A View on Affordable Housing

Last month the head of a Washington D.C.-based affordable housing organization asked me to attend a meeting in the Hart Senate Office Building to give my views on “Corker-Warner 2.0” and its potential effect on low- and moderate-income mortgage borrowers. As I presented my perspective and arguments, a Senator with whom I had not met before seemed interested in and intrigued by them, and asked me if I could write them up. I did, and sent the resulting paper to the Senator’s staff. Since affordable housing has been a key sticking point for reform legislation in Congress, I thought readers of this blog would be interested in the text of the paper, which I’ve reproduced below.

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The need for reform

For the past several decades the U.S. has had two general sources of financing for conventional (i.e., non-government guaranteed) home mortgages: depository institutions and the international capital markets. Depository institutions finance home mortgages using consumer deposits and purchased funds; capital markets investors finance them by purchasing mortgage-backed securities (or MBS).

In the mid-1970s three-quarters of all home mortgages were made and held by depositories, mainly thrift institutions. Two successive thrift crises—the first in the late 1970s triggered by deposit deregulation and the second in the late 1980s triggered by asset deregulation—caused that system to collapse. Thrifts’ share of home mortgages financed plunged from 57 percent in 1975 to just 17 percent in 1995. Financing by Fannie Mae and Freddie Mac, sourced from the international capital markets, filled almost the entire gap. At the end of the 1990s, Fannie and Freddie either owned or guaranteed more than 40 percent of all home mortgages, up from less than 5 percent 25 years earlier.

In the early 2000s, during a time when the Federal Reserve and Treasury were embracing free market principles and declining to regulate new lending practices or mechanisms, private-label securities (PLS) emerged as an alternative to mortgage securitization by Fannie and Freddie. PLS placed few limits on the riskiness of the loans they would accept, and as a consequence issuance of PLS increased rapidly. In 2004, more new mortgages were being financed by PLS than by Fannie, Freddie and Ginnie Mae MBS combined. Easy, ample and low-cost borrower access to mortgages through unregulated PLS issuance fueled an unsustainable housing boom that continued until the fall of 2007, when the PLS market finally collapsed amidst an avalanche of delinquencies and defaults.

We now have nearly ten years’ worth of performance data on mortgages financed just prior to the crisis by PLS, FDIC-insured depository institutions, and Fannie and Freddie. These data leave no doubt as to where the flaws in the mortgage finance system were. Cumulative loss rates on the PLS that were outstanding at the end of 2007 exceed 25 percent, and loss rates on home loans made and held by depository institutions as of the same date exceed 12 percent. In contrast, loss rates on year-end 2007 loans held or guaranteed by Fannie and Freddie barely exceed 4 percent.

Capital markets investors and Congress understood what had happened in the PLS market—where an absence of regulation allowed both primary market lenders and Wall Street securities issuers with no capital at risk to make money off mortgages that had little chance of being repaid—and they reacted accordingly. Congress responded with the 2010 Dodd-Frank Act, which required lenders to apply an “ability to repay” rule to mortgage borrowers and, through the “qualified mortgage” (QM) standard, effectively prohibited the most risky mortgage products and loan features that proliferated during the PLS bubble. Investors simply abandoned the PLS market due to its inherent conflicts of interest, and they have not come back

From 2004 through 2006, the PLS market had been financing nearly two of every five new home mortgages in the country. When it suddenly imploded, that left the commercial banks, Fannie and Freddie, and the FHA to pick up the slack. All were under stress because of the overheated housing market, calling into question how, and even whether, the mortgage market could continue to function.

What happened at this point is disputed, but compelling evidence supports the notion that Treasury Secretary Henry Paulson made a policy decision to use what he termed “the awesome power of the government” to force Fannie and Freddie into conservatorship—without statutory authority, against their will, and while they remained in compliance with their regulatory capital requirements—because, as he told the Financial Crisis Inquiry Commission, “[Fannie and Freddie] were the only game in town,” and with mortgage credit drying up, they “more than anyone, were the engine we needed to get through the problem.”

At the same time, Treasury seems to have found in the turmoil of the financial crisis a unique opportunity to strengthen the competitive position in the $10 trillion home mortgage market of the commercial banks it regulates, at the expense of Fannie and Freddie and the capital markets investors to whom they sell their securities.

As soon as the companies were put in conservatorship, Treasury required them to shrink their combined $1.6 trillion mortgage portfolios by 10 percent per year (later increased to 15 percent per year), even though the spread income from those portfolios helped offset their credit losses. Shortly afterwards, Treasury and the companies’ conservator, the Federal Housing Finance Agency (FHFA), used highly pessimistic estimates of future losses to justify recording $320 billion in non-cash expenses that exhausted the companies’ capital and caused them to draw $187 billion in senior preferred stock they did not need and were not allowed to repay. Then, just as the artificial losses that caused this alleged “bailout” were about to reverse (as they did, in only 18 months), Treasury and FHFA agreed to a “net worth sweep” that required Fannie and Freddie to pay all of their net income to Treasury in perpetuity, ensuring that they would remain in conservatorship until Treasury and advocates for the banking industry could come up with a plan to replace them.

Affordable housing borrowers are critically dependent on a low-cost and efficiently functioning secondary market. Prior to the 2008 financial crisis, Fannie and Freddie had been able to support these borrowers by using cross-subsidization to price their credit guarantees more advantageously, and by purchasing nonstandard affordable housing loans for portfolio. Today, Fannie and Freddie’s portfolios are less than one- third their former size—because of Treasury’s directive to shrink them—and they operate with guaranty fees set artificially high by their conservator, FHFA, not based on the riskiness of the loans they guarantee but instead, in the words of the agency, to “reduce their market share,” and “encourage more private sector participation.”

Since the mid-1990s more funding for mortgages has been provided by capital markets investors than by depository institutions, so primary market lenders use the cost of selling into the secondary market to determine their quoted mortgage rates. Increases in the cost of the credit guaranty process, i.e., MBS guaranty fees, therefore get passed on to all borrowers, whether their loans are sold or not.

Dodd-Frank reformed both the PLS market and primary market mortgage lenders through the QM standard and the ability-to-repay rule, and regulators have raised banks’ capital requirements. Only Fannie and Freddie remain unreformed, because advocates for the banking industry insist not on reform that benefits the financial system and homebuyers but on reform that benefits the competitive position of primary market lenders. With the PLS market dormant, Fannie and Freddie are virtually the sole means of tapping the capital markets for money to finance conventional mortgages. Holding this financing channel hostage to banks’ demands that it be restructured in a way that makes it more costly and less efficient—for the patently false reason that its current structure is a “failed business model” that caused the financial crisis—has had severe negative consequences for the mortgage system as a whole, and for affordable housing borrowers in particular. Congress and Treasury are the only entities that can remedy this situation. 

Support for affordable housing

 The government can increase the availability and lower the cost of mortgages for affordable housing in three ways: (a) fostering the development of a secondary market system that provides the lowest-cost mortgages to the widest range of borrower types, consistent with an agreed-upon standard of taxpayer protection; (b) setting mandatory affordable housing goals, and (c) devising and implementing subsidy programs that assist underserved populations. Taking each in turn:

A credit guaranty mechanism that expands borrower access

Advocates for commercial banks have sought legislative replacements for Fannie and Freddie for nearly a decade. Their idea in the 2013 Corker-Warner bill was a cumbersome bureaucracy called the Federal Mortgage Insurance Corporation; today the new version of Corker-Warner calls for multiple credit guarantors with explicit government guarantees on the securities they issue. Both versions, however, offer self-serving solutions to invented problems, and fail because Fannie and Freddie’s business model, with its proven track record of providing efficient and low-cost access to capital markets funding, works far better than the proposed alternatives.

