatorship and the nine years since.

          Little understood is that except when the banks between, 2006-and 2008, went around the GSE systems—spewing out $2.7 TRILLION dollars of their flawed private label securities (PLS)—and attempted to use own paid brokers, back offices, brokers, extorted inflated ratings and applied insufficient guarantees—Fannie and Freddie (especially Fannie) have forced the banks to employ GSE underwriting standards, or—if they refused–sell their originations as PLS or hold that garbage in their portfolios.

          All part of the reason big banks have been unstinting GSE opponents. (Also, read all about it in Tim’s book, “The Mortgage Wars,” a good holiday present for those who haven’t yet.)

          Liked by 1 person

          1. My question was a rhetorical one. It is the only issue that Republicans and Democrats agree on. The few senators that have verbally challenged the net worth sweep in the past are silent now.
            I have been a shareholder since 2013. I have read pretty much every article written on the issue and I find myself totally disallusioned with the courts and the political system. How many more years will it take are judge Sweeney to actually hear this case?


    1. Hensarling’s first principle remains at odds with the direction Senate Banking Committee members appear to be taking, which includes embracing an explicit government guarantee. Let’s see if the SBC actually does produce a draft bill before year end.

      [5:45 update]: I just was sent a headline from the publication “Inside the GSEs” that says, “HFSC Chairman Hensarling Makes It Official–He’s Open to the Idea of the U.S. Backing Mortgages, But Still Wants to Kill Fannie and Freddie.”

      I am at a loss as to what “principle” can square those two positions, other than a desire to give the banks whatever they ask for.

      Liked by 2 people

      1. Very bad news for GSEs and their allies, if Hensarling (rumored to be lusting for David Stevens seven figure plus annual salary job) is willing to give Uncle Sam a US mortgage role, which is what the MBA wants for it members FHA-VA businesses.

        I guess this sudden conversion is part of Hensarling’s first audition to head the MBA?

        Given that most House Committee chairmen can drive legislation like a hot knife through butter, old Jed can get a bill out pretty quickly. Once again, it will rest with Senate D’s–using tougher Senate procedure–to slow any legislative train.

        IMO, Huge GOP political risk to kill the GSEs in a midterm election year, without a viable alternative, except “Let’s give everything to the nation’s big banks and back them with more federal subsidies,” as we do away with the CFPB and lighten the rules governing mortgage brokers.

        Of course, nobody seriously objected to GOP-endorsed travel bans, vilification of Mexico and Mexicans, and other Hispanics, and all looked Right when their tax bill came up, so we shouldn’t be surprised they’d garrote housing finance, too.

        But, the question looms large, if you do away with the CFPB and then Fannie and Freddie, what can slow down or stop bank driven systemic bedlam and chaos??

        Left to their own devices, Jed, history showed exactly what unfettered bank mortgage lending will produce and the result was catastrophic for consumers and three times the taxpayer bailout for the nation’s banks than was given the GSEs.

        Liked by 1 person

        1. this is a big mess. i could use a modifying expletive, but decline out of respect to tim.

          the GSEs are about to go into negative capital due to tax reform and there has been no discussion by treasury/fhfa as to response.

          senate banking committee is driven by two guys (corker(lame duck)/warner) who are preoccupied with other matters that may reduce the committee’s “bandwidth”. plus anything that committee reports out will need 60 senate votes, which seems unlikely.

          house financial services committee led by a lame duck who seems to accept expanding federal guaranty exposure if it also kills GSEs. isn’t that (at least) mildly inconsistent?

          you would have to think that mnuchin, after busting it on tax reform, will look up soon and wonder what’s going on in GSE reform-land?

          and then you have the courts…dont get me started.

          so against perhaps sane judgment, i look forward to rop/bhatti constitutional cases and the expectation that congress, currently riven with partisan animus and sexual accusation, will do nothing because that is exactly what congress is capable of, in this and perhaps all regards.


