The Interested Parties Respond

The Federal Housing Finance Agency (FHFA) released its notice of proposed rulemaking on “Enterprise [Fannie Mae and Freddie Mac] Capital Requirements” on June 12. After the comment period closed on November 16, there were 77 entries on FHFA’s comment log. Half (38) were from individuals who wrote short comments ranging from one sentence to a few paragraphs expressing their personal points of view, and there were eight administrative-type entries (correspondence to and information or meeting summaries from FHFA).

The remaining 31 entries broke out this way: One each from Fannie and Freddie; 5 from private individuals—Myself, the team of Ed Golding, Laurie Goodman and Jun Zhu (who work at the Urban Institute but submitted their piece as individuals), and Andrew Davidson (who submitted three separate comments); 1 from an affordable housing advocate—The Center for Responsible Lending; 3 from private mortgage insurance entities—Genworth, Arch Capital, and U.S. Mortgage Insurers; 4 from Wall Street interests—Moelis & Company, Pershing Square Capital Management, Katz Capital, and The Structured Finance Industry Group; 5 from community lending groups— The Independent Community Bankers of America, The Community Home Lenders Association, The Credit Union National Association, The National Association of Federally-Insured Credit Unions, and Heartland Credit Union Association; 4 from large trade associations—The American Bankers Association, The Mortgage Bankers Association, The National Association of Realtors, and The National Association of Homebuilders; three from Washington think tanks—The American Enterprise Institute, The Housing Policy Council, and The American Action Forum), and four from multifamily interests—The DUS Advisory Council, Walker and Dunlop, NorthMarq Capital, and the National Multifamily Housing Council and National Apartment Association, commenting jointly.

For those whose interest is in multifamily lending I must offer an apology: from the start of the capital exercise I have concentrated almost exclusively on the single-family side, since that is where my expertise (and most of the controversy) lies. But multifamily lenders serve a critical segment of the housing community, and getting Fannie and Freddie’s capital right for these borrowers is just as important as it is in single-family. As soon as I can, I intend to dig into the multifamily comments, try to get up to speed on the issues there, and see if there is anything I can add to the dialogue that might be helpful.

Commenters on the single-family standard, as a rough generalization, fell into two groups: those whose primary concern was how the proposed capital rule could (or needed to) be improved in order to strike the desired balance between taxpayer protection and the provision of an ample flow of mortgage credit to as wide a range of potential borrowers as possible, and those whose comments were colored by a different objective—whether it be ideological (reducing the role of “government” in housing), competitive (engineering the capital rule so as to move business away from Fannie and Freddie to a preferred financing source), or something else.

The focus of this post is on comments intended to improve the FHFA standard. (If those who wish to use capital to constrain the companies end up carrying the day, the issues the former group is trying to get right won’t matter as much.) From this perspective, I found the most useful and constructive comments to have come from Fannie Mae, the team of Golding, Goodman and Zhu from the Urban Institute, The Center for Responsible Lending, and the three mortgage insurance entities (who had valuable insights into how the capital dynamics of insurers differ from those of banks). And even including the comments from the “we’re going to wind this thing [Fannie and Freddie] down, we’re going to kill it, we’re going to drive a stake through its heart, and we’re going to salt the earth so it can never grow back” crowd, the submissions as a whole revealed a number of areas of legitimate concern:

  • The lack of transparency of the FHFA proposal, which makes it difficult to understand it in sufficient detail to offer constructive suggestions for how to improve it (or to prevent unintended consequences);
  • Near-universal agreement that using current loan-to-value ratios in the standard creates severe problems of procyclicality, which need to be addressed;
  • The adverse effect on mortgage rates of layering conservative assumptions one on top of the other;
  • The need for FHFA to acknowledge the role of guaranty fees in absorbing credit losses;
  • A significant degree of overcapitalization of higher-risk mortgages relative to their historical performance;
  • Confusion as to how the minimum capital ratio, loss reserves, the going concern capital buffer, any systemic risk buffer (proposed by some) and excess capital relate to one another in the standard, and
  • Reservations about the proposed equity capital relief for securitized credit risk transfers.

Below are brief elaborations of each of these points:

Lack of transparency. U.S. Mortgage Insurers spoke for many commenters when it said, “The NPR does not provide sufficient factual detail to permit interested parties to ‘comment meaningfully’ on the proposal.” USMI said that, “FHFA has chosen to abandon the existing capital rule in its entirety…using instead as a foundation for this NPR the CCF [FHFA’s Capital Conservation Framework], which has not been publicly released.” USMI added, “The remedy is to treat this proposal as an ANPR [Advance Notice of Proposed Rulemaking], solicit further comments on the appropriate capital regulations for the Enterprises, and, in particular, solicit comments on whether an insurance company capital model is more appropriate in light of the fact that these entities are not banks.”

Pershing Square Capital and The Center Responsible Lending (CRL) believe FHFA’s current standard may be too complex to fix, and for that reason are prepared to support a simple 2.5 percent leverage ratio for all of Fannie and Freddie’s business.

Use of current loan-to-value ratios in stress test. This feature was almost universally cited as problematic, because of its strong procyclical effect. The Urban Institute’s Golding, Goodman and Zhu noted with understatement that, “It will be difficult for a GSE to manage to a requirement that can double in two years.” Several commenters (including Fannie, the Urban Institute team, Pershing Square, the ICBA and the ABA) supported moving back to the original LTVs used in the 1992 standard. Yet nearly an equal number (including Genworth, Arch Capital, the Housing Policy Council and the MBA) proposed sticking with mark-to-market LTVs but having FHFA adjust them for “fundamental housing values,” which would somewhat increase required capital in strong housing markets and somewhat reduce it in weak ones.

I was surprised that trying to offset current LTV volatility by attempting to estimate when homes are overvalued or undervalued had as much support as it did. Most obviously, such estimates of fundamental value always will be subjective. Second, this approach still would have the companies holding too little capital near market peaks and too much capital at troughs. And third, it leaves unsolved the problem of how to set guaranty fees when required capital is not known at the time of pricing. But given the number of comments in favor of this alternative, FHFA will need to examine it seriously.

Layered conservatism. FHFA says it “considers it prudent to have risk-based capital requirements that include components for credit risk, operational risk, market risk, and a risk-invariant going-concern buffer; that require full life-of-loan capital for each loan acquisition; that are calculated to cover losses in a severe stress event comparable to the recent financial crisis, but with house price recoveries that are somewhat more conservative than experienced following that crisis; and that do not count future Enterprise revenue toward capital.” Numerous commenters, including the community lending groups, wanted FHFA to quantify the effect this layered conservatism had on guaranty fees and mortgage rates. As the NAR noted, again with understatement, “the significant caution taken in creating a conservative rule mutes or may hinder the Enterprises’ ability to support their public mission.”

The Urban Institute group, CRL, Arch Capital, USMI, the NAR and the NAHB all called attention to another significant, but hidden, form of conservatism in the standard: since the 2008 financial crisis, the adoption of the qualified mortgage and ability to repay standards, improved appraisals, changes in underwriting and stronger capitalization of mortgage insurance companies all have reduced both the likelihood and severity of a similar crisis in the future, but none of these favorable changes are reflected in the stress loss percentages in FHFA’s look-up tables or risk multipliers.

In addition, embedded in Fannie’s comment is a subtle but important fact: FHFA has built all of these levels of conservatism into a stress standard that uses current value LTVs which, given the recent run-up in home prices, are near record lows. Were FHFA to switch to an original LTV-based standard—as it should—Fannie said its required capital under the FHFA standard would rise “by nearly $25 billion.” This would make Fannie’s capital requirement for its September 30, 2017 book not the 343 basis points estimated by FHFA, but well over four percent—much higher than almost all of the commenters on the standard are expecting it to be.

 Exclusion of guaranty fees in stress test. No commenter defended FHFA’s decision not to count guaranty fees in determining required stress capital (although a few suggested that some type of discount or “haircut” might be appropriate to account for the uncertainty in estimating the magnitude of those fees). USMI had perhaps the most cogent comment on this topic: “It would be highly ironic (if not irrational) to require higher fees based on capital needs, but not count those fees when determining capital requirements.”

 Excessive capital requirements for higher-risk mortgages. Both the Urban Institute team and CRL did extensive analyses of the FHFA proposal by loan attribute. The Urban Institute team wrote, “Our conclusion: the lower FICO higher LTV mortgages require more capital than is necessary relative to their less risky brethren.” CRL was more specific, saying, “The model would disproportionately place the cost of this systemic failure capital [capital required to pass FHFA’s stress test, plus cushions] on lower wealth borrowers, by a factor of as much as ten to one,” and it made the added point that “not counting revenues adds a further bias to high LTV low FICO QM loans” because these loans prepay more slowly during stress periods, and thus can cover a higher percentage of their losses with guaranty fees. CRL concluded its analysis by saying, “The proposal has greatly excessive capital demands. This will harm the housing market and overall economy, and it will place the heaviest unnecessary burden on working families of modest means.”