Yet as the 2008 financial crisis revealed, there are weaknesses in this model that can and should be remedied. The companies need a new and more effective capital standard; they need better (and less adversarial) regulation, and they perhaps also should have utility-like limits on their returns, as a risk-control measure. These reforms can be done either in legislation or administratively. Whichever course is followed, however, the most critical aspect of Fannie and Freddie reform for access and affordability will be the capital standard.

The capital standard imposed upon Fannie and Freddie, or any credit guarantor, must strike a careful and deliberate balance between a very high level of taxpayer protection on the one hand and the cost and breadth of access to mortgages on the other. Too little capital will expose the taxpayer to potential losses; too much capital, or a standard that does not tie capital to credit risk, will distort guaranty fee pricing and impede the flow of capital market funds into mortgages, for affordable housing borrowers in particular.

Fortunately, Congress already has addressed the issue of credit guarantor capital, and come up with the right answer. Section 1110 of the Housing and Economic Recovery Act (HERA) of 2008 states, “The Director [of FHFA] shall, by regulation, establish risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.” A true risk-based capital standard for Fannie and Freddie, consistent with HERA, will result in the least amount of unnecessary capital, the lowest average guaranty fees, and the greatest flexibility to use cross-subsidization to support the affordable housing community, while still providing an extremely high level of taxpayer protection.

FHFA has not yet implemented the capital provision in HERA, likely because it and Treasury have chosen to manage Fannie and Freddie in conservatorship in a manner consistent with ultimately winding them down and replacing them. That is a serious policy mistake that needs to be corrected by Congress, or by Treasury itself.

To implement the risk-based standard in HERA, Congress or Treasury first would pick the stress environment it wants the guarantors to be able to protect against. (The 25 percent nationwide decline in home prices used in the Dodd-Frank stress tests for banks would be a likely candidate). FHFA then would use Fannie and Freddie’s historical data to project default rates and loss severities during this environment, by risk category—at a minimum, combinations of loan-to-value ratios and credit scores—and the resulting stress loss amounts would be the basis for setting the companies’ new capital requirements, at the risk-category level.

Fannie and Freddie’s experience during and after the 2008 financial crisis suggests how they would have to capitalize against a future 25 percent home price decline. With their loans and MBS at the end of 2007, and the (low) guaranty fees they then were charging, 2 percent capital would have been more than enough to absorb all of the credit losses on those books of business. FHFA of course will set the actual stress capital levels. It also should impose a minimum capital ratio, which will benefit affordable housing borrowers by making it impossible for Fannie or Freddie to drive their required capital below that minimum by unduly favoring pristine credits.

A true risk-based capital standard for Fannie and Freddie, endorsed by Treasury as meeting a rigorous stress standard for taxpayer protection, would obviate the need for an explicit government guaranty on their mortgage-backed securities. Moreover, if catastrophic loss insurance were necessary to enhance Fannie and Freddie’s credit quality (to hold down their MBS yields), private insurers could provide it; with true risk-based capital, insurers would know the precise thresholds, by risk category, at which their loss coverage would kick in, and could price for it accordingly.

Mandatory affordable housing goals

The potential impact of mandatory affordable housing goals for Fannie and Freddie, or any credit guarantor, is limited by the fact that these companies do not originate mortgages; they only can guarantee the loans primary market lenders make. Even so, housing goals can be used to create incentives for secondary market companies to channel the benefits of capital markets financing to subcategories of underserved borrower. A regulator should have the authority to impose penalties on a credit guarantor if, in any year, its percentage of affordable housing business—either overall or in an underserved subcategory designated by Congress—falls short of the percentage originated in the primary market that year.

Housing goals also can be used to promote cooperative initiatives with state and local governments, nonprofit institutions and community housing groups to create custom-tailored products for targeted housing needs on a smaller scale, although for this to be effective a credit guarantor will need to be able to hold some number of these loans on its balance sheet, since many will not be eligible for securitization.

HERA contains a robust set of housing goals for Fannie and Freddie, which would be maintained in administrative reform of the companies. Mandatory credit guarantor housing goals may be more difficult to include in new legislation, given the political disagreements over their appropriate role.

Subsidy programs that support underserved populations

The bank-promoted bill currently being drafted in the Senate Banking Committee relies almost exclusively on direct subsidy programs to assist affordable housing borrowers, funding these programs with a ten basis point Mortgage Access Fee.

Supporters of this mechanism are correct that direct subsidy programs are more efficient, on a dollar-for-dollar basis, than the cross-subsidies historically done in the secondary market through charging lower-risk borrowers higher guaranty fees so that guaranty fees for higher-risk borrowers can be reduced. But the draft Senate bill errs in presenting direct subsidies as an alternative to cross-subsidies, rather than as a complement to them. The two are independent; direct subsidy programs do not in any way lessen the importance of doing as much as possible to support affordable housing through an efficient credit guaranty mechanism.

The draft Senate bill also proposes to assess the Mortgage Access Fee only on loans that have secondary market credit guarantees. This creates two problems, both of which can be fixed by assessing the fee on all new mortgages. The first is transmittal leakage. Because a credit guarantor’s ten basis point Mortgage Access Fee will be added to its guaranty fee, the same amount also will be added to the mortgage rates quoted by primary market lenders, for the reason noted earlier. But these ten basis points paid by the borrower only will enter the affordable housing subsidy pool if the loan receives a credit guaranty; a lender that keeps a loan in portfolio also keeps the borrower’s ten basis points. A Mortgage Access Fee on all new mortgages will avoid this leakage (and windfall for primary market portfolio lenders), and ensure that all monies collected from the fee go to their intended beneficiaries.

The second problem with a Mortgage Access Fee charged only on loans financed in the secondary market is that it unnecessarily ties the subsidy programs that benefit from such a fee to legislative mortgage reform, which will be challenging to enact. A Mortgage Access Fee on all new mortgages would be less controversial as a stand-alone measure, and thus more likely to be implemented.

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How best to address the needs of the affordable housing community in mortgage reform is no mystery. But that hasn’t been the goal of secondary mortgage market reformers—it’s dominance of the $10 trillion residential mortgage market by large primary market banks. With Fannie and Freddie banned from political activities, these banks have been free to distort the record, define the objectives of secondary market reform, and put forth reform proposals that benefit themselves. Advocates for affordable housing, as well as community banks, realize this, and are responding with fact-based rebuttals and alternatives of their own. That’s a very good thing. If large primary market lenders are allowed to dictate how the capital markets-based financing channel is structured and operates, homebuyers in general, and affordable housing borrowers in particular, will pay a steep price in both cost and access.

88 thoughts on “A View on Affordable Housing

  1. Tim and Rolg
    Good evening. Did you have a chance to read the new complaint filed by Joshua Angel, a well known corporate specialized lawyer acting on his own?


      1. As ROLG noted, the basis for Mr. Angel’s suit is a claim that Fannie and Freddie junior preferred stock carries a “Federal Government implicit guaranty” of dividend and principal payments that the Third Amendment violates.

