A Three-Year Retrospective

This past Saturday marked the third anniversary of the initial live post on Howard on Mortgage Finance. I began it in response to my perception that the dialogue on mortgage reform was being dominated by ideological and competitive critics of Fannie Mae and Freddie Mac who over the past two decades had created provably false stories about the companies’ business, risk-taking and role in the 2008 financial crisis, which through constant repetition in the media had become almost universally accepted as true. My goals for the blog were to serve as a source of objective and verifiable facts about the mortgage finance system in general and Fannie Mae and Freddie Mac in particular; to draw on my experience with and knowledge about these areas to provide informed analyses of current developments in single-family mortgage finance, and to use these facts and my analyses as the basis for offering opinions on mortgage-related issues.

I’ve now said (or written) most of what I had to say and wanted to say when I began the blog. Largely for this reason—and because the blog was not intended to be a running commentary on mortgage-related events (I try to do a version of that with responses to reader questions and observations in the “comments” section)—the frequency of my posts has declined each year. I did 18 posts in 2016, 10 in 2017, and 6 last year. I put up a post when I have something new or different to say; otherwise I don’t.

The large majority of my posts have dealt with how the government should resolve the conservatorships of Fannie and Freddie, now over ten years old. Within this overarching issue I have written extensively on a number of recurring topics: the course and status of the legal cases challenging the government’s actions during the conservatorships; my thoughts on the right objectives for mortgage reform and how best to achieve them; critiques of the repeated attempts by banks and their supporters to replace Fannie and Freddie in legislation with bank-centric alternatives, and in