Interaction of capital components and loss reserves. Several commenters are concerned that FHFA has not thought through how the different components of its proposed capital standard relate to one other, or what each one’s purpose is, resulting in what USMI calls “a ‘mash-up’ of different capital concepts.” Genworth questions “the need for both a going concern buffer and a minimum leverage requirement,” while the criticism of USMI is more general:It is not clear that the proposal takes into account the full extent of, and interactions between, loss reserves, the minimum leverage standard, the incentives provided by prompt corrective action for the Enterprises to hold excess capital and the market pressure for the Enterprises to hold even more capital.”

Fannie raised an important question about how the FHFA capital rule would be affected by implementation of the Current Expected Credit Loss (CECL) accounting method scheduled to take effect on January 1, 2020. Under CECL, a company will set its loss reserves based on the “expected lifetime losses” of its loans, rather than its “incurred losses,” as currently. The FHFA capital proposal states that, “The credit risk capital requirements in the proposed rule are based on unexpected losses (stress losses minus expected losses) over the lifetime of mortgage assets.” I had interpreted this to mean that as Fannie and Freddie’s loss reserves rose under CECL during a stress period (along with their expected losses), their required equity capital would fall by a comparable amount, since the total stress standard will not have changed. Fannie’s comment suggests it does not believe that will be the case. FHFA must clarify this relationship. For an insurer, loss reserves and capital serve the same purpose: to absorb credit losses. If an accounting change (CECL) can push up the companies’ total required capital, that is a flaw in the FHFA proposal that needs to be fixed.

 Too favorable treatment of credit risk transfer securities. Finally, numerous commenters questioned the cost-effectiveness of securitized CRTs, with most (including Fannie) focusing on their likely non-availability during times of stress, when they would be most needed. The Urban Institute team, CRL, Arch Capital and Genworth all said that the cost of Fannie and Freddie’s CRT securities should be deducted from any capital relief given to the companies when CRTs are used.

*                                                   *                                                                   *

 As should be evident from the above, enough questions about and serious objections to FHFA’s proposal were raised by those who commented on it that the agency almost certainly will need to rework and reissue it. This has obvious implications for the timing of any administrative mortgage reform that preserves the role of Fannie and Freddie in the secondary market. The companies cannot be released from conservatorship until they are recapitalized, and they cannot be recapitalized until they have binding regulatory capital requirements. Fannie and Freddie’s required capital will determine not only the dollar amount of new equity they would have to raise but also how they would have to price their business, which in turn will affect the volume and mix of business they could do (and, through these volume and loan quality impacts, their investment values as going concerns). A workable final FHFA capital regulation is at the same time an essential step on the path to administrative reform and a challenge that must be met to get there.

The Mortgage Bankers Association—which is solidly on record in favor of legislative reform that creates competitors to Fannie and Freddie rather than administrative reform that recapitalizes them—clearly sees the potential for protracted discussions over the risk-based capital standard to delay administrative action indefinitely. Its comment letter is not subtle about this. In addition to advising FHFA that a lengthy, “multi-round set of notice-and-comment periods would give FHFA the opportunity to fine-tune the proposed rule, benefiting from outside points of view, improving it in stages,” MBA told FHFA, “In fact, as can be seen from the structure of our comment letter, we find ourselves with more questions than answers with respect to many aspects of the proposed rule. We would ask that FHFA seriously consider the full set of questions posed when developing additional data and information to release prior to further rounds of notice and comment.” I counted all of the MBA’s questions and there were 86 of them—enough, should FHFA elect to address them all in detail, to keep the agency tied up for months.

FHFA, instead, should “get on with it.” By now it undoubtedly will have reviewed and categorized all the comments it has received. After analyzing them thoroughly, it should take the initiative to meet with the individuals or groups whom it believes have the best insights into or ideas for constructive changes to the standard, with the objective of creating a new less complex, more consistent, cohesive, transparent and defensible proposal that it can issue as a new notice of proposed rulemaking, with advance buy-in from key stakeholders. Supporters of administrative reform also need to engage on this. They have the most reason to get Fannie and Freddie’s capital right, and to get it right as quickly as possible.

127 thoughts on “The Interested Parties Respond

  1. Tim

    I have noted that 5th Circuit en banc rehearings are rare, but haven’t found quantification until now: https://twitter.com/Alec_Mazo/status/1085241775961235456. 8 out of over 7300 appeals in 2018.

    now what do we take from this? just focusing on the separation of powers claim for a moment, the merits panel found the single agency director removable only for cause to violate the separation of powers doctrine, but provided no retrospective relief (vacate NWS). a majority of 5th Circuit judges must vote in favor of rehearing en banc and it occurs about about .1% of the time. either the 5th circuit wants to review the ruling that there was a constitutional violation or it wants to review the denial of relief.

    given the treasury and fhfa briefs, the finding of a constitutional violation will not be argued by treasury, nor by fhfa if the en banc court finds that Ps have Article III standing (injury in fact), which the merits panel found. all this tells me that the focus in the en banc hearing will be whether retrospective relief should be given. the 5th circuit’s letter of advisement to the litigants makes this clear: https://www.dropbox.com/s/63ewbjp8dfz2xoq/collins%20letter%20of%20advisement.pdf?dl=0

    rolg

    Liked by 2 people

      1. @jerry

        the APA claim will also be reviewed en banc. what’s interesting here is that willets wrote a bravura dissent, and the majority was one sentence, saying essentially we agree with the Perry majority. I don’t expect the en banc majority opinion on the APA claim to be one sentence.

        rolg

        Liked by 1 person

        1. I am eager to read the transcript of the January 23 en banc hearing when it’s released (although very likely others will have read it before I see it, and someone will have identified the key takeaways….). My guess is that the focus of the panel will become evident early in the session, and that not too long afterward the inclination of the majority also will be apparent. Having monitored the various legal proceedings from the outset, however, I wouldn’t even think of hazarding a prediction about the outcome. On verra.

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    1. ROLG, does it matter that the Collins plaintiffs are a combination of both junior preferred and common stock holders? I’m thinking as the Collins plaintiffs gain some power here post en banc that any relief to the plaintiffs might have to balance the interests of both junior preferred and common stock stakeholders. Do you have any thoughts on this?

      Liked by 1 person

      1. @biv

        nothing in collins differentiates claims made by junior preferred and common Ps. both would benefit from the relief sought (vacate NWS). in any recap, hard to predict how that might look, though the Moelis blueprint offers one view.

        rolg

        Liked by 1 person

      1. @ 2.0. can’t tell from website. last cases’ recordings posted having hearing dates of 1/9 and 1/10, but I cant tell when the mp3s were posted. court rules don’t provide guidance

        Liked by 1 person

    1. This decision has little implication for the constitutionality cases involving Fannie, Freddie and FHFA. The article itself explains why: “The appeal was a long shot because it would have forced the court to hear the case shorthanded. Justice Brett Kavanaugh took part in the dispute when he was an appeals court judge, precluding his participation at the Supreme Court…[Solicitor General Neil] Francisco pointed to three pending appeals court cases that he said raise the same issues.”

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      1. @mark

        no treasury maintained that position in the merits panel brief; it is being consistent. it just doesn’t want to grant P’s any retrospective relief. and it would be consistent with prior briefing if fhfa agued that there is no separation of powers violation in the en banc brief, not yet filed (or at least docketed). but the question is whether having a trump appointee in Otting will cause fhfa to switch gears and align itself with treasury. I am not holding my breath but it is a possibility.

        rolg

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          1. oops, my bad. I had just read table of contents of the fhfa brief for the previous comment, which indicated no diversion from a “normal” fhfa brief. but then I read this in the introduction:

            “Under prior leadership, FHFA petitioned for rehearing en banc seeking consideration by the full Court of the Panel’s holding that FHFA’s structure, in particular its leadership by a single director removable only for cause, unconstitutionally limits the President’s ability to supervise FHFA. As of January 7, 2019, FHFA is led by a new Acting Director, who has reconsidered the issues presented in this case. For the reasons discussed herein, it remains FHFA’s position that it is unnecessary for this Court to reach the constitutionality of the Housing and Economic Recovery Act’s (“HERA”) for-cause removal provision in order to resolve this case and affirm the dismissal of Plaintiffs’ claims. To the extent the Court concludes it is necessary to reach the constitutional issue, FHFA will not defend the constitutionality of HERA’s for-cause removal provision and agrees with the analysis in Section II.A of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.”

            so Otting got a half of loaf…fhfa lawyers say, in essence, that Ps don’t have proper standing to raise separation of powers claim. but if the collins en banc court decides otherwise (as did the collins merits panel), then fhfa will stand down and agree that fhfa is unconstitutionally structured (as does Treasury).

            but fhfa will still argue that Ps don’t deserve retroactive relief (invalidate NWS): “Nevertheless, that issue provides no basis for awarding any relief to Plaintiffs in this case. Therefore, the Court should affirm the District Court’s judgment dismissing Plaintiffs’ claims.

            Liked by 2 people

  2. apparently Otting just made his first on the record comment about GSEs: OTTING in Politico Pro: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

    Liked by 1 person

    1. Full text:

      Otting: ‘A lot’ can get done during acting FHFA tenure

      By Victoria Guida
      01/10/2019 12:45 PM EDT

      Joseph Otting, who took over as acting director of the Federal Housing Finance Agency this week, said today there’s a lot he can accomplish to further housing finance reform during his tenure at the agency, despite the temporary nature of his position.