          Liked by 1 person

        2. This has been a very expensive polical science lesson for me. I used to believe that most politicians were good honest working people trying do what’s right for their constituents. I used to believe that the courts were just and fair. I truly and firmly believed these things.
          No longer. Most of the shareholders that write in on these blogs share their frustration, anger and disbelief at the injustice of the governments actions. For years I tried to make sense of this saga. It is now clear to me, once you stop thinking in terms of right and wrong and just follow the money, it all makes perfect sense.
          Hensarling, DeMarco and all the rest of the “ kill Fannie” fan club do not care what havoc and destruction they create in the housing market as long as they make a fortune along with their banking Pals. Why should they care? No really. When the housing market is in a shambles down the road, they will just create more lies. After all, anyone who disagrees with you is just pedaling fake news right?
          The courts have rejected the many cases brought before it even though there are thousands of pages of documents in which the key players in their own writing contradict what they told the American public and the courts. I find this to be an even greater outrage than the corrupt politicians.
          Sorry if I sound like I’m ranting but my head just about exploded when I read Harnslings comments today. WHERE IS NPR? WHERE IS 60 MINUTES? WHY ISN’T TIM HOWARD IN WASHINGTON IN THESE DISCUSSIONS?

          Liked by 3 people

  7. Today’s House of Reps Hearing on CRT was a good one, key highlights:
    – There was a good fight between CRT insurers vs. MI’s as to who had a better product for GSEs
    – Dr. Susan M. Wachter was the only one who called out both the pros/cons of CRT. She summed it up that they should NOT be mandatory but should be based on actual economics/benefits to the GSEs (whereas all the greedy insurance panelists wanted all the CRT transactions they could get their hands on).

    Liked by 1 person

    1. I didn’t see the House CRT hearing, but if Dr. Wachter did say that CRTs should not be mandatory but done based on their economics, that’s terrific. She’s a neutral and credible expert on housing finance. Having her, and others with similar stature, say this is helpful. There really is no defensible argument for making CRTs mandatory– it removes the economic element from them, and transforms them from potential tools to reduce credit risk to vehicles that very likely would increase it.

      Liked by 1 person

  8. Hi Tim,

    Great post as usual. Just had a couple of questions to some of your answers in the comment section. You said:

    “I also think the Moelis plan can be improved– mostly in its approach to capital, but elsewhere as well.”

    Besides the capital approach, where else could it be improved upon?

    You also said:

    “Personally, I don’t think Treasury will couple the DTA write down (and likely draw, at least for Fannie) with an administrative reform package–it isn’t far enough along in the process to be able to roll one out yet”

    By process, do you mean the tax reform process or housing finance reform process?



    1. On the Moelis plan, two other areas in which I think it could be improved is in the way it envisions using credit risk-transfer (CRT) securities or mechanisms, and its proposal that the remaining dollar amount of support from the Preferred Stock Purchase Agreements (PSPAs) be turned into catastrophic support by the government in exchange for a fee.

      On the CRTs, Moelis discusses reducing Fannie and Freddie’s required capital percentages based on the amounts of CRTs they have or use. I think that needs further thought, because it has the potential to be destabilizing. It will be easy for Fannie and Freddie to run their CRT balances up—and get the capital credit for them—in good markets, but what almost certainly will happen in the late stages of a cycle is that the companies won’t be able to issue new CAS and STACR securities on terms that make economic sense, and on top that, when the economy slows and interest rates start falling, their existing CRTs will pay off at accelerated rates. When that happens, in order to remain adequately capitalized Fannie and Freddie will be forced to issue new equity to replace their liquidating CRTs (which previously had counted as capital) at precisely the wrong time.

      I also think that keeping the PSPAs alive in any form post-conservatorship is neither necessary nor desirable. I’ve said elsewhere that if FHFA follows HERA and updates Fannie and Freddie’s capital standards to withstand a defined level of economic stress—and Treasury publicly endorses those standards as meeting its safety and soundness objectives—the companies’ MBS would trade at yield spreads over Treasuries comparable to what they were pre-conservatorship. And if for some reason they didn’t, I believe that with a risk-based standard property and casualty companies would be both able and willing to provide private catastrophic reinsurance for Fannie and Freddie’s credit guarantees at a fairly small annual fee.

      And, yes, when I said Treasury wasn’t “far enough along in the process” I meant the mortgage reform process.


  9. Dear Mr. Howard:

    I so appreciate your writings on Fannie Mae, Freddie Mac, their conservatorships, and the ongoing mortgage finance reform efforts by government officials and industry operatives. Each time I come away from one of your articles, I have a better understanding of the competing forces involved in the future outcome of these two shareholder-owned enterprises.