        Angel first raised this issue two years ago in a paper titled “Government Perfidy and the Mismanagement of the GSEs in Conservatorship.” On March 1, 2016 he sent this paper to the Fannie and Freddie boards, requesting that they “seek and obtain clarification from outside counsel” on his claim, adding that, “I have engaged counsel to commence suit against you and the Company for class redress for breach of duty and breach of contract.” In a subsequent letter to the companies’ boards dated April 19, 2016, Angel reiterated his threat to sue, and attached a draft complaint. I read that complaint and recall thinking at the time, “that’s a real long shot.” He finally filed his suit (rewritten but substantially similar in content) this past Monday, and I still feel the same way about its prospects.

        Liked by 1 person

  2. tim

    i found this reference in footnote 2 to a table in the regulatory capital footnote 12 (F-55) in the fnma 2017 10K:

    Statutory minimum capital requirement(2)


    (2) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances.

    leaving aside the off-BS items, this 2.5% of BS asset requirement seems sensible to me, and i assume it has been adjusted upward since the FC. i realize you have stated that fhfa needs to do a real world risk-based analysis, as instructed by HERA, which it hasnt done yet. but wouldnt 2.5% be a capital requirement that would balance well the interests of the taxpayer in minimizing risk exposure and the interest of the homeowner in paying a non-inflated guaranty fee?



    Liked by 1 person

    1. speaking of which, just saw this item re watts’ testimony today before senate banking committee:

      “The FHFA director also said the agency is planning to propose a risk-based capital and minimum leverage capital rule for the GSEs that would replace the standards in place prior to the conservatorship. While the rule would be suspended while the GSEs are in conservatorship, Watt said it’s important for the agency to propose a rule based on current operations.”

      Liked by 2 people

      1. The risk-based capital and minimum leverage ratios would be an excellent step; I hope that as FHFA does these it is transparent as to the process it is following. It needs to be based on some defined stress environment, and be clear (and reasonable) about the treatment of guaranty fees and admin expenses during the course of the test. It’s really not hard to do properly, if that indeed is FHFA’s intent. (My concern is that, as with the Dodd-Frank stress test FHFA runs each year, Treasury insists that FHFA follow a methodology that effectively backs into the “bank-like” capital number supporters of the banks would like to see).

        On your first comment, the 2.50% on-balance sheet capital number and the 0.45% off-balance sheet number are the minimums from the Federal Housing Enterprises Financial Safety and Soundness Act of 1992; they have not been updated since the crisis.

        Liked by 1 person

        1. ICBA Statement on Capital Proposal from FHFA Director Mel Watt

          Washington, D.C (May 24, 2018)—Independent Community Bankers of America® (ICBA) President and CEO Rebeca Romero Rainey issued the following statement on a proposal from Federal Housing Finance Agency Director Mel Watt to develop new risk-based and minimum-leverage capital rules for Fannie Mae and Freddie Mac.

          “ICBA strongly supports FHFA Director Mel Watt’s comments regarding the development of a new risk-based capital and minimum-leverage capital rule for Fannie Mae and Freddie Mac. ICBA has vocally urged Director Watt to require the government-sponsored enterprises to develop and implement a recapitalization plan, as required by the Housing and Economic Recovery Act of 2008. Establishing these capital standards for both GSEs is the first step in that process, which ICBA hopes will eventually lead to their full recapitalization.

          “Only a strongly capitalized secondary market can protect taxpayers and provide the liquidity needed to support the mortgage market. Community banks count on the liquidity that the GSEs provide to help meet the home-lending needs of their communities. ICBA looks forward to continuing to work with policymakers to ensure housing-finance reform meets the needs of all borrowers and lenders.”

          Liked by 1 person

      2. I know it’s hard for a bunch of lawyers to fathom, but maybe you shouldn’t make a law about the best % of risk and instead let the equity markets decide if the companies are properly managing for risk…

        when all you have is a hammer, everything looks like a nail.


  3. Tim –

    FHFA may have heard your comments on Credit Risk Transfers.

    Direct quote from the their report released today:

    “Moreover, initiatives such as credit risk transfer transactions confer risk management benefits but impose costs that could reduce Enterprise earnings.”

    “Header: Barriers to Investor Participation in Credit Risk Transfer Transactions
    Body: This credit risk transfer market is relatively new and evolving and relies on ongoing investor interest and ability to purchase the credit risk. FHFA has previously identified several statutory impediments which, if addressed, could avoid unintended consequences for some types of investors and thus help to expand investor participation in Enterprise credit risk transfer transactions.
    FHFA continues to believe that these statutory impediments should be removed.”

    Full link to the report:


    Liked by 1 person

    1. This is all pretty general. And FHFA still hasn’t addressed the fundamental problem that exists with securitized CRTs: if investors only buy them when they expect to make an attractive return on the capital they invest–i.e., when their combined interest payments and return of principal comfortably exceed any credit losses they expect to have transferred to them–how could issuance of these securities ever be effective for Fannie and Freddie as a means of managing their credit risk?

      Liked by 2 people

  4. Tim,

    Good morning. I wanted to get your thoughts on this new piece of information, as the Treasury has been mostly tight-lipped regarding future plans.

    As always, thank you.


    1. more of phillips today:

      Treasury Official Sees Major Impact from Single Security
      By John Bancroft


      A key Treasury Department official suggested that issuers of non-agency MBS may someday participate in the common securitization platform being developed by Fannie Mae and Freddie Mac.

      Craig Phillips, counselor to the Treasury, said the industry has made a lot of progress toward the launch of the single security that is scheduled for June 2019. “Industry preparedness is about an eight or nine on a scale of 10,” he said during remarks at this week’s secondary market conference sponsored by the Mortgage Bankers Association in New York.

      Phillips characterized the CSP as “reform-agnostic,” suggesting that it will be an important part of the MBS infrastructure regardless of how Fannie and Freddie are eventually reformed. While the platform is currently owned by a joint venture between Fannie and Freddie, the Treasury official said issuers of non-agency MBS may someday be able to invest in the venture and use the platform.

      Treasury wants to encourage the growth of the non-agency MBS market through regulatory reform, Phillips said. That includes streamlining disclosure rules and overhauling bank capital rules that discourage participation.


      one of the nagging little problems of the private label securitizations done before the financial crisis was that all of the documentation was “standard” but not really “uniform”. meaning, if you were buying PLS mbs, unless you read the docs you couldnt be sure there wasnt a weird term in the docs that might affect the waterfall in ways that you did not understand. no investors really read the docs since they thought if they bought enough mbs, the diversification would net out any anomalies that may be in a particular underlying doc.

      it is no surprise that phillips, who used to run morgan stanley’s mbs desk, would be in favor of a single mbs security governing not just FnF but also all bank securitizations that may be done down the road. just as a treasury security is fungible except for maturity and interest rate, so will be all mbs (assuming there is a fed backstop to all mbs…although a FnF guaranty will achieve better pricing than any private label mbs that is just relying on internal pool credit support). and it sounds like FnF might even get paid a fee for the use of the platform…wouldnt that be a surprise!