      Otting, who is also comptroller of the currency, will be in charge of the agency that oversees Fannie Mae and Freddie Mac until a permanent replacement is confirmed. President Donald Trump has nominated vice presidential aide and libertarian economist Mark Calabria for that position.
      “There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA.

      “If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added.

      Otting echoed Treasury Secretary Steven Mnuchin by saying that “ending conservatorship is a priority,” and maintaining the 30-year mortgage is important.
      He declined to go into detail about his views on what type of reforms might be needed to the mortgage giants, often referred to as government-sponsored enterprises.

      “We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.”

      He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

      Liked by 1 person

      1. This is a very positive statement. By my recollection it’s the first time any senior official at either Treasury or FHFA has made an unambiguous commitment to “release the GSEs,” and Otting goes beyond that by adding the explicit goal of ensuring “that it [the release] supports the U.S. housing market.” Otting further indicates that he is unlikely to make any dramatic moves at FHFA prior to the confirmation of a director by the Senate (which doesn’t surprise me).

        Liked by 2 people

        1. If Otting gets started with a thing or two it’ll make Calabria’s confirmation easier because path will seem inevitable. If he sits on his hands, there will be an impression that stopping his nomination can prevent certain outcomes. So I’m going with the former.

          Liked by 1 person

        2. Otting is moving before Calabria is confirmed. He stated there is a clear direction from the White house and Treasury, and doesn’t state Calabria. He also mentioned Mark can “continue” that mission which means Otting will be the initiator.

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          1. which leads me to think he will be more a policy implementer and less a policy formulator (rendering much of his 1950s mortgage market musings irrelevant)

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          1. Tim, would you please share with us your opinion on what motivates David Stevens to write article after article pushing the “billionaire hedge fund” narrative wrt the GSEs? I tend to think accusations that he is “bought by the banks” are nothing more than conspiracy theories, but the fervor and persistence of Stevens’ smear campaign makes me wonder if I am being naive.

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          2. Dave Stevens up until recently was the president of the Mortgage Bankers Association, whose largest and most influential (and largest dues-paying) members are the big commercial banks. His job there, literally, was to do whatever he could to help them get what they wanted, in Congress or administratively. One thing the big banks have wanted since the late 1990s is to reduce (or eliminate) the competitive power of Fannie and Freddie in the secondary mortgage market, to banks’ benefit in the primary market.

            The MBA and other opponents and critics of Fannie and Freddie, however, never have had strong arguments for replacing them with a bank-centric alternative. The companies have the best business model for their primary activity—guaranteeing the credit of residential mortgages—and their performance during and after the financial crisis was provably far superior to any other source of mortgage finance. So where do you go if you’re Dave Stevens (or another opponent or critic of Fannie and Freddie)? You invent things—“Fannie and Freddie caused the financial crisis”—you make vague negative statements about them—“they have a flawed business model”—or, as we’ve seen recently, you find a boogeyman to attach to them—“greedy hedge fund managers” who want to make money by bringing the companies (undeservedly) out of conservatorship.

            These were the weapons Dave wielded as president of the MBA, and it’s no surprise that he’s still using them. And by now he may even have convinced himself that he’s on the right side of the argument. I do wish, though, that he would stop saying that Fannie and Freddie caused the financial crisis. He knows that’s not true, and he diminishes himself by repeating a known falsehood.

            Liked by 3 people

          3. Ooh, he mad. I bet every penny that the share prices rise causes his blood pressure to go up a point.

            This is the most bald-faced expression of his disdain for hedge funds that we have yet seen from Stevens. It’s clear that he will go to any lengths to try and deny current shareholders any price increase in their shares. In fact, it’s starting to seem like his primary concern, with the future state of the country’s housing finance system only being invoked as cover.

            To his first point, Trump, Mnuchin, and Trump’s picks for FHFA (Otting now, Calabria later) actually do have a sense of urgency. Trump and Mnuchin might be out of office in 2021, so anything they do will have to be done in the next 2 years. By the standards of a recapitalization of this size, that’s pretty fast. It’s also ludicrous to say that a recap and release benefits shareholders at the expense of taxpayers, then turn around and claim that it’s preferable to have the companies rely on taxpayer money (Treasury’s credit line) in the case of a downturn rather than loss-absorbing equity capital from private investors.

            To his second point, the administration has been rather clear that they want the companies released by the end of 2020. Release means recap, and recap means ending the NWS. While this is a worse deal for the government from a pure income perspective, it also allows Treasury to finally cease its funding commitment, a large source of taxpayer risk.

            To his third point, a recap and release will certainly NOT “only serve to bolster the shares of the two companies”. Cementing the changes that the SPSPAs and Watt have put in place (reduction in retained portfolio, the CSP, etc) is a primary goal of releasing the companies.

            His second-to-last line also betrays a clear misunderstanding of the purpose of getting the companies out of conservatorship. That purpose is minimizing taxpayer risk, which remains sky-high given the companies’ lack of capital and Treasury’s funding commitment.

            It’s comforting to know that Otting is in power and Stevens isn’t.

            Liked by 1 person

          4. from Stevens: “I was surprised to read the comments from FHFA Acting Director Joseph Otting as articulated by Politico. If accurate, the idea of retaining capital prior to real reform is striking in its vulgarity.”

            it is striking that the most prominent historical lobbyist against the GSEs is reduced to characterizing the current FHFA director’s ideas as vulgar. the man doth protest too much.

            rolg

            Liked by 2 people

      2. Key point: the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.

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    2. Tim(and perhaps ROLG)-

      FHFA sought and obtained an extension of the deadline by which it must file a supplemental en banc brief in the Fifth Circuit because, FHFA says, “[t]his case raises significant issues of interest to FHFA’s new leadership [and] FHFA’s new leadership requires additional time to review the issues presented in the case and to evaluate FHFA’s positions.” The filing is now due on Mon., Jan. 14, 2019. A copy of today’s request is attached to this e-mail message. The Court entered a paperless order granting the request. 17-20364-00514792607

      Do you believe this request for an extension is just another delay tactic(it’s only one day I believe), or something greater? Do you think FHFA would have a change in position at this point? I believe that with a new director the position has in fact changed, but would the courts be the place to verbally change that position? Wouldn’t they just keep delaying until they implemented their plan? Curious of your thoughts and I may be thinking too much at this point. Thank you as always for your time.

      Liked by 1 person

      1. A one-day delay is certainly not a “delaying tactic.” To me it indicates two things: first, FHFA’s new leadership is appropriately focused on this case, and second, the Fifth Circuit intends to stick to its timetable for the en banc hearing on the 23rd (hence the only one business day slip in the deadline for FHFA filing its response).

        Liked by 1 person

        1. I did have a scenario play through in my mind when I read this fhfa motion for delay to file until 1/14.

          the clerk of 5th circuit wrote into the docket that all filing deadlines were to be strictly observed, as all 16 judges are being kept away from their own 3 judge merits panel cases, and as Tim mentions, the oral argument is in only two weeks. while the motion was unopposed, the clerk did fhfa a solid by granting an extension given its prior admonition.

          now, usually counsel files the brief on the last day permitted and completes it very soon before filing. I imagine fhfa counsel (Arnold & Porter) would send briefs in the past to fhfa director watt as a courtesy and watt never read them. I also imagine that fhfa counsel did likewise with fhfa acting director Otting and found out much to its shock and consternation that Otting wanted to read it. this is what successful ceos of large banks do, they read documents that are submitted under their name. hence the delay for Otting (or his designee) to read it over the weekend.

          will Otting red-line the brief and change content? no, I don’t expect the fhfa brief will contain any admissions or surprises when filed. while Otting may very well be proactive, I wouldn’t expect him to initiate action through the vehicle of a legal brief. but I imagine some lawyers at Arnold & Porter had visions of their careers passing sadly before their eyes.

          rolg

          Liked by 1 person

          1. I can’t help but believe that yesterday’s interview and today’s court delay during Otting’s first five days are indeed setting a tone of quick action.

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          2. It is going to be fascinating to watch the legal situation play out over the coming weeks and months. Mark Calabria, the nominee for FHFA director, is one of the authors of the Housing and Economic Recovery Act of 2008, and he has made clear in his writings that he believes the net worth sweep is in violation of HERA. The new acting director of FHFA, Joseph Otting, knows many of the plaintiffs in the suits against the net worth sweep, and through these contacts understands that Fannie and Freddie were not “rescued,” they were nationalized by Treasury for policy purposes, and that what Treasury and others have called their “bailout” was in fact a cynically engineered strategy to saddle them with temporary or artificial book losses in order to load them up with non-repayable senior preferred stock, at a 10 percent after-tax dividend, intended to prevent them ever from emerging from their Treasury-imposed captivity. Now Otting has said, unequivocally, that FHFA is committed to releasing Fannie and Freddie from the conservatorship it and Treasury forced them into in the first place. Treasury has remained silent on its intentions for the companies. How will Treasury, and FHFA, address all these issues from their institutional past? The drama is about to unfold.