    As you and the rest of us like-minded folks know by now, the conservatorships of Fannie Mae and Freddie Mac were a convenient fraud perpetrated by the Washington-Wall Street elite using the 2008 financial crisis as the perfect curtain for their Wizard-of-Oz illusion. Neither company was undercapitalized at the time their boards were coerced into agreeing to the conservatorships. And, when the companies were finally placed into conservatorship in September 2008, not one single criterion required under the Housing and Economic Recovery Act of 2008 (“HERA”) that authorized the appointment of a conservator, was met – NOT ONE!

    Moreover, the companies were forced by government officials to record unsupportable loan loss reserves (which, as expected, never materialized) that required Fannie Mae and Freddie Mac to borrow large and contractually unrepayable sums of money from the U.S. Treasury. This ultimately required them to borrow additional and unnecessary funds just to pay the egregious 10%/annum interest payments required under the original Senior Preferred Stock Purchase Agreements (“SPSPA”). Incredibly, they had to pay interest on money borrowed to pay interest – until the third amendment to the SPSPA changed all that. Now they hand over nearly all their earnings to the government – UNABATED.

    According to everything I’ve read, the companies “borrowed” approximately $187.5 billion but have returned in excess of approximately $265 billion – a 77.5 billion-dollar undeserved windfall for the government, over and above the money received through the U.S. Treasury’s interest payment shenanigans.

    Now, almost ten years later, we have the Moelis plan. I must confess that I haven’t read the details of the plan, but I am aware from reading the opening bullet points and executive summary that it not only permits the U.S. Treasury to keep ALL its ill-gotten gains obtained through these illegal quarterly earnings transfers, but it goes on to unbelievably encourage (NOT DISCOURAGE) the U.S. Treasury from exercising its warrants in order to seize another $75 to $100 billion dollars of shareholder money. If the Moelis plan is operationalized and the government is allowed to walk away with and/or squander (and I’ll be kind because I know it’s a lot more) approximately $177.5 billion (excess repayments + warrants) of shareholder equity, without regard to the common and preferred shareholders (the TRUE owners of the two companies), then it’s going to be yet ANOTHER FIFTH AMENDMENT TAKING – and make no mistake. It. Will. Be. Challenged.

    But, setting aside the unconstitutional and grovel-like aspects of the Moelis plan for a moment (and I say “grovel-like” because this plan is the perfect and bigger-than-life example of the schoolboy having to hand over his lunch money to the bully, just so the bully will relinquish the schoolboy’s things) their blueprint calls for the two companies to build a combined core capital balance of approximately $155 billion, which will help to qualify the firms for release from conservatorship under HERA. For arguments sake, I’ll assume that figure is appropriate. But I see a better way of accomplishing this goal without infringing any further upon the constitutional rights of the shareholders – including (if not particularly) the current shareholders that purchased and, thus, assumed the rights, risks, and rewards of the common and preferred shares of Fannie Mae and Freddie Mac from willing and able sellers of the companies’ shares.

    First, forensic accountants need to unwind the history of the borrowings and payments made between the companies and the U.S. Treasury since September 2008, in order to eliminate the payments of interest that included borrowings based on past borrowings of interest (since in-kind payments were allowed) and not principal borrowings (even though those are based on fraudulent loan loss reserves). I suspect this will produce approximately $30 billion in overpayments to be returned to the companies. Second, FHFA needs to declare the U.S. Treasury repaid at $157.5 billion (or less, if the Honorable Director Watt is truly honorable) and, thus, the senior preferred stock fully redeemed. Third, the $77.5 billion of obvious overpayments is to be returned to the companies. And fourth, the warrants are to be extinguished, since they are no longer needed for repayment of the debt owed to the U.S. Treasury and, more importantly, the American taxpayer.

    If my math is correct, that leaves approximately $47.5 billion needed to complete the “capital build.” However, the companies need to include an additional $33.3 billion in the capital build figure to retire the preferred shares at full redemption value. That brings our remaining total needed for full recapitalization to $80.8 billion. So, how do we fill our 80.8 billion-dollar hole? Through retained earnings and the issuance of new preferred shares.