      Liked by 1 person

      1. There’s nothing new in any of Phillips’ comments. The common securitization platform (CSP) is being built as a utility, currently to accommodate the securitization of Fannie MBS and Freddie PCs, but potentially to be used by other security issuers as well. As Phillips says, for the latter to happen will require a directive either by Congress or the administration (with the latter likely triggering additional lawsuits). Since the CSP project as it stands now benefits Freddie at the expense of Fannie, I’d been expecting to see suits from Fannie shareholders challenging it; I suspect the reason we haven’t has to do with the lack of success to date in plaintiffs’ lawsuits against the net worth sweep.

        Liked by 2 people

  5. Perry Cap. LLC v. Mnuchin, 848 F.3d 1072 (D.C. Cir. 2017) (Brown, J. dissenting in part)

    “I cannot conclude the anti-injunction provision protects FHFA’s actions here or, more generally, endorses FHFA’s stunningly broad view of its own power. Plaintiffs — not all innocent and ill-informed investors, to be sure — are betting the rule of law will prevail. In this country, everyone is entitled to win that bet.”

    The LAST sentence hits other judges really hard. I think that as a judge of many years, she read their mind.

    Liked by 4 people

  6. for ROLG or anyone else, Does anyone know the last time Chuck cooper, argued in court? The Saxton case in district was previously argued by a different attorney. Is it typical to change up the litigator on appeal?


    1. @elliot

      he who pays, says.

      any trial depends upon discovery of facts more than perry mason dramatics, and there already has been developed a thorough set of facts in the court of claims action, which is available to all counsel who sign a confidentiality agreement. if the litigated claim is treasury coercion over fhfa at time of signing of NWS, i could see additional depositions relating to who did what to whom at that time relating to that event.

      but the firm which probably has the best handle on the facts pattern at time of NWS is cooper’s firm.


      Liked by 1 person

  7. Dear Tim
    Good afternoon. I have been listening for, at least, a couple of years the arguments about the difference between “may” and “shall” in legal instruments. So far several judges concluded that “May” is permissive and “Shall” is mandatory, and then they think that FHFA has the “option” of restoring the companies to sound financial shape.
    But, I wonder if anyone argued that Congress could not have used “Shall” and was forced to use “May” because it could not be mandatory for FHFA to achieve a result that did not depend only on its will. I mean you cannot make mandatory for an entity to be successful in business because it depends on many factors that are out of the control of that entity. Such factors are market conditions, competition, natural disasters, economy in the rest of the world , etcetera.
    Stepping in the shoes of Congress, one can say: “you may succeed putting the companies in solvent condition, or you should try to put the companies in solvent condition”. But, again stepping in the shoes of Congress, one cannot say: “you shall succeed in this business”. This is because of the uncertain nature of business and because of the factors that FHFA cannot control.
    I wonder if “may’ instead of used as permissive was , in fact, used as and expression of possibility.
    Do you know if this point was made by plaintiffs?
    Thanks for your work fighting for the true on this sad chapter of US judicial history.

    Liked by 2 people

    1. J Barnes,

      Judge Brown in dissent addresses this.

      “The Court makes much of the statute’s statement that a
      conservator “may” take action to operate the company in a sound
      and solvent condition and preserve and conserve its assets while a
      receiver “shall” liquidate the company. It concludes the statute
      permits, but does not compel in any judicially enforceable sense,
      FHFA to preserve and conserve Fannie’s and Freddie’s assets
      however it sees fit. See Op. 21–25. I disagree. Rather, read in the
      context of the larger statute—especially the specifically defined
      powers of a conservator and receiver set forth in Subsections
      4617(b)(2)(D) and (b)(2)(E)—Congress’s decision to use
      permissive language with respect to a conservator’s duties is best
      understood as a simple concession to the practical reality that a
      conservator may not always succeed in rehabilitating its ward. The
      statute wisely acknowledges that it is “not in the power of any man
      to command success” and does not convert failure into a legal
      wrong. See Letter from George Washington to Benedict Arnold
      (Dec. 5, 1775), in 3 THE WRITINGS OF GEORGE WASHINGTON, 192
      (Jared Sparks, ed., 1834). Of course, this does not mean the
      Agency may affirmatively sabotage the Companies’ recovery by
      confiscating their assets quarterly to ensure they cannot pay off
      their crippling indebtedness. There is a vast difference between
      recognizing that flexibility is necessary to permit a conservator to
      address evolving circumstances and authorizing a conservator to
      undermine the interests and destroy the assets of its ward without
      meaningful limit.”

      (page. 83- https://www.cadc.uscourts.gov/internet/opinions.nsf/66A4E1FEF4BB8401852580CE005620C3/$file/14-5243-1662090.pdf)

      Liked by 1 person

    2. “But, I wonder if anyone argued that Congress could not have used “Shall” and was forced to use “May” because it could not be mandatory for FHFA to achieve a result that did not depend only on its will.”

      this is exactly what judge brown wrote in her dissent in perry.

      Liked by 2 people

      1. Cooper offered a different argument: (1) showing an instance of ‘may’ elsewhere in HERA where if the action wasn’t performed by choice it would be absurd and (2) that ‘may’ can mean ‘is allowed to’.


        1. if you listen to the saxton oral argument, both cooper and the 8th circuit judges referred to an 8th circuit case, cedarminn. while the holding was unrelated (relating to timeliness of a conservator’s or receiver’s rejection of a burdensome lease), there is language in the case that made clear that the 8th circuit in that case thought the conservator (under FIRREA with the same exact “may” language as HERA) was required to preserve and conserve assets….which is what the conservator turned receiver in cedarminn was doing…rejecting an uneconomic release in order to preserve and conserve assets.

          now fhfa and treasury counsel argued that this language was tangential to the holding in the case (they didnt use the word “dicta” but that was their point), but the judges seemed to think that Ps were appropriately arguing the cedarminn case to the effect that the 8th circuit has precedent that “may” is not discretionary in the manner that the other circuits had found.


          Liked by 2 people

          1. I finally have been able to listen to the Saxton oral argument. I think that overall Chuck Cooper did an excellent job representing plaintiffs’ position–particularly his emphasis on the importance of having an opportunity to explore the factual record at trial in order to determine whether FHFA/Treasury’s actions were ultra vires (rather than allowing a judge to conclude that they weren’t based on Treasury and FHFA’s egregious and unrebutted misrepresentations of that record in their filings and arguments). Still, I wish Cooper had found a way to make the same point about “may” versus “shall” that judge Brown did in her dissent: whereas you can say a receiver “shall” liquidate a company, you can’t say that a conservator “shall” rehabilitate a company because it may not be possible to do so. That’s such a simple and powerful concept, and in my view it makes the government’s interpretation of HERA–that Congress intended “may” to mean that FHFA acting as conservator can do whatever it wants with Fannie and Freddie, with no definable boundaries (at least the Saxton judges were unable to elicit any from the government’s lawyers)–ludicrous by comparison.

            Liked by 4 people

          2. Tim/ROLG
            Is there any other lawsuit where the dissent of Judge Brown can be used as argument on the interpretation of “may” and “shall” on the issue of NWS based on the statute of HERA.. I am not a lawyer but the interpretatioin/ position of Judge Brown and your interpretations makes a compelling argument for the plaintiffs. In the revised filing of plaintiff in Judge Sweeney’s court did they include NWS as illegal and unconstitutional?
            Thanks a lot for all your hard work.