            Liked by 1 person

          3. Tim

            when Mnuchin became treasury secretary, one might have considered whether treasury under mnuchin might have an effect on the DOJ’s representation of treasury in the NWS litigation. in short it hasn’t, and the reason likely is because of the dynamics of how DOJ represents the federal government. DOJ is totally in charge of things legal, and for the DOJ to even consider changing its course of legal action, someone at treasury would likely have had to get approval at DOJ’s office of legal counsel. not happening.

            different case with an independent agency, such as fhfa. here, the agency director is in control and gets to choose agency counsel and supervise its legal course of action. to Demarco’s credit, for example, fhfa used the law firm Quinn Emmanuel in all of its rep and warranty putback litigation against tbtf banks, which was a brilliant choice netting fhfa tens of billions of dollars in recoveries (and Quinn Emmanuel likely tens of million of dollars in fees). as to the choice of Arnold & porter to represent fhfa in the NWS litigation (which was also a Demarco pick as I recall), this was also a very good choice of a very fine firm, but with Otting (and eventually Calabria as director), legal oversight can be exercised by the fhfa director in ways that are simply not institutionally possible in the case of treasury and the DOJ.

            again, I expect to see an unexceptional fhfa brief filed Monday in collins en banc, but this fhfa client/lawyer dynamic bears watching.

            rolg

            Liked by 1 person

        2. The most plausible scenario to resolve this expeditiously is for the 5th circuit to invalidate the NWS en banc. That would quickly set in motion administrative release options and this whole cluster of a saga would be over.

          Liked by 2 people

          1. @jerry

            hard to say. 5th circuit en banc rehearings are rare. on one hand, 3 judges have heard this case via the merits panel, and the other 13 judges have read their opinions, so they all have a leg up. on other hand, having 16 judges deciding a case may require more time than a 3 judge merits panel.

            the merits panel issued two well-reasoned opinions that the en banc court can build on (or respond to), but P’s claim for retroactive relief under the separation of powers claim (vacate NWS) will have to be decided and opinion written, and this is the biggest focus of the case, at least for me.

            rolg

            Liked by 2 people

  3. Hello Tim,

    I find the timing of this interesting and maybe the decision is an idealogical one for Mr. Bright.

    I wonder if, given the failed agenda to shrink or eliminate Fannie and Freddie’s business, i.e the Milken Institute think tank and the Corker-Warner bill, that maybe he is admitting it’s time to move on. He probably was also hoping that Fannie and Freddie’s business would be moved to Ginnie Mae (somehow).

    Are you familiar with Maren Kasper?

    https://www.housingwire.com/articles/47884-michael-bright-abruptly-steps-down-from-ginnie-mae

    Like

    1. Mr. Bright’s seemingly sudden decision to leave his position at Ginnie Mae (telling HUD he would “institute an orderly transition process” in the week between the January 9 date of his resignation letter and his stated departure on January 16) is consistent with him having learned from some source that his vision of a future secondary residential mortgage market with Ginnie Mae firmly implanted at its center was not in the cards. I have no inside information on this, but perhaps Bright’s reason for leaving will become more apparent either from a future statement he makes or once we learn where he is going (that is, the “where” may reveal the “why”.)

      I do not know Maren Kasper.

      Liked by 2 people

      1. He’s going to become president of SFIG (Structured Finance Industry Group):

        https://www.bloomberg.com/news/articles/2019-01-09/key-ginnie-mae-official-is-said-to-quit-to-join-industry-group

        These are the guys who, at their recent NY conference, urged members and attendees to join them in lobbying the government to cut back F/F market share and allow use of the CSP for PLS, not understanding that it’s fundamentally faulty product and not GSE competition that is preventing mainstream investors from buying their securities and restoring their market to what it was pre-2008.

        Liked by 1 person

        1. Interesting. When I said in my current post that comments on the FHFA capital proposal for Fannie and Freddie were divided into two categories, “those whose primary concern was how the proposed capital rule could (or needed to) be improved in order to strike the desired balance between taxpayer protection and the provision of an ample flow of mortgage credit to as wide a range of potential borrowers as possible, and those whose comments were colored by a different objective—whether it be ideological… competitive or something else,” my “poster child” for the second category of comment, had I chosen to name them, would have been the Structured Finance Industry Group, where Mr. Bright is headed.

          The SFIG made no attempt to downplay its position that FHFA’s capital rule for Fannie and Freddie should be designed to make it easier for private-label securities to re-emerge as a significant source of funding in the future mortgage finance system, saying, “SFIG continues strongly to believe that reinvigorating the non-agency private label mortgage-backed securities (“PLS”) market should remain an important priority for both the FHFA and for the broader housing finance industry.” The SFIG said it believed Fannie and Freddie should not be accumulating credit risk (which is what a single-family mortgage credit guarantor does), and not only did it advocate a “level playing field” for capital that would produce this result, it went further, adding, “Thus, g-fee policy and other limits on Enterprise activity may still be required, even with a level playing field for capital, to limit risk at the Enterprises and maintain competitive equilibrium across the spectrum of mortgage industry participants and products.” (I’ll confess that when I read the SFIG comment the image that came to mind was the lawyers for Lizzie Borden asking the judge to place her with foster parents.)

          Mr. Bright should fit right in there.

          Liked by 1 person

    1. No, not with respect to the Secretary’s possible actions affecting Fannie and Freddie on mortgage reform. These “kudos” are in my view a purely political reaction to an increasingly unpopular action–the government shutdown–that is starting to stick more to the Republican administration than to the Democratic leaders of the House and Senate. As a good soldier, Mnuchin is doing his part to help out.

      Like

      1. I see it as completely political, but I find it rather interesting that he’d use this unfortunate standoff of the government shutdown as an opportunity to praise the work of the GSEs. Not just praise them but praise them for assisting individuals experiencing hardship, which aligns nicely with the GSE charter yet is somewhat contrary to the charter of big banks (or even One West). Maybe I’m reading too much into this but it…

        Liked by 1 person

    1. There is nothing in this piece that surprises me, given the positions the Milken Institute has taken on mortgage reform previously. Milken says it opposes “releasing the GSEs from conservatorship without fixing the critical flaws in the GSE charters,” which Milken says only can be done through legislation. What are those flaws? “Most notably,” says Milken, “the privatizing of profits and socializing of losses.” I’m sure this diagnosis will seem puzzling to Fannie and Freddie shareholders, who have experienced massive amounts of book losses forced on them by FHFA and Treasury from the second half of 2008 through the end of 2011, and then had the cash profits their businesses generate seized in perpetuity by the net worth sweep in 2012–precisely the opposite of “privatizing profits and socializing losses.”

      Once you rule out releasing Fannie and Freddie from conservatorship administratively, however, all of Milken’s recommendations for “administrative reform” become more understandable. Their goal is to reduce the companies’ effectiveness as credit guarantors, and weaken them financially, to the point that legislating bank-centric replacements for them, with an explicit government guarantee, seems less foolish and thus more potentially achievable. It’s a version of the “boiled frog” technique, but in this case I suspect the frogs would sense the heat being turned up on them, and call (or croak) for help.

      Liked by 3 people

      1. Tim

        I would agree that as to substance, this paper is noxious and hubristic. but I wonder to myself why MI published this paper now.

        it seems to me that MI believes that administrative reform is coming and based upon whispers and peeks, it is fearful it won’t go the way it would like. on p.23 of the paper, MI lays out two options: the first is Moelis blueprint-like, and the second is their prescription, which MI admits is the harder path. why set up the first as a straw man unless MI fears it is actually the boogie man?

        why would MI agree to suspend NWS dividends (certainly a departure from their previous position), as part of its preferred option, if it didn’t fear something more definitive was possibly coming soon? I may be imagining things.

        rolg

        Liked by 2 people

        1. I agree that the Milken Institute authors are worried that Moelis-style administrative reform that results in the recapitalization of Fannie and Freddie and their release from conservatorship may be gaining traction, and feel a need to try to head that off if they can.

          Milken’s suggestion that the net worth sweep be suspended to enable the companies to rebuild capital was curious. Their recommendation had two important conditions: that the sweep suspension “(i) is not a prelude to releasing the GSEs from conservatorship absent legislation to resolve serious charter flaws, and (ii) would not represent a compromise of taxpayer claims.” On the first, if you’re not going to release the companies, then what is the objective of having them (slowly) rebuild capital, at Treasury’s expense? Milken doesn’t say. Their second condition was linked to a proposed imposition of the “periodic commitment fee” in the senior preferred stock agreement that has never been charged, but that in Milken’s words “would continue to compensate Treasury for the hundreds of billions of dollars of taxpayer dollars that backstop the GSEs’ debt and MBS guarantees.” In a footnote, however, Milken notes that if Fannie and Freddie’s periodic commitment fees are less than the amount of the net worth sweeps that are suspended, it would be a “compromise of claims” that would “require the written approval of the Attorney General or his delegate.”