    According to the Moelis posse, the companies will earn approximately $15 billion per year. By the end of fiscal 2020, they will have retained approximately $60 billion. Also, Moelis & Friends estimate that the two firms can raise $25 billion through a public offering of non-cumulative preferred stock. So, where does that leave us? With a cool $4.2 billion of extra capital AND no need to issue any additional common shares beyond the original, undiluted amount displayed on their balance sheets.

    Surprise, surprise, surprise. The preferred shareholders rightly receive full redemption value for their stock, and the common shareholders won’t have to share the future earnings of their two companies with any new owners. It’s rather amazing what can be accomplished when one points out that the king is not wearing any clothes.

    A few additional thoughts. No plan will succeed to garner the support of private equity, like me, if the government continues to behave in such a flagrantly, mean-spirited manner as it has over the last ten years towards the loyal and steadfast shareholders of America’s mortgage finance giants, Fannie Mae and Freddie Mac. Moreover, the government is NOT in the business of business because of its overwhelming advantage (e.g., endless resources, perpetual existence, etc.) in the marketplace, and they have NO business trying to make a profit for the taxpayers. They need only recoup the costs of their public-interest efforts on behalf of the American taxpayers (of which I am one) – PERIOD!

    Thank you for allowing me the opportunity to contribute to the discussion on The Economics of Reform, and thank you for everything you’re doing to save those companies.

    Best regards,

    Bryndon Fisher

    Liked by 6 people

    1. Bryndon—

      Thank you for sharing your thoughts and analysis on these issues. You’ve covered a lot of ground with them, so I’ll try to be as brief as I can while responding to your main points.

      First of all, I share your perspective (and disgust) about what has been done to Fannie and Freddie since mid-2008; the facts are now available to anyone who wishes to acknowledge them (although far too few fall into that category). The Treasury forcefully—and in my view illegally, though that has yet to be proven—seized two private companies for its own policy purposes and to its sole financial benefit, and in steps has expropriated all of their assets. That’s an outrage.

      The question is: what, if anything, can be done to right these wrongs?

      Treasury’s actions damaged not just common and preferred shareholders of Fannie and Freddie, but also the low- moderate- and middle-income homebuyers the companies were chartered to serve. I am a shareholder of Fannie myself, but I personally place a higher priority on the broader goal of finding a way to get it and Freddie out of conservatorship and set them up again as private companies that work as efficiently as possible to provide affordable financing to a wide range of borrowers than simply to get the most value for their common and preferred shares. The two goals generally are compatible, but in some cases they may not be. One area in which they probably aren’t is in the risks one might be willing to take to improve the chances of achieving an uncertain result.

      Which brings me to the Moelis plan. As I discuss in the current post, ending the conservatorships of Fannie and Freddie (and if we don’t at some point get a victory in one of the legal cases, they could be left there indefinitely) can be done either through legislation or executive action by the administration. I think the bank lobby in Congress is strong enough that anything that is done there will be good for banks and bad for homebuyers. So that leaves me with administrative reform as the only option. Why would Treasury—which has opposed Fannie and Freddie for decades (and through many administrations of both parties)—and President Trump support letting the companies out of conservatorship? One reason, and one reason only: they could make upwards of $100 billion by converting and selling the warrants.

      I don’t like the warrants either. They were given by Treasury to itself, after Treasury bullied the directors of Fannie and Freddie into accepting a conservatorship which Treasury and FHFA immediately turned into an effective nationalization. But what are the chances of successfully challenging them? Only the Washington Federal lawsuit now does so, and it’s stuck in a holding pattern behind Fairholme et al in the Federal Court of Claims, and also is being pursued by a law firm that typically settles cases rather than litigates them to the end. I suspect that the statute of limitations precludes a new challenge to the warrants, but even if there was some way around that we haven’t exactly done well with the net worth sweep cases, which should be slam-dunks. There, plaintiffs are right on the law and right on the facts, but the courts keep stretching for reasons to interpret the law in the government’s favor.

      So my view is that if we have to take risks—and I think we clearly do—it’s better to take them in an area where the win will be for the mortgage finance system itself, rather than just existing shareholders. I recognize that all (and more likely most) readers of this blog don’t share that priority, which is why I want to be explicit about it. I also think the Moelis plan can be improved—mostly in its approach to capital, but elsewhere as well. At this point, though, I don’t see any realistic alternative to it as a means of restoring a functioning conventional credit guaranty capability to the secondary market. I’m open to suggestions, but until I see an alternative to the Moelis plan that I think has a better chance of success in the world as it exists today, that’s the horse I’ll ride.