          3. @anon/tim

            there is a certain amount of weakness in arguing to a new court that the dissent had it right in a previous court. i admit the logic of the use of may in the case of a mission that can’t be guaranteed to be successful is powerful, and frankly i think cooper did use this logic in an altered fashion in his briefing and argument when he said that the conservator cannot “abandon the conservator’s mission” to preserve and conserve…another way of saying the preserve/conserve mission is obligatory even if the word may is not.

            cooper took a calculated chance in his reply brief to focus on the 8th circuit cerdarminn case (https://law.justia.com/cases/federal/appellate-courts/F2/956/1446/326280/) where you will find this language:

            “Fourth, the importance of retaining an independent right to repudiate contracts is exemplified by the distinct missions of the conservator and receiver. That Congress intended conservators and receivers to have different missions is clear. RTC as conservator of a failed institution was empowered to take action necessary to restore the failed thrift to a solvent position and “to carry on the business of the institution and preserve and conserve the assets and property of the institution.” 12 U.S.C.A. § 1821(d) (2) (D). As receiver, on the other hand, RTC was empowered to liquidate the institution.”

            so without getting bogged down parsing the relative permissiveness of the word may, cooper used this 8th circuit acknowledgement of a conservator’s “mission” as the touchstone for his argument.

            when you add this language in a case, that at least one judge thought distinguished the 8th circuit from the other circuits which have found in favor of fhfa, to the concern raised twice by the panel that this understanding of “may” resulted in the nationalization of FnF, then you have an oral argument that cooper is likely to be pleased with.


            Liked by 1 person

          4. I wasn’t suggesting that Cooper refer to the language in judge Brown’s dissent; just that he make the same point as she did about “may” versus “shall” in this context. The government is winning net worth sweep cases it shouldn’t be winning, and it is doing so by making very simple (albeit incorrect, and often inaccurate) arguments, and repeating them. Plaintiffs counsel, in my reading, has been making more logical legal arguments and losing. I’m not suggesting they abandon their logical or nuanced arguments, but I do think supplementing them with some simple and clear ones on key aspects of the case would be well advised.

            Liked by 2 people

        2. @tim

          judges at two times asked defendants’ counsel if this is a case of “not worth anything then, not worth anything now,” but shareholders are still paying for the shares. D counsel did not know how to react (at one point cayne said he was thinking he would stick to the legal issues), and i am not sure where the judge was going with this: cynicism it seems, but directed at Ps or Ds?

          but for a fact pattern that smells bad, yes perhaps Ps counsel might direct the judges’ attention more to the bigger picture, and beyond the dictionary definition of a single word..



          1. I know that plaintiffs counsel is frustrated with how both the government and the courts have been treating the facts in this case. At this stage of the proceedings–which is a motion to dismiss–the courts are duty-bound to take plaintiffs’ statement of facts as true. But they clearly are not; many of the judges’ questions are couched in the context of the “bad facts” the government has succeeded in injecting inappropriately into this case. It’s possible that plaintiffs counsel is being too literal in adhering to the “basic principle that every first year law student has been taught” of taking plaintiffs’ statement of facts as true in adjudicating a motion to dismiss, but I don’t know what other realistic alternative it has. The government isn’t playing by the rules, and the judges are letting it get away with that.

            Liked by 1 person

      2. Brown is correct in her conclusion but not in her logic.

        The use of “may” does not have in any prima facie sense the import of the possibility of not succeeding. In other words, it’s not cogent to argue that “may” was used instead of “shall” in order to acknowledge the reality that it might be impossible to restore the entities to a sound and solvent position. Her reasoning was, since conservator might not be able to restore the GSEs, it couldn’t be said that the conservative “shall” save them.

        I think she was lead down the garden path. Consider, “may” merely means that it’s permissible that the conservator run the business to that end, one of solvency. That is, the conservator is permitted to do what is necessary to restore the GSEs. Such a prima facie interpretation is narrow. Single propositions usually are!

        “May” does not address what the the conservator *may not* do. Accordingly, it’s logically fallacious for defendant(s) to argue: since FHFA may conserve assets, it needn’t conserve assets. NOTE: That’s an argument from silence that takes on an enormous burden of proof. That my sixteen year old “may” go out with her friends tonight does not imply she may also stay home and raid dad’s wine cellar. To find out what the conservator may not do, we have to look elsewhere. It’s not implied by “may.” A better analogy might be, “you may water the garden while I’m away.” From that proposition we cannot rationally deduce that permission has been granted to do other things, like having a party for instance. But even more glaringly, we surely may not deduce that in addition to watering the garden, you may also mow over and destroy the garden!

        Liked by 1 person

        1. @ron

          there is a legal phrase, bad facts make bad law.

          for many years “may” has been associated with what statutory conservators do, without controversy because conservators were trying to conserve and preserve. no bad acting conservators, no bad facts.

          here comes a coerced conservator and a bad fact pattern, a conservator trying to accomplish a treasury-directed policy objective of shutting down FnF, and shoehorn it into the word “may”…hence the bad law relating to what “may” means that is perry and the other misguided APA decisions.


          Liked by 1 person

        2. Agree!

          “You may stand up” does not imply “You are allowed sit down” or “you are allowed lie down” or “you are allowed to eat” or anything else.

          I think cooper has this covered in a new filing in the Saxton case:

          “When Congress says that an agency “may” do one thing, it does not
          simultaneously give the agency license to do the opposite. “

          Liked by 4 people

          1. there is an interesting interplay between saxon in 8th cir and bhatti (federal district court within 8th circuit). judge schlitz is hearing 3 principal claims in bhatti: unconstitutional structure of fhfa (which he appears to think little of as per oral argument), appointments clause violation where acting director demarco acted over 4 years of his 5 year term without presidential appointment and senate consent (which he thought more highly of), and an unconstitutional delegation argument (if “may” means that a fhfa director can do anything while acting as conservator, then this is an unconstitutional delegation by congress of legislative power to an agency).

            the unconstitutional delegation argument means that even if saxton panel find that may means what perry etc have found it to mean, judge schlitz may find that this judicial reading affords the fhfa director too much discretion. now, whether schlitz waits for the saxton court to rule first on the meaning of “may” or not is hard to say, especially since he can rule on the other two claims, which were not argued in saxton before the 8th circuit.


            Liked by 1 person

      1. Correct Mark.

        “Congress … does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions–it does not, one might say, hide elephants in mouseholes.” Whitman v. American Trucking Association, 531 U.S. 457, 468 (2001). This doctrine is an exception to the textualism approach to constitutional interpretation.


  8. Tim,

    Good morning. It’s no secret that Jim Parrott of the Urban Institute has #TBTF bank clients. As a matter of fact, just this morning, Josh Rosner claimed to have heard it straight from the mouth of the horse that Bank of America had Parrott on payroll. Why is it that the Urban Institute, if wanting to be taken seriously in the mortgage reform discussions, isn’t required to disclose which #TBTF banks are influencing their opinions from a financial standpoint?

    As always, thank you.