          In many of its court filings, the government has asserted (very unpersuasively in my opinion) that the periodic commitment fee referenced by Milken would be “incalculably large.” Milken appears to endorse that view, but it undermines their rationale for suspending the sweep. If the sweep is suspended but replaced by a periodic commitment fee that is of comparable size, that would be of no benefit to Fannie and Freddie in rebuilding capital. Yet if the periodic commitment fee is a lot less than the suspended sweep payments–which it should be–the Attorney General would have to explain why he or she were approving this “compromise of [taxpayer] claims,” which they are highly unlikely to wish to do. So what, exactly, is Milken proposing here? My take is that it’s pure optics–endorsing an action that seems to be a compromise on their part but that has no chance of ever being acted upon.

          Liked by 1 person

          1. in my view the compromise of claims argument is ludicrous. treasury waived the imposition of a commitment fee for 4 years before the NWS. the commitment fee was never calculated such that its prospective imposition, which treasury supposedly gave up in exchange for the NWS, was never part of the supposed negotiation between fhfa and treasury. this is all post-hoc litigation argumentation. this is MI grasping at vanishing straws.

            Liked by 1 person

  4. Tim, would you please send a response to this nonsense editorial publlished by The Washington Post? I left a lengthy comment (part of which I stole from you … sorry) but I’m nobody who will be taken seriously.

    https://www.washingtonpost.com/opinions/trumps-nominee-to-oversee-fannie-mae-and-freddie-mac-could-provoke-a-needed-discussion/2019/01/01/f3d2229e-fe4e-11e8-862a-b6a6f3ce8199_story.html?utm_term=.bd403a194852

    Thank you.
    Jeff Wood

    Like

    1. The Post has a 30-year history (at least) history of declining to publish op-ends, and even letters, favorable to Fannie Mae. I have submitted a number of them, and never had one published. Shortly after I published my book I tried to go in from the top. I asked a friend and former colleague to contact the Post’s editorial page editor, Fred Hiatt, to bring an op-ed I had prepared to his attention, and to make the journalistic case for why the Post should publish it. Fred sent a note to one of his editorial aides, who wrote me asking if I could send it to her (she said it must have gotten lost because she couldn’t find it.) I resent it, and the next day got the Post’s standard rejection notice: “The column was carefully reviewed, but the Post unfortunately is unable to publish this piece.” (They never give any reason that might be useful in tailoring the next submission.) Six months after this episode I sent another op-ed–on the Johnson-Crapo legislation, which the Post favored and about which it had published several positive pieces, including an op-ed–to the same editorial aide, and the next day got the same rejection email. Being pretty adept at pattern recognition I haven’t tried another one since.

      Liked by 2 people

      1. LOL. Yes, no point in attempting to educate the willfully ignorant who insist on preaching to us. We all should have learned that lesson by now. Thanks for your response.

        Like

        1. As an institution, the Post many years ago took the position that Fannie and Freddie were bad public policy choices. I personally think it was because this was the insistent contention of what I call the Financial Establishment, whose members advertise in the Post’s pages (and on-line) and serve as sources for their many financial stories. But whatever the reason, even in the face of evident and provable facts to the contrary the Post has never acknowledged, or informed its readers, that there might be two sides to the controversies surrounding Fannie and Freddie. You only hear one side from the Post, except in an occasional letter to the editor. I wish there were something I or others could do to change this, but the Post has the final call, and it doesn’t appear to be willing to budge on its posture on the companies.

          Liked by 3 people

      2. I went back and left the following in the WP comments for this story. Maybe some intern will read it and follow up with the PTB there.

        “To my knowledge, at least since the financial crisis in 2008, The Washington Post opinion section has refused to publish any letter or op-ed supporting the “other side” of the Fannie and Freddie story, the side that claims the shareholder-owned companies were unnecessarily nationalized and the investors’ money stolen by the government under the guise of “protecting taxpayers.”

        “I realize the editorial board is under no obligation to be fair or balanced in their writing. But for an organization that preaches “Democracy Dies in Darkness” to deliberately keep the public in the dark, for decades, about one entire side of this story is shameful.

        “Shame on you, Washington Post. You are not worthy of the public’s trust.”

        Liked by 2 people

          1. Gary Hindes gets the credit not only for getting his letter published, but also given a prominent position in the Sunday Outlook section of the Post’s print version. I do know that Gary’s initial contact at the Post was at an even higher level than Fred Hiatt (whom I had contacted), and perhaps that helped.

            Liked by 3 people

        1. Erin: I checked the comment log, and saw that on December 22 a post from you was submitted for approval asking the question, “Assuming a recap n release how do you see commons fairing out? all I see is dilution dilution dilution.”

          I’ve never quite understood why some posts get submitted for approval and others are simply posted. But as I’ve noted from time to time, I have guidelines for what types of posts I accept or allow to stay on the blog. If a post falls outside those guidelines I either don’t approve it (which is what happened in your case) or I delete it.

          I generally do not accept or approve comments that merely state a poster’s personal view, without adding any insight or information that I feel might be of use to other readers. (The majority of the posts I delete fall into this category.) I also apply this same “interest to a wider audience” standard when deciding whether to accept or answer questions from individuals seeking to inform themselves on a particular topic.

          Your question fell into a third category: topics I don’t address in the blog. One of those is the value of or outlook for Fannie or Freddie common and preferred stock. While the blog does provide information and analysis that might be helpful to readers in determining how to value the companies’ shares, I do not give investment advice myself, nor do I speculate on how various reform alternatives might affect the prices of Fannie or Freddie’s preferred or common stock.

          I know it may seem a little harsh (or judgmental) to have a comment not accepted or deleted, but posters should try not to take it personally. It is, I’ve found, the only way I can keep the content of the blog focused on the topics I believe are of the most interest to my readership, thus preserving the value of the site for them.

          Liked by 3 people

          1. Tim

            I have followed and read your writings for so long and appreciate your knowledge and help, sorry if this question has been asked to you over and over, as I see it now FnF aren’t going anywhere now the rhetoric is what form they will be released, raise capital, how much capital etc. Assuming a recap n release how do you see commons fairing out? all I read is dilution dilution dilution.

            Thanks in advance, happy holidays

            Like

    2. Calabria is a human rorschach test. he is against the NWS and, oh by the way, the GSE model to boot. I have no idea what he will do as FHFA director but the question you have to ask yourself is to what extent will he formulate rather than implement policy. I have read his writings, many quite polemical, and noted that he is a diehard Grateful Deadhead (as am I). I suspect that he will take direction but, given this administration, who knows when or if direction will. be given.

      rolg

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  5. Tim,

    Good morning. You are probably aware by now that Joseph Otting was named interim director of FHFA. With all of the choices available, it seems that the Otting appointment is signaling Mnuchin is in full control and plans to make an immediate administrative move. Why appoint someone like Otting as opposed to a more seasoned public servant to head FHFA temporarily unless you are about to have him maneuver as you see fit? The speculation is that this administration has had 2 full years to meet with everyone under the sun as it relates to GSE reform. Why wouldn’t they have a plan fully developed and ready to deploy by now?

    Bloomberg Quint had this to publish this morning: “Treasury’s Phillips has indicated in meetings with lobbyists, trade groups, academics and other administration officials that he would be amenable to parts of the Moelis plan, said the people who asked not to be named because his remarks weren’t public.”

    Thanks!

    Like

    1. By statute, the president’s authority to appoint an acting director of FHFA after Mel Watt’s term expires next month is limited to either (a) one of Watt’s current deputies at FHFA or (b) an individual who has previously been confirmed by the Senate. As Comptroller of the Currency, Joseph Otting meets the second criterion, and this, together with the fact that he worked with Mnuchin at One West Bank and is familiar with the mortgage business (One West was the entity created by the FDIC when Indy Bank failed in 2008), made him the obvious choice to be FHFA’s acting director at FHFA. I wouldn’t read any policy implications into it.

      Liked by 1 person

  6. Tim

    a curiosity.

    in FSOC’s 2018 annual report (just released), p.12, it states: “The Enterprises are now into their eleventh year of conservatorship. The Council reaffirms its view that housing finance reform is urgently needed to address the conservatorships, codify existing reforms, and implement a durable and vibrant housing finance system.”

    https://home.treasury.gov/system/files/261/FSOC2018AnnualReport.pdf

    in FSOC’s 2017 annual report, it states: “Fannie Mae and Freddie Mac are now into their tenth year of conservatorship. The Council acknowledges that, under existing regulatory authorities, federal and state regulators are approaching the limits of their ability to enact regulatory reforms that foster a vibrant, resilient housing finance system. The Council therefore reaffirms its view that housing finance reform legislation is needed to create a more sustainable system.”

    https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/FSOC_2017_Annual_Report.pdf

    2018 report leaves out the word “legislation” that was in 2017 report. could be an omission, could be an intention.

    rolg

    Liked by 1 person

    1. Given all of the other subtle changes in tone from administration officials in their statements and writings on mortgage reform recently, the absence of the word “legislation” in the FSOC’s report this year is unlikely to have been inadvertent.

      Like

      1. I also found the 2018 language, “codify existing reforms”, in the absence of the use of the word, legislation, to be interesting…perhaps administrative action that is intended to be comprehensive and requires no further legislation.