      Liked by 4 people

      1. Tim, few questions as a follow up to Bryndon’s

        (a) Can the warrants issue be included in Supreme Court case once they decide to hear?

        (b) The DTA loss will hit Jan 1, 2018 (20% tax rate). Is that right? Would just the news of it not roil the markets? Is that not a chance for administrative action when congress takes a break this month? Mnuchin keeps saying that he knows this business better than any lawmakers.

        (c) The piece you just wrote: can it be circulated to Senators and Congressman? It is important for them to know how banks are influencing the housing for their own gain at the expense of homeowners with false propaganda. I think you should contact Gretchen Morgenson for an interview or for her to write a piece based on your findings. Thank you for what you are doing as indefinite conservatorship is not a solution and neither is anything in Corker-Warner bill.

        (d) I wonder if your wisdom reaches to the right people than just the retail investors? It is important that this hard work is known well.

        Liked by 1 person

        1. Quick responses to your questions:

          (a) With my usual “not-a-lawyer” caveat, I believe the warrants cannot and will not be addressed if the Supreme Court agrees to hear the Perry Capital appeal, since the warrants were not challenged in the lower court case.

          (b) We still don’t have a reconciled and signed tax bill yet. I believe an earlier version of the Senate bill delayed the effective date of the corporate tax cut until January 1, 2019, and if that remains in the bill the Senate just passed (I haven’t seen it yet) and survives reconciliation with the House, Fannie and Freddie would have a year to work their DTAs lower and to build capital through retained earnings, if FHFA lets them. Otherwise, the companies would have to write down their DTAs on the day the final bill is signed by the president. Personally, I don’t think Treasury will couple the DTA write down (and likely draw, at least for Fannie) with an administrative reform package–it isn’t far enough along in the process to be able to roll one out yet. Hopefully, though, Treasury will help calm the markets by reminding us that this draw is a byproduct of the net worth sweep (Treasury effectively will be repaying some of the capital it’s swept from the companies since 2013), rather than join the chorus of Fannie and Freddie’s critics yelling, “Bailout!” But we’ll see.

          (c) People should certainly feel free to circulate this post to their Senators and Congressmen/women. Re Gretchen, as you may know she’s moved from the New York Times to the Wall Street Journal. I’m afraid that anything significant she writes about Fannie and Freddie would have to be approved by her editors, who haven’t allowed a positive article about the companies for as far back as I can remember.

          (d) I’ve got a pretty good roster of readers, so I’m confident my posts are seen and read by a lot of opinion leaders. What they do with/about them, though, is up to them.

          Liked by 4 people

      2. Tim, as always, many thanks for your blog. We all appreciate it very much!

        This Moelis plan: everyone talks about it as if it were some sort of gospel, brought to us from angels above. It is simply one plan. One plan created by one investor holding one type of the outstanding securities. It gets us out of C-ship and recaps the companies, yes, but upon first reading it I looked critically at it for two main reasons:

        1. It assumes warrants are fully exercised and
        2. it assumes massive capital being raised fairly quickly resulting in large dilution to existing shareholders.

        I am completely against the warrants because they were issued not as a security/collateral/guarantee for the “bailout” money. They were issued solely as a way to kill the companies and drive the share price down to oblivion. Treasury is paid back and more – absolutely no reason for them to receive them. Having said that, I could live with them being partially exercised so UST has an argument to allow a recap. Amend the amount and strike price so capital flows to FnF where it is needed and UST receives a “golden” or better put, “bloody” hand shake of say 30bn for their efforts. Jeez, thats good business for them anyway.

        Agreeing that and relisting FnF to NYSE and off the OTC would immediately have an upward effect on share price enabling capital increases at much higher valuations resulting in much less dilution.

        And, lastly, FnF should be given several years to raise this capital. The only reason they dont have any is because UST has stolen it all for the past ten years. UST can keep the excess they stole and use it as an explicit back-stop for FnF in return for giving them five years to retain capital. Heck, they can still call it C-ship for all I care but the market will know:

        that UST can no longer sweep 100% of earnings
        that 79.999% of their capital (and any future capital issued) can not be grabbed by the UST.
        that these companies are not disappearing, they are thriving and developing
        that the share price is fairly traded without manipulation on a real exchange

        All those together get the companies back in the market, all shareholders are made whole, future share issues can be carried out to properly capitalize them.