      1. As I mentioned I would, I’ve gone after this issue as well, on a somewhat different tack from Josh’s. I sent a note to a senior person in the Urban Institute hierarchy calling attention to and giving my critique of the latest Parrot-Zandi piece, quoting from the comment I made about it on my blog and also pointing out that it repeats Treasury’s fictitious rationale for the net worth sweep, notwithstanding the fact that discovery in the Court of Federal Claims has unearthed numerous communications from Parrott admitting the real reasons for it—to keep Fannie and Freddie from recapitalizing and to perpetuate the conservatorships. I concluded my note by saying, “My reason for writing isn’t to complain about the paper, but to make sure the leadership of the Urban Institute knows its name is on a deliberately slanted (in my view) and knowingly inaccurate advocacy piece. I suspect that’s something the Urban Institute neither wants nor supports.”

        The person to whom I wrote acknowledged the legitimacy of the criticism and said they would “take this up.” So I know the Urban Institute’s leadership is aware of and I believe now focused on this issue.

        Liked by 4 people

  9. Sure liked what I heard in the Saxton hearing. Judges were clearly open to the possibility that the 3rd amendment was ultra vires. Also would guess that Cooper’s last utterance, ‘Surely I get to try these matters!’ was a good conclusion and fell on sympathetic ears. Let’s hope.

    Liked by 2 people

    1. http://media-oa.ca8.uscourts.gov/OAaudio/2018/5/171727.MP3 to hear the transcript.

      this was a promising oral argument…as was perry, so caution is in order.

      this was the first time that i recall that the non-legal point was made by a judge that, my golly, the NWS “nationalized” these companies. finally a judge was (one hopefully assumes) finally concerned that a conservatorship/receivership statute was converted into a nationalization statute without clear authority from congress…sort of an astounding premise that those so advanced in the legal community to become federal appellate judges normally overlook.

      cooper for Ps was excellent, cayne for fhfa meh, and wright for treasury, dont get me started.

      net net, the judges were troubled by the extent of fhfa/treasury claim that any act pursuant to a conservator power was authorized even if antithetical to the conservator purpose.

      at least these judges were independent thinkers. we shall see.


      Liked by 2 people

      1. just a tidbit addendum if i may on saxtion oral argument in 8th circuit.

        at one point, a male judge (stras or benton) asks cayne for fhfa to react to what the judge refers to as the Ps strongest point, that fhfa was under the direction of treasury in direct contravention of HERA.

        in his reply, cayne states that he has never considered this to be a strong point for Ps at all. rule #1…never gratuitously contradict the judge. of course, cite alternative authority, make a counterargument, but never say to a judge, in effect, you’re off base. all cayne said was, gee there was a two-party negotiation, and the NWS was the arms-length result…which of course is a question of fact.

        given Ps well-pled complaint, cooper reiterated in rebuttal that surely he had the opportunity to prove at trial whether fhfa was improperly under treasury’s direction…that very question of fact the male judge seemed interested in.

        so again, for fear of reading too much into the oral argument, this sounded like there is at least one judge who thought Ps should go to trial on fact question whether fhfa was improperly under direction of treasury.


        Liked by 3 people

        1. supplementary tidbit addendum if i may.

          when you listen to the saxton oral argument, fhfa counsel cayne starts his argument, as he should, with recitation of the three other circuit courts that have rejected P’s APA claim that fhfa exceeded its authority as conservator.

          and then you hear a male judge cut cayne off and say in effect, yes, but now mr. cayne you come to the 8th circuit and you must now confront our 8th circuit case, CedarMinn.

          CedarMinn, construing FIRREA, upon which HERA is based (and in material part copies verbatim), is a 1992 case that has favorable language for Ps insofar as it speaks of the statutory conservator’s “mission” and “duties” as in “parallel” with the common law conservator. (the perry majority rejects use of common law conservator duties to inform what fhfa as conservator “may” do).

          to see how Ps are trying to use CedarMinn, see saxton Ps reply brief: http://gselinks.com/Court_Filings/Saxton/17-1727-0020.pdf

          @p.7 ” This Court’s decision in RTC v. CedarMinn Building Limited Partnership could not be more clear: a conservator’s “mission[ ]” is “to take action necessary to restore the failed [financial institution] to a solvent position and ‘to carry on the business of the institution and preserve and conserve the assets and property of the institution.’ ” 956 F.2d 1446, 1453 (8th Cir. 1992) (quoting 12 U.S.C.
          § 1821(d)(2)(D)).”

          cayne tried to distinguish CedarMinn, and the judges didnt seem all that eager to go down cayne’s path. how much CedarMinn informs the judges view on saxton is the wildcard in this case, as the other circuits have no reason to accord an 8th circuit case with any particular precedential value, unlike the 8th circuit itself.


          Liked by 1 person

  10. i have never seen this before, and i am not sure what the 5th circuit will do with collins, but the 5th circuit accepted on an interlocutory appeal the all-american case, alleging that the cfpb is unconstitutionally structured.

    collins had oral argument awhile back, and Ps asserted two claims: that the NWS violates HERA under APA (like perry), and that fhfa is unconstitutionally structured. the fhfa and cfpb are very similarly structured, with fhfa director even more independent arguably because of HERA’s anti-injunction bar.

    so essentially the same claim is at issue in the same circuit in two different cases at the same time. you would expect some sort of coordination at the instance of the chief judge, and since collins was argued already, collins should come first…and yet a merits panel decision in collins on the constitutional claim may not be agreeable to all of the other 5th cir judges, including those who will comprise the merits panel in all-american. one possibility is that collins is put on hold and all-american goes to briefing and argument en banc (or collins is reargued en banc).

    of course if the collins merits panel rules in favor or against Ps on APA claim, then that could come down with the constitutionality claim held in abeyance. who knows.

    ted olson is on briefing on all american and will likely argue.


    Liked by 2 people

    1. 1. Dico Akseraylian, a spokesman for PHH, confirmed that the company did not petition the Supreme Court.

      2. Judge Shiltz may be praying the 5th Circuit to do something similar to that done by DC Circuit. Otherwise he would have to rule the organization of FHFA was unconstitutional. (by Appointment clause)

      3. Single director problem is far more worse. If unconstitutional, the original C-ship is voided.

      4. Arguments by Judges Henderson and Cavanaugh were more powerful, may find friendlier ears in 5th circuit.


      1. @mark

        1. the appeal was granted in all-american some 3 days before the PHH cert petition needed to be made. PHH won reversal of penalty based on statute, didnt need to pursue unconstitutionalilty structured claim. ted olson on both cases. i can see olson saying to PHH that you dont have to pay my fee for a cert request if i am going to argue claim again in a circuit other than DC.

        2. judge schlitz will have to decide the (strong) appointments clause claim at some point since not raised in collins.

        3. single director claim is arguably worse for Ps in front of judge schlitz as well. in the oral arg transcript, you can see his dislike of a remedy that would invalidate everything fhfa has done since demarco and before watt (even though collins P just focused on NWS). appointments clause claim remedy (assuming bright line remedy of 2 year cutoff borrowed from recess appointments clause in const) would invalidate NWS but not PSPA and first two amendments.

        4. as is judge brown’s dissent in perry. we shall see.


        Liked by 2 people

  11. Hello Tim, years ago when you released the Mortgage Wars, you held a talk at Politics & Prose bookstore in DC. (Here’s a link to those who want to see video https://youtu.be/kQAKx9nXg7g)

    Tim, are you considering doing another solo talk/lecture? The event itself would draw key industry insiders and would spark great discussions.