        Like

        1. sorry, one more thought. look again at the 2017 language: “The Council acknowledges that, under existing regulatory authorities, federal and state regulators are approaching the limits of their ability to enact regulatory reforms that foster a vibrant, resilient housing finance system”. in other words, FHFA has done all it can and more is needed…through legislation. 2018 language doesn’t refer to need to go beyond existing regulatory authority, but rather simply “codify” existing reforms already achieved by regulatory authority. codify is a capacious term that certainly includes legislation, but by omitting the word legislation in this context, it would seem to indicate that codify includes fhfa rule making as well.

          Like

  7. The treasury Secretary speaks (again): https://www.bloomberg.com/news/articles/2018-12-18/mnuchin-hints-at-fannie-freddie-changes-to-end-federal-control

    “Mnuchin didn’t specify on what Treasury might do unilaterally, though he indicated that securing Senate confirmation of a new Federal Housing Finance Agency director will be key to the administration’s efforts.”

    one might recall that Mr. Watt continually testified to congress that it was up to congress and not the fhfa director to reform GSEs.

    rolg

    Liked by 1 person

    1. I saw that. First of all, Mnuchin’s comments make clear that he has no objection to Calabria as head of FHFA. Second, the careful phrasing of his statement, “My preference would be to do something that has bipartisan legislative support” indicates that he has shifted his efforts from a legislative solution to an administrative one, and referring to bipartisanship as his “preference” also suggests that he would be willing to take an administrative reform path that the Rs like but the Ds do not. The affordable housing advocates would be well advised to turn their Treasury lobbying efforts up a notch (or more).

      Liked by 1 person

        1. The key word in that sentence from Mnuchin is legislative “support.” Legislative support is different from the legislative majority (a simple majority in the House, and a 60 percent majority in the Senate) required to get a bill passed in Congress. I interpret Mnuchin’s use of the word “support” as indicating that he would like Congress to approve what he does, but that he does not intend to wait for Congress to pass a bill before he develops and recommends an administrative approach that ends Fannie and Freddie’s conservatorships. If that interpretation is correct, the focus now would shift to looking for clues as to what this administrative approach might look like–and how Treasury is thinking about ending the net worth sweep and the associated lawsuits in a manner that will allow administrative reform (whatever its details) to proceed.

          Liked by 1 person

          1. I think the recently passed sentencing bill is instructive in the sense that if anything gets passed during the next two years, it will have to be consistent generally with D policy goals; if this is correct, then it is hard to conceive of passage of a GSE bill that would get the necessary senate votes. hence the need for administrative action. and as Tim said, Mnuchin has just told us as much.

            while it is hard to say what that administrative path looks like now, it is clear that it will not include items needing congressional action (like an MBS govt guaranty which, at least according to the MBA, is important to the creation of additional competition int he GSE space).

            if administrative reform boils down to making permanent (whether by agreement or regulatory rule) the GSE reforms achieved to date during conservatorship (eg lower loan inventory) and doing a deal to raise more private capital, this is something an ex-Goldman Sachs mortgage banker feels competent to do, and moelis has provided the blueprint. it may also involve raising GSE fees, which the tbtf banks will likely appreciate.

            so it looks to me like dj Mnuchin is going to spin TINA and the warrants, and fhfa director watt did not want to dance to any particular tune, hence the need for a new fhfa director. and keep an eye out for the 5th circuit en banc in collins.

            rolg

            Liked by 1 person

          2. To the “ending lawsuits” point, when does treasury start talking to plaintiffs to organize a settlement? After the new director is confirmed? What clues can we look for to see if settlement talks are happening?

            Might be a ROLG question.

            Cheers,
            Justin

            Like

          3. @Justin

            if I were advising treasury, I would first point out that it faces a collective action problem. lots of different Ps who need not act collectively. one may wonder whether there are fewer litigation funders than Ps so before any talks begin in earnest, treasury would need to find out who are the real Ps having the financial interest supporting the litigation (it may already know). I would surmise that this would be relatively small group, but still subject to a collective action problem.

            I would also point out that if treasury has a definite view as to its objective re GSE reform then it should just proceed and let the litigation be a second order issue. if that objective entails eliminating the NWS and the senior preferred stock since it has been paid off in respect of the original terms of that stock, then this result solves almost all of the litigation…it provides the relief the Ps are asking for. I say almost because there is the amended Washington Federal complaint that seeks some $40B of damages suffered by Ps in 2008, and voiding the NWS does not provide that P the relief it is asking for.

            but generally, if treasury has a strong view as to what the administrative path should look like, then I would advise it just proceed full speed ahead. when you ask someone else what it wants, you may not be able to accomplish what you want.

            this process would avoid any leaks of negotiations simply because there would be no negotiations, and that would be another benefit of the strategy. assuming financial advisors would be retained in connection with any negotiations, and those retentions provide for success fees, one can expect one or more financial advisors to leak in the hopes of increasing the likelihood of settlement (leaks increase the stock price of the financial parties in interest among Ps, which increases the cost of not reaching settlement).

            rolg

            Liked by 1 person

          4. The two critical components of an administrative reform proposal are settling the litigation and recapitalizing the companies. I see the nomination of Mark Calabria as head of FHFA as clearly facilitating the first (he does not believe that the net worth sweep–which the agency he has been nominated to head has been defending aggressively in numerous judicial venues–is legal), but complicating the second. Calabria has made no secret of his belief that Fannie and Freddie should have smaller roles in the residential mortgage financing process, and that depository institutions should have larger ones. The easiest and least controversial way he could accomplish this would be to have FHFA, as Fannie and Freddie’s regulator, require something close to “bank-like” levels of capital for the companies’ credit guaranty business, in spite of the fact that the normalized credit losses of this business are one-tenth those of commercial banks (with their very broad range of lending powers). But that will make the challenge of recapitalizing Fannie and Freddie all the more difficult.

            Saddling the companies with excessive capital requirements will have three important results: (a) it (obviously) will mean that Fannie and Freddie will need to raise a much larger dollar amount of new equity to meet their new capital requirements (at which point they will be able to reinstate dividends to their existing preferred and common shareholders); (b) the companies will have much less favorable prospects for doing business going forward, since they will be forced by their excessive capital requirements to price their credit guarantees far too high for the economic benefits those guarantees convey, and finally (c) the investors who will be asked to buy the new equity in these companies will know (or if they don’t know, will be constantly told by Mr. Calabria) that the companies they are being asked to invest in are decidedly NOT viewed favorably by the administration that is attempting to get them recapitalized.

            I can see how Secretary Mnuchin might deal with the first “critical component” of administrative reform; I am less clear as to how he will deal with the second.

            Like

          5. Tim

            if with Calabria as new fhfa director the first step of the process is to cancel the NWS/senior pref stock, that goes a long way to settling litigation AND establishing a new pricing equilibrium for the common and junior preferred stock of the GSEs. my thought is that the market will be a very interested “third party” in the process going forward. the dynamic between being able to raise additional capital, and how much, and what level of “footprint” and capital the administration steers towards, will be a pull and tug reported upon daily by the market. one would think that trump/mnuchin might be mercenary enough to have the valuation of the warrants play an important role in their analysis.

            rolg

            Like

          6. Tim,

            I believe Calabria is in an ideological dilemma. I don’t see how he can be true to himself if he continues to decry the NWS while seeking to saddle the GSEs with bank like capital strictures. To do the latter would be to act contrary to his laissez-faire ideology. He’d have to artificially manipulate things in order to let the free market have its way. Seems a bit hypocritical to me.

            So, how do you think he can alleviate this tension? Or maybe Mnuchin handles the percentages (2-5%?) and Calabria does the other?

            Like

          7. An additional wild card in all this is the court cases. I’m thinking particularly about the en banc hearing in the Fifth Circuit on the Collins appeal, scheduled for the 23rd of January. According to the Fifth Circuit website, this court agrees to only one of every 100 requests to hear a case en banc. They took this one, and as I’ve noted in an earlier comment the plaintiffs did a masterful job of presenting their case in a way that will make it hard for a majority of the justices to rule against them. I can easily imagine one of the Justice Department lawyers saying to either Secretary Mnuchin or his deputy Craig Phillips, “You know, we could actually lose this.” To date Treasury has had a convenient reason to keep postponing action on Fannie and Freddie, since the net worth sweep payments have been flowing into Treasury’s coffers quarter after quarter. The now very real possibility that this stream of income might soon end likely is what’s behind the sudden flurry of interest by the government in administrative reform–as well as all of the articles from opponents of this reform (the latest being the piece in The Hill by DeMarco, Parrott, Stevens, Zandi, Holtz-Eakin and Ranieri) arguing against it.

            IF Treasury is now beginning to focus on the value of its warrants on Fannie and Freddie’s common stock as a substitute for the potential loss of its sweep income, this puts the conflict between Calabria’s apparent vision for the companies (smaller, less efficient and overcapitalized) and the goal of getting at least $100 billion in value from the warrants (by configuring Fannie and Freddie not to just limp along but to succeed by operating in a manner similar to how they did prior to the conservatorships) at center stage. It will be very interesting to watch how this conflict gets resolved.