        So Moelis is our only alternative? Fine, but lets change it.


        1. I do not disagree with your criticisms of the Moelis plan. It allows Treasury to profit hugely and improperly from two actions that were unfair (and I believe illegal) and are indefensible: the granting to itself of warrants for 79.9 percent of Fannie and Freddie’s common stock, and the payment of some $70 billion in dividends on $187 billion in senior preferred stock the companies did not need and did not ask for, but were forced to take by FHFA’s non-cash accounting entries, then were not allowed to repay by Treasury when their effects reversed. In the Moelis plan, common shareholders of the companies bear the full cost of these outrages, while holders of preferred stock could be made whole.

          I certainly understand that. In my earlier writings I’d argued for either cancellation of the warrants or a significantly higher strike price for them, and also for an unwinding of the (unjustified) senior preferred stock draws in a way that greatly reduced the quarterly dividend payments credited to them.

          But then I get to the question: how would these actually be made to happen? As I note in this post, you really have only two ways to get Fannie and Freddie out of conservatorship: legislation by Congress, or executive action by the administration. Since my primary goal for reform is to fix the system in a way that is best for the economy and homebuyers, I personally would not recommend going down the legislative road in the hopes that we could convince Congress to abandon the banks and get behind homebuyers, because I think the odds of success on that are too low. It’s possible that existing common shareholders of Fannie and Freddie could get a better deal with legislative reform that makes the companies vassals of the banks, but that is not something I would support.

          I do support the Moelis plan—with all its faults and its grossly unfair treatment of common shareholders (of whom I am one, although I also own Fannie preferred)—because for now it’s the only plan on the table that has a chance of leading to the macro outcome I favor. The challenge is that Moelis has to have Treasury’s support to succeed, and I can’t see Treasury leaving money on the table if it elects to go that route. And the Moelis plan does have a potential silver lining. With the warrants, Treasury has an incentive to maximize the long-term value of the companies, which also benefits existing common holders. This incentive should, and I hope will, lead Treasury to support measures like ensuring that the companies are not overcapitalized in a way that reduces their efficiency (and thus their business volumes), and also to manage warrant conversion—including perhaps through a higher strike price—in a way that makes all holders’ stock price as high as possible.

          I’ve seen or read a number of proposals for recapitalizing Fannie and Freddie that are better than Moelis for common shareholders, and the companies. But that’s not enough. To succeed, a particular proposal needs advocates, either in Congress or the administration, who are in a position to get it implemented. The latter is a very tough row to hoe, and without it a good proposal will remain no more than that.

          Liked by 2 people

          1. Thanks Tim,

            Do you have any indication as to how the Moelis plan is progressing? It’s been a while since it has been released. Is it being put in front of the right people (most importantly UST) and being evaluated against other reform plans or has the plan not gained any traction to date?


          2. I deliberately do not ask senior people at the investment funds who have filed lawsuits–or who are backing a specific proposal like the Moelis Plan–what they are doing to further their interests, for the simple reason that if they have something they think they should tell me about that, they will. Most often, one does better working behind the scenes than by having one’s playbook broadcast to prospective opponents. I respect the key players’ judgment and discretion, and don’t to pry secrets out of them. And I also trust their instincts and skills in knowing how best to achieve their objectives.

            Liked by 2 people

  10. You can almost hear Michael Bright (Milken plan author)–possibly becoming the new Ginnie honcho–spinning his lies about why the recent and dramatic Ginnie-driven federal indebtedness–and the additional amount he would add if Ginnie takes more of the Fannie Freddie business–is “good for the nation, the economy, and the GOP.”

    Bright is evidence David Fiderer’s “Big Lie” machine has been oiling up and will go full bore if the mortgage finance changes are made.

    Don’t underestimate sending Tim’s blog to your Senators and Members, challenging them to read it and respond to you.