    Liked by 1 person

    1. I hadn’t considered a talk or lecture, but I’d now be more inclined to appear at events discussing the follow-on to the “mortgage wars,” which is really how I view the last ten years of the banks trying to take over Fannie and Freddie’s business, for their own competitive benefit and for made-up reasons that are readily rebuttable. The banks have done a very thorough job of cementing their fictional view of the causes of and remedies for the financial crisis in the media, the Congress, the mind of the general public and even, it seems, the court system. Those of us who know what actually happened–and what needs to be done to create a future mortgage finance system that works for homebuyers and not the banks–need to do a much better job communicating these things to those in a position to make a difference in the reform process.

      Liked by 3 people

      1. tim

        would you have any interest in meeting with, for example, a member of the house financial services committee? if so, perhaps you can email me with your contact info and i might be able to set that up.


        Liked by 4 people

  12. Jim Parrott and Mark Zandi published another paper about the GSEs. It seems to try to address arguments for release from conservatorship, scaling back CRTs, etc.


    Is any of this worth responding to? One of the worst claims, imo, is that they don’t think Treasury can amend the terms of the SPSPAs to cancel/redeem/etc the seniors because of restrictions on the government’s ability to “compromise a debt”. But the seniors aren’t debt, they’re equity!

    Liked by 1 person

    1. Parrott and Zandi have done a number of papers for the Urban Institute, but this one, in my mind, is unique, in that it substitutes politics for policy in a way that does not do credit to the institution that published it. I intend to make this point to the Urban Institute’s leadership.

      Parrott and Zandi justify their political speculation by writing the following set-up paragraph early in the paper: “Since the early days of the recent Great Recession, conservatives have been highly critical of the role that the GSEs play in the housing finance system. They attribute a significant portion of the blame for the crisis to Fannie and Freddie and bemoan the increased importance of the two institutions in the years since, arguing that they distort the mortgage market and create excessive risk for the taxpayer. To address these concerns, a conservative director of the FHFA will likely take steps to reduce the GSEs’ role in the market.”

      Parrott and Zandi both know that Fannie and Freddie didn’t cause the crisis (Zandi wrote a paper explaining that) and also that they don’t distort the market or create excessive risk for the taxpayer. But they don’t say that, as any actual policy analyst would. Instead, they say that since “conservatives” believe these things (because that’s what advocates for the banks, including Mr. Parrott, keep telling them), and since this is a conservative administration, it therefore follows that the inevitable course of administrative mortgage reform will be to reduce the companies’ “dominance” in the market (and let banks pick up the slack). Through this artifice, the policy merits of everything that follows become irrelevant, and don’t need to be addressed.

      And what follows is a bunch of teeth-gnashing assertions and slanted analysis to justify Parrott and Zandi’s contention that the only possible outcome of “reform” is either what the MBA has been pushing for the last couple of years or something even worse for homebuyers. And if mortgage rates go up 90-100 basis points and the availability of conventional mortgages to lower-income borrowers shrinks to a fraction of what it was pre-crisis, well, there’s unfortunately nothing that can be done about that. It’s complete nonsense.

      I don’t plan to respond to this paper directly—other than the note to Urban Institute leadership mentioned earlier—but I do know some who intend to, and I’ve offered to help with suggestions and comments.

      Liked by 4 people

      1. Tim,

        Thanks for your response. It’s good to hear (judging from your last sentence) that you are not alone in resisting the narratives in that paper.

        Parrott and Zandi’s apparent shift in tactics is just another strange turn in this saga. Their continued insistence on, ahem, “Parrott”ing the false narrative by couching it in terms of “some conservatives think this” while being aware of its falsity should be embarrassing.

        If being conservative was all it took to shrink or gut the GSEs, it would have happened already during Trump’s term. It all sounds like a “No True Scotsman” fallacy to me.

        Liked by 1 person

      2. Tim – What did you think of the discussion by Parrott & Zandi that: “A solution often suggested is to amend the terms of the relevant agreements to reduce the GSEs’ obligations to the taxpayer. However, it is not at all clear that the law allows for such a move. Under 31 U.S. Code § 3711 and 31 CFR 902.2, the government can only “compromise a debt” owed the taxpayer when the debtor cannot pay, the cost of collection is prohibitive, or there is significant doubt as to the government’s liability to prove that the debt is owed. It would not appear that any of these circumstances apply here.”


        1. I didn’t think much of it, for two reasons. First, Fannie and Freddie’s senior preferred stock is not ” a debt owed to the taxpayer;” it is a confiscatory dividend-paying (not interest-bearing) security Treasury granted to itself after it forced the companies into conservatorship while refusing to tell them (or Fannie, at least) the terms of the “assistance” they would be given. Many commentators have said that Treasury could cancel the senior preferred at any time it wishes, and I agree with that. Which brings me to my second reason. I have lost count of the articles written by Mr. Parrott–some co-authored by Zandi, others not–that contain arguments for why anything other that what he would like to see happen to Fannie and Freddie either isn’t legal, isn’t feasible, runs counter to some obscure rule or precedent, or will end up disadvantaging homebuyers, relative to what he wants to do. I tend to be skeptical about reasons why something can’t be done that are advanced by people who don’t want to do it.


  13. Any Chance you are in the running to succeed Mel Watt as Director of FHFA ?

    IMF NEWS TODay … Wed May 9, 2018 …

    A former Fannie Mae executive, who worked for the government-sponsored enterprise pre-takeover, is being mentioned as a possible White House pick to succeed Mel Watt as director of the Federal Housing Finance Agency, sources told IMFnews. As more details become available, we’ll let you know…


    1. If so, I’m being considered without anyone having spoken to me about it. If the rumor is true it’s likely to be someone else, but I don’t know who (nor do I have a good guess).


      1. As a shareholder of gses, you have my support as president and CEO of Fannie Mae, you have my votes! your experience and knowledge give me the assurance that you are the best executive for any of the gse’s and, of course, for FHFA. In my opinion, you are the best qualified person to find the best role for these companies that, ultimately, is the best for his shareholders and taxpayers.

        Liked by 1 person

        1. One of my ex-Fannie Mae colleagues says that the “former Fannie Mae executive” mentioned in the IMF News item as a possible successor to Mel Watt is Adolfo Marzol, who I know well. He was hired from Chase Mortgage into Fannie’s capital markets group in 1996, then moved to a position in the single-family guaranty business before becoming chief credit officer in 1998. He left Fannie not too long after I did, and shortly thereafter got involved—first as a consultant then as an executive—with Essent Group, a Bermuda-based mortgage insurer and reinsurer. Last May he was named Senior Advisor to Secretary Carson at HUD, where he is now. Adolfo knows the mortgage business, and Fannie and Freddie, well, and in my view would be a better choice as FHFA director than any of the other people whose names have been bruited about for the position.

          Liked by 5 people

  14. Tim

    We all appreciate your work and insight and I apologize to ask but I am curious, are you a shareholder? If so which? Again sorry to ask.


    1. I own no shares of Freddie Mac, and discussed my holdings of Fannie when I began doing the blog (in February 2016). Enough time has since passed that it’s probably worth repeating: “When I left [Fannie] I held common shares and vested stock options, all obtained as compensation there…I sold no shares, and took shares (not cash) upon exercising stock options, until Fannie Mae completed its earnings restatement in December 2006. From January through June 2007 I sold approximately half of my and my family’s holdings of Fannie Mae common stock. I held the rest when the company went into conservatorship, and in August 2009 sold half those shares and used the proceeds to buy Fannie Mae series N preferred stock (picked because it was the last preferred stock issuance the company did when I was CFO). I have done no transactions in either the common or preferred shares of Fannie Mae since then.” That’s still true, and I’d add that Fannie’s common was trading at around $70 per share when I left, so at today’s prices my holdings of Fannie common and preferred are not a significant percentage of my financial assets (i.e., I’m not doing the blog in the hope of financial gain).