            Liked by 1 person

  8. Tim or ROLG,
    Tim, Thank you again for your insights. I read the Collins 5th Circuit en banc Brief. I am not a lawyer, but it seems well put together and mentioned several of three Justices’ cases in the brief: Thomas, Scalia (former Justice), and Kavanaugh. I suspect that this was either in preparation for appearing before the Supreme Court, or to come to a conclusion via the suggestion of a conclusion before going to the Supreme Court. What was your take on the Brief? Thank you again.
    FNMA Supporter1

    Liked by 1 person

    1. I thought the brief was exceptionally well done: clear, persuasive, and most importantly in my mind, comprehensive. The brief properly begins with a discussion of whether the finding of the Fifth Circuit appellate court that FHFA is unconstitutionally structured requires it to then grant plaintiffs “backward-looking relief” by voiding the net worth sweep (which the appellate judges declined to do). I thought Cooper and Kirk did an admirable job of laying out the evolution of judicial thinking on this topic, citing recent decisions involving justices Scalia, Thomas and Kavanaugh, as well as judges on the Fifth Circuit itself, that all supported the view that the judges in the Fifth Circuit en banc MUST grant such relief. Cooper and Kirk went on to explain (prompted by a letter from the clerk of the court asking it to do so) that relief could be granted in a way that not only did not interfere with FHFA’s duties as conservator or regulator, but in fact freed FHFA to carry those duties out in the way HERA intended it to, by allowing the companies to return to a safe and sound condition through recapitalization. It was also important for C&K to explain that the net worth sweep could be unwound without it resulting in any dollar outlays by Treasury, and that granting plaintiffs relief in the net worth sweep case did not invalidate other prior actions of a FHFA director acting in violation of the Constitution’s separation of powers (which would need to be litigated separately).

      C&K then tied the constitutional and the APA violations together neatly and cleanly. In discussing the APA aspect, C&K zeroed in on the two glaring weaknesses of decisions of other courts that have upheld the sweep as consistent with HERA: these courts’ reading of the word “may” as being discretionary rather than permissive, and the fact the same courts, in grasping at the clause that said FHFA may “take any action…that [FHFA] determines is in the best interests of the [Companies] or the [FHFA]”, ignored the fact that the same sentence adds the qualifier, “as authorized by this section.” This section, of course, is called “Incidental Powers,” so it limits FHFA’s powers to act in its own interest, rather than (as other courts have wrongly said) expanding them to allow FHFA to do whatever it wishes in any aspect of its conservatorship or regulation of the companies (which would render the precise wording of the rest of HERA meaningless). Being able to quote the strong dissenting language of justice Willett–who is a Fifth Circuit justice and will be a member of the en banc panel–on both of these points added heft and credibility to plaintiffs arguments.

      The tying together comes from pointing out that even if one (wrongly) concludes that the prior courts got it right on the APA violation, the judges still have to deal with the constitutional issues raised earlier in the brief. The remedy for both the APA violation and the constitutional separation of powers issues is the same (unwinding the net worth sweep), but finding in favor of the APA violation would allow the Fifth Circuit judges en banc to (if they wish to) decide the case without having to get into the issue of severability and the more complex potential remedies associated with that.

      I will be very interested to learn how the judges react to plaintiffs arguments, and the defense’s counter arguments, at the en banc hearing on January 23. The quality and thoroughness of the C&K brief gives me reason for optimism.

      Liked by 1 person

      1. Tim and f1

        that was an excellent summary, Tim!

        I would only emphasize that Cooper & Kirk pointed out that even if the circuit found a violation but was not inclined to grant vacateur relief for the separation of powers claim (and the brief provided many reasons and precedents why it should), nonetheless since this case arises in connection with agency action governed under the APA, the APA (section 706 as I recall) is an additional basis for granting relief for a “violation of a constitutional right”, so that a constitutional violation should give rise to relief under two theories, constitutional and statutory, belt and suspenders.

        another interesting point in the brief is n.5, which can be explained by this hypothetical: say on the 16 judge 5th circuit the judges split 8 in favor of the separation of powers claim (and would grant relief under this claim), and the other 8 in favor of the APA NWS exceeds conservatorship authority claim (and would grant relief under this claim); you would have all 16 judges voting to grant relief without a majority voting in favor of either claim. the footnote points out that relief must be granted if a majority of the circuit votes for it, even if for different claims. another two bites of the relief apple.

        the circuit has scheduled oral argument only two weeks after the fhfa brief submission deadline. it is eager to hear this case (as am I).

        rolg

        Liked by 1 person

  9. Tim,
    I read your blog from the very first day. You deleted my comments many times. I don’t blame you because I was rude and unkind with the anti-GSE community. In fact you have been a gentleman not blocking me in advance before reading my comments.
    Today I made a commitment to not read or write anything else about GSEs. It has been extremely stressful over five years specially reading the malicious lies out there.
    In this last comment I want to expose my KISS ( keep it simple solution) idea. Many will laugh, maybe for someone will make sense:
    1) A fourth amendment suspending the NWS for ever.
    2) Extend the Treasury 200B backing commitment for 10 years in exchange for a fee.
    3) Exercise the warrants in exchange for the payment of the Senior Preferred.
    4) Retain profits for capitalization until the desired capital is accumulated.

    and that is it. Government may start selling the warrants as they see the market price is convenient. The 200B commitment never was needed and never will be, let alone with current FnF.

    Thank you for honesty and good bye.
    Jerry

    Like

  10. Tim,

    Good morning. Paul Muolo with Inside Mortgage Finance published a short article today titled-

    Headed into Receivership: Fannie & Freddie? It goes on to say the following: “Federal Financial Analytics, a Washington-based consulting firm, in a new report said it believes the Trump administration will use its statutory authority to convert the conservatorships of Fannie & Freddie into receiverships. FFA calculates the trigger will be pulled by mid-2019. The firm, run by the consulting veterans Karen Petrou and Basil Petrou, predicts this could happen absent Congressional action or an all-hands crisis.”

    This seems to go against what we have heard from not only the Administration but from Calabria himself. Do you have thoughts or comments on this development?

    Thank you in advance.

    Like

  11. Not if the OTCs are being manipulated by dealers to keep the price low for purposes of court cover on the low ball settlement offer from the gov’t.

    Like

    1. I don’t know about DeMarco, but I know that at least three of the authors of this piece know what they’re saying about the causes of the housing and financial crises is not true. But they want bank-centric mortgage reform, and believe the best way to get it is to stick with a known false story that makes it seem justified. This has been going on for ten years.

      Liked by 3 people

      1. Tim – why do you think these people keep lying and why do you think no one in the press does anything to counter their lies? It’s beyond pathetic at this point.

        Like

      2. I thought you had commented on this before. Can Treasury sell warrants in a piecemeal approach? I believe not, as they own 79.9% of remaining at any point of time, so 100% of them must be utilized at once. Can you confirm?

        Like

        1. Treasury must convert the warrants before they can sell the resulting shares, and it may convert them either in whole or in part. I believe that if Treasury ever does convert the warrants it will do them all at once (while reserving the right to sell the shares over time),.Unconverted warrants will be a strong disincentive for Fannie or Freddie to issue new equity, since any percentage of the warrants Treasury has not yet converted would give it the right to that same percentage of the new equity issue as well, which the companies will wish to avoid.

          Liked by 1 person

          1. Tim,
            I believe the warrant was equal to 79.9% of all common shares previously issued pursuant to the warrant. So any additional common shares issued dilutes Treasury % also.

            Like

          2. Eric: Rereading Treasury’s warrant fact sheet (which I hadn’t done in a while), you are correct. The number of shares to which Treasury is entitled by contract is defined by the “Fully Diluted” description as the amount of Fannie or Freddie’s common stock outstanding “immediately prior to the exercise of this Warrant (or a portion of this Warrant)”. That would mean that Treasury would have to exercise only some of the warrants before Fannie or Freddie could raise more common equity without giving Treasury the right to 79.9 percent of the number of new shares they just raised.

            Liked by 1 person

  12. The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles

    By Michael Krimminger and Mark A. Calabria
    February 9, 2015

     Demonstrate that the conservatorships of Fannie Mae and Freddie Mac ignore that precedent and resolution practice, and do not comply with HERA. Among the Treasury and FHFA departures from HERA and established precedents are the following:

    o continuing the conservatorships for more than 6 years without any effort to comply with HERA’s requirements to “preserve and conserve” the assets and property of the Companies and return them to a “sound and solvent” condition or place them into receiverships;

    o rejecting any attempt to rebuild the capital of Fannie Mae or Freddie Mac so that they can return to “sound and solvent” condition by meeting regulatory capital and other requirements, and thereby placing all risk of future losses on taxpayers;

    o stripping all net value from Fannie Mae and Freddie Mac long after Treasury has been repaid when HERA, and precedent, limit this recovery to the funding actually provided

    o ignoring HERA’s conservatorship requirements and transforming the purpose of the conservatorships from restoring or resolving the Companies into instruments of government housing policy and sources of revenue for Treasury;

    o repeatedly restructuring the terms of the initial assistance to further impair the financial interests of stakeholders contrary to HERA, fundamental principles of insolvency, and initial commitments by FHFA; and

    o disregarding HERA’s requirement to “maintain the corporation’s status as a private shareholder-owned company” and FHFA’s commitment to allow private investors to continue to benefit from the financial value of the company’s stock as determined by the market.