    Liked by 1 person

    1. apparently, bright, acting head of GNMA, testified at a hearing recently that the GNMA guaranty differs from the GSE guaranty because unlike the GSEs, GNMA doesn’t have a commercial relationship with originating lenders.

      anyone know what he means by this? (of course the GSEs are market participants and not regulators, but they are subject to FHFA reguation…but bright cant be making his pitch based upon this, can he?)

      from IMF today: “While working at the Milken Institute last year, Michael Bright and his co-author Ed DeMarco wrote a white paper pitching the idea of Ginnie Mae being the linchpin to a new government MBS market. On Wednesday, in Congressional testimony, Bright – now the acting president of Ginnie – floated the concept once again.
      In prepared remarks before the House Housing and Insurance subcommittee, Bright noted: “If a government backstop, or wrap, of MBS were to be considered by Congress as an important part of housing-finance reform, the expertise and experience of Ginnie Mae as an administrator of just such a backstop can likely be helpful.”
      The former PennyMac executive also contrasted the operating differences between Fannie Mae/Freddie Mac and Ginnie: “Unlike the GSEs, who have a commercial relationship with the housing finance industry, the administrator of any government wrap will, in all likelihood, look a bit more like a regulatory relationship than a purely commercial one. In short, a government wrap will likely look similar to the model we use at Ginnie…”


      Liked by 1 person

      1. I don’t know what Bright means by this. I also don’t know how he envisions a Ginnie “wrap” of a Fannie or Freddie MBS (if the companies survive in his proposal) working. Will Ginnie guarantee individual security pools? If so, at what threshold would it make a payout? Would it only be if and when either Fannie or Freddie become insolvent, and can’t make good on their corporate guaranty? If that’s how it works, then you’d be using the government to back outstanding securities, but there would be no surviving credit guarantors to make new ones for Ginnie to wrap. And with no ongoing conventional credit guaranty function in the middle of a crisis, home prices undoubtedly would spiral lower, making an already bad situation worse.

        If members of the Senate Banking Committee are indeed circulating a mortgage reform proposal among themselves–as Inside Mortgage Finance reported a week or so ago–perhaps it will have enough details to enable us to evaluate it. All of the reform proposals from think tanks seem to leave the “pesky details” for someone else to figure out.

        Liked by 2 people

        1. thanks tim. for what it’s worth, IMF appears to me to be a backdoor PR program for MBA and Milken Institute. i have to believe that IMF published above quote from bright after submission to IMF by bright, with instructions to print this. i imagine the provenance of the “draft bill” circulating IMF new item, without particulars as to details, was similar.

          you have to admire his use of the word wrap, rather than guarantee. maybe GSE reform should change its guaranty into a wrap and have done with it, all in congress will feel better.



        2. Sometimes a “cigar is just a cigar” and, having worked up there for Bob Corker, Bright knows just how “unBright” (ugh!!) most of the Senators are on mortgage finance issues.

          So, don’t be astounded if in his testimony or Q&A he distorted, fudged, spun, flummoxed, or just resorted to whoppers.


    2. Politics got the GSE’s in their present condition, for better or worse, and only politics will correct this going forward to my untrained eyes


  11. Curious that if Tax Bill passes and ultimately deplenishes GSE capital, do you think that may nudge POTUS into an administrative solution? No way on earth POTUS would free GSE prior, enraging Corker and his much needed vote no doubt, but afterwards, why not? You did respond to that suggestion umpteen times but hey, times they are changing, fast. Given POTUS history combined with human nature, I would be floored to gobsmacked if the guy didn’t swipe his pen at GSE. A real estate guy, no less. Saving the American dream/safest way to wealth creation which is home ownership? Meantime, Happy Holidays Tim, readers et al.


  12. tim

    as always, fact-based and analytically persuasive.

    indeed, i think if you ask any congressperson (or mnuchin for that matter) why the taxpayer is on the hook at a “first-loss” position for 17% of the outstanding US mortgages (GNMA), i imagine you will receive a querulous look. if you further ask them why it makes sense for the taxpayer to increase its loss exposure by structuring an additional federal guaranty in connection with GSE reform, then the only answer that they could rationally provide is the one you set forth in the post…because it is good for the banks.

    if mnuchin understands all this (as i imagine he does), then one wonders how all this squares with his first principle of GSE reform, making sure the taxpayer is never again exposed to writing a treasury check.

    all best


    Liked by 2 people

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