      Liked by 3 people

  15. And who is going to take on the interest rate and prepayment risk of fixed-rate mortgages? That was the key role of the Fannie/Freddie between 1981 and 2008.

    Liked by 1 person

    1. This is an important aspect of the reform debate that the supporters of banks either are unaware of or willfully ignoring. Pre-crisis, Fannie and Freddie supported 30-year fixed rate mortgages in two ways: by issuing fixed-term debt (both callable and non-callable) to investors, and using the proceeds to buy these loans, and by putting low-cost credit guarantees on pools of 30-year mortgages so that capital markets investors could buy them without having to worry about the creditworthiness of the underlying borrowers (which they had no way of assessing).

      When Fannie and Freddie held mortgages in portfolio (and at one point they had a combined $1.65 trillion of them), they took the interest rate and prepayment risk. But they managed that risk with callable debt and derivatives, which they constantly “rebalanced” to keep the durations of their funding closely matched with the estimated durations of their assets. On their MBS, it was capital markets investors who took the prepayment and interest rate risk.

      As I noted in this blog post, Treasury required Fannie and Freddie to greatly shrink their portfolios, for no reason other than the banks had traditionally opposed them (claiming the companies had an “unfair funding advantage” over banks, which is blatantly false—banks’ government-insured consumer deposits, which make up the bulk of their funding, have rates much lower than Fannie and Freddie debt). Today Fannie and Freddie’s portfolios total less than $500 billion, so that’s $1.15 trillion in demand for fixed-rate mortgages that the “reformers” have caused to disappear.

      Now they want to go after the fixed-rate mortgages supplied by capital markets purchasers of Fannie and Freddie-guaranteed MBS, by making the credit guaranty process (unnecessarily) more costly. If successful, this would have two results: first, driving more fixed-rate loans onto the balance sheets of banks—who can earn very wide spreads by funding them with mismatched short-term consumer deposits and purchased funds without incurring any capital penalty, because the Basel III capital requirements don’t penalize banks for taking interest rate risk—and second, making bank-friendly (and consumer-unfriendly) adjustable-rate mortgages relatively more attractive by pushing up guaranty fees, which get added to the cost of fixed-rate loans.

      I am hoping the affordable housing groups and community bankers can drive these points home to members of Congress and Treasury. What the banks want is a much more expensive, more restrictive and riskier mortgage delivery system than we had pre-crisis, for no reason other than to further pad their (already fat) bottom lines.

      Liked by 1 person

      1. “…by making the credit guaranty process (unnecessarily) more costly”

        if there is a treasury mbs guaranty (even assuming that it kicks in after FnF goes insolvent), wouldnt the process become less costly?



        1. What the banks are offering is a package: require Fannie and Freddie to hold an unnecessarily high percentage of capital that will push their guaranty fees up 25 basis points (which benefits the banks, by both driving more loans onto their balance sheets and giving them wider funding spreads on those loans), then add a paid-for government guaranty to cut 10 basis points off that total (which will benefit the banks as well, by lowering the capital risk weight on the F/F MBS they hold from 20 percent to zero). My proposal is a true risk-based capital requirement for F/F, endorsed by Treasury as meeting the government’s high standard of taxpayer protection and backed, if needed, by private catastrophic risk insurance. The latter will deliver a considerably lower all-in mortgage cost to borrowers.

          Liked by 2 people

  16. Tim,

    Thank you for both advocating for good policy, and posting this informative piece in a public forum.

    This is especially important because, as you remind us, the GSEs are “banned from political activities, these banks have been free to distort the record, define the objectives of secondary market reform, and put forth reform proposals that benefit [only] themselves.”

    Your remarks are brief–a necessity given your intended audience. The parsimony that makes this so rhetorically effective, though, necessarily precludes fine detail. Would you mind expanding a bit on this: “the draft Senate bill errs in presenting direct subsidies as an alternative to cross-subsidies, rather than as a complement to them. The two are independent; direct subsidy programs do not in any way lessen the importance of doing as much as possible to support affordable housing through an efficient credit guaranty mechanism.” How, in practice, do direct subsidies and cross-subsidies work?

    Have you had any requests from elected officials or their staffs to elaborate on this or other aspects of this (very tight) piece?


    1. A direct subsidy is a payment of cash to a targeted borrower type for a specific purpose, such as buying down the mortgage interest rate or assistance in making a down payment or paying closing costs. You might think of these as “hard” subsidies: cash is collected from one source, and paid to another. In contrast, cross-subsidies might be termed “soft” subsidies, where no money changes hands. The way these have worked in the past is that a large number of lower-risk borrowers are charged guaranty fees that are moderately higher than is warranted by the riskiness of their loans (although they don’t know that), so that guaranty fees on a smaller number of higher-risk borrowers can be significantly lower (helping them afford the loan), without the credit guarantor being any worse off. As I mention in the post, both types of subsidies have their roles, although direct subsidies need a significant amount of administrative infrastructure to determine which specific individuals get the subsidies, for what purpose, and how much.

      As for requests from elected officials or their staffs to elaborate on the piece, my policy is not to publicize or comment on those. I find I can be more effective in getting people to agree to meetings (or discussions) if I keep both them and their content confidential.

      Liked by 4 people

  17. Thanks Tim, I always learn something new about housing finance every time I read one of your articles. You have the force of clear and honest reasoning behind you. It’s hard for your opponents to disagree with your factual statements without resorting to obfuscation and rumors.


  18. Tim,

    A heart felt thank you for your continued work on mortgage finance issues and for being a much needed voice of truth and reason.

    God bless you!

    As an aside, how do you see the common securitization platform fitting in to the future of mortgage finance? Specifically, can you foresee the GSEs (or FHFA) allowing originators use of the CSP for a fee in order to offer their own MBS product?



    1. The role the common securitization platform (CSP) will play will depend on when the secondary market of the future is decided upon and implemented. The CSP may well be completed and in operation before that time, in which case I would expect, if Fannie and Freddie are retained in some form, both companies would keep using it. I would be surprised if either of them opens it up to other issuers for a fee, however.

      Liked by 1 person

    1. Certainly. It never hurts for constituents to send articles to their members of Congress. Most such missives don’t make it past the staffers, however, and for that reason there also are people who will be sending the paper (with a title, my name as author, my former affiliation, and date) directly to senators and representatives they know personally.

      Liked by 2 people

  19. Tim,

    What a great piece. Here’s to hoping you and others are finding more than just a few powerful folks, up on The Hill, willing to truly listen and LEARN.

    Thanks again for your amazing efforts!

    Liked by 2 people

  20. What you advocate here sounds great, but what fail-safe covenant would protect this from future politicians meddling with what has proven to work, politics being what it is?


    1. Having to worry about politicians meddling with a sensible secondary market reform proposal AFTER it has been implemented is what’s known as a “high quality problem.” Let’s get the sensible reform implemented first.

      Liked by 1 person

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