    Liked by 2 people

    1. Hi Tim,
      With Mark Calabria being the top candidate for FHFA, would you care to share what your views on him are?
      -he is quoted jun 17th 2015 “To my GSE shareholder friends, it is possible for you to have been screwed over & for the basic GSE model to be bad public policy.”

      -also being quoted in 2017 saying that the Trump admin will get the GSEs out of Cship before the next admin takes over. but it will not be an easy task

      so with his Free Mkt small gov philosophy, yet also being a believer in the law: How do you think this pans out? more Model changes before being released? Do you believe he will try to shrink their foot print?

      Anyone else that knows Mark, or his views I encourage you also to enlighten us on this topic

      Liked by 2 people

      1. Calabria was one of twenty individuals (including myself) or teams who submitted recommendations on housing reform to the Urban Institute’s “Housing Finance Reform Incubator” series in the spring of 2016. Based on the essay he submitted, if Calabria in fact is nominated to head the Federal Housing Finance Agency when Mel Watt’s term ends, and if confirmed, he would be yet another appointee of the Trump administration who does not support the mission of the agency he has been selected to lead (whether one thinks that is a good thing or not).

        In his Urban Institute essay Calabria was highly critical of the securitization model for housing finance, although oddly he made no distinction between private-label securitization, which failed disastrously, and securitization by Fannie and Freddie, which had far lower credit losses than loans from lenders (mainly banks) who followed the “originate and hold” model Calabria said he advocates. In spelling out his vision for reform in the Urban Institute article–which essentially is a return to the depository portfolio-centric system we had from the 1950s through the 1980s (and which ended with two systemic failures within a decade, the second in 1989)–Calabria said, “There may well be value in a smaller secondary market and in the current GSEs. To retain whatever value there is, the current GSE charters should be converted to national bank charters, and the GSEs reorganized as bank holding companies (BHCs).”

        That, of course, would take legislation, which is unlikely (particularly with the House soon to be in the hands of the Democrats). So the “smaller footprint” idea for Fannie and Freddie that often has been associated with Calabria’s name would appear to be a fairly good guess as to what his intent might be as head of FHFA. As always, though, it’s best to wait to see what he says himself.

        It’s also true that Calabria has been highly critical of the conservatorships, and the net worth sweep. But that issue is being driven by Treasury, and I believe Treasury will continue to call the shots on it after a new FHFA head is in place.

        Liked by 2 people

        1. Tim, regarding the last paragraph of your response, if Mnuchin moves to Chief of Staff, then what? Obviously, who knows for sure? My unspoken questions have been, does Mnuchin share Trump’s vision on ending the conservatorship? Does Trump even have thoughts on the GSEs?

          Like

          1. Treasury’s having the lead for the administration on issues related to Fannie and Freddie is institutional rather than personal. As everyone knows, Secretary Paulson didn’t bother to check with FHFA director Lockhart when he decided to force the companies into conservatorship (and then, after he learned that FHFA had just issued a letter deeming them to be adequately capitalized, had little difficulty getting the agency to do a quick 180 and support what he wanted). And even before that, prior Treasury secretaries during my tenure at Fannie did not take FHFA (or as it was then called, OFHEO) seriously as a financial regulator (one making little effort to hide his scorn for the agency and its leaders). Should Mnuchin leave, I think whoever succeeds him will assume responsibility for the issue of what comes next after the Fannie and Freddie conservatorships. I doubt Calabria (again, if nominated and confirmed) will challenge the new secretary, and have even greater doubts that if he does he will succeed.

            Of course, if there IS a new Treasury secretary we will need to wait to find out what ideas he or she has on mortgage reform, if indeed they have any at all. Which leads me to the president. I have yet to see any credible evidence that he has thought about the future of the residential secondary mortgage market for one moment, and I personally doubt that he has. Since just after the election Mnuchin has been the person who has talked about it being an administration priority to “get [Fannie and Freddie] out of the government…reasonably fast,” and the fact that for more than two years now nothing has happened suggests strongly that Mnuchin has not been able to get the president to engage on the topic, let alone make it a priority.

            Liked by 1 person

          2. That issue currently is being litigated in Bhatti and other cases. Ed DeMarco was acting director of FHFA for four and a half years, which plaintiffs argue is far too long, and thus a violation of the Appointments clause of the Constitution.

            Liked by 1 person

        2. Tim , good morning ,
          Can M Calabria start his office as an acting director immediately while he awaits confirmation? or have to be another person the acting director until he is confirmed?

          Like

          1. I’m not sufficiently familiar with that aspect of the HERA statute to give you a confident answer. I believe the president has more flexibility to appoint an acting director after the term of the current director (Watt) expires in early January than he does today, but I don’t how much more flexibility.

            Like

  13. Tim

    very informative as usual. thanks!

    what are your thoughts regarding an insurance company insurance model, per USMI (and requesting comments as to that)? isn’t the GSE guaranty essentially an insurance function? how would things change?

    rolg

    Liked by 1 person

    1. While I don’t call it that, an “insurance model” is what I advocated in my comment to FHFA. I began it by saying that Fannie and Freddie aren’t banks—they’re single-product companies whose one risk, mortgage credit risk, has produced historical loss rates one-tenth those of commercial banks. (And I also suggested that FHFA get a copy of the letter from Paul Volcker to Fannie’s David Maxwell, in which Volcker discussed at some length why bank capital standards were not appropriate for and should not be applied to Fannie and Freddie.) I then went on to recommend that FHFA’s revised capital proposal have only three elements: (1) a straightforward (i.e., transparent, with no fudges) stress-based capital requirement, by risk category (although with far less granularity than FHFA has now—you don’t need that much); (2) a modest cushion to account for model error or the possibility that the next stress environment will be worse than the last one (although as I note in the current post, several commenters made the opposite point—that because of all the positive changes made since the crisis, having to protect against a repeat of the 2008 collapse is too extreme a standard), and (3) a going concern buffer (and here, too, some commenters argued that this isn’t needed: the combination of a minimum leverage ratio and FHFA’s prompt corrective action authority will serve the same purpose).

      An “insurance model” would have other features, but it’s basically what I just described. And calling it that should give it more credibility—there are real regulatory schemes for insurance-type entities, and they differ from the regulatory regimes for banks for a reason. Genworth had a very good quote on this that I didn’t have the space to use: “Basel applies to depository institutions that, among other things, are subject to a possible ‘run on the bank’ that would curtail new revenue. As a result, bank capital requirements focus on equity capital to meet prescribed ratios, while most insurance frameworks are primarily focused on ensuring liquid (available) assets are sufficient to pay claims under stress.”

      What caused the banks to need bailouts in 2008 were flights of short-term purchased funds (or so-called “hot money”) and withdrawals by depositors. The only way a bank can protect against this—given their funding mismatch and their leverage—is to have a mountain of capital big enough to convince mutual funds and depositors to keep their money there even during a crisis. It’s not really “loss-based” capital, it’s “confidence-based” capital. Insurance companies (and Fannie and Freddie) are different. Their losses, when they happen, happen slowly; they don’t have (much) short-term funding that can run away, and their revenues (guaranty fees) are linked to their long-term assets (life-of-loan credit guarantees). I’ve never understood how the notion of “bank-like capital” for Fannie and Freddie ever could have taken hold the way it did.

      So, yes, an insurance model would be the right one for FHFA to adopt.

      Liked by 6 people

        1. This is a legal article (discussing the mechanics of a receivership), not a financial one (discussing its feasibility or practicality). As the authors note at the end, “As a general rule, FHFA must wind up an LLRE [limited-life regulatory entity, charged with liquidating Fannie and Freddie’s assets] no later than 2 years after it is established. However, FHFA may extend the life of an LLRE for up to 3 additional 1 year periods. Thus, an LLRE has a maximum life of 5 years.”

          So, query: If in receivership an LLRE is going to be running off, defeasing or unwinding all of Fannie and Freddie’s $5.0 trillion worth of credit guarantees over a maximum of 5 years, what entity or entities will step up to replace them? Oh, there isn’t anything? Well, maybe receivership isn’t such a good idea.

          Liked by 3 people

      1. Tim

        thanks for thoughtful reply.

        you mention that FHFA has “prompt corrective action authority”. I think this bears emphasis. while it is always the objective to get a regulatory action right the first time, FHFA can always react and revise. So while I suppose nothing gets done until Watt’s replacement is in place early next year, it seems to me that FHFA has already revised much of the regulatory landscape for GSEs (eg positive changes re reduction in whole loan inventory, qualified mortgages etc), and this capital proposal actually is (or should be) less of a difficult job than FHFA seems to have set out for itself. Hopefully the comments it has received that you have summarized so well will help FHFA see that.

        as you say, lets get on with it knowing that this is a process that always can be revisited.

        rolg

        Liked by 2 people

  14. Great info. From reading the comments on the FHFA website, I especially loved how all the anti GSE groups requested more time and info from the FHFA, and how they waited until the last day to comment.

    Like

  15. Wow! This is deep – with lots of special interests. Thanks for following this so well and keeping us informed. It’s sickening, scary and frustrating to see what the government and courts have done to a basically good and needed system.

    Liked by 1 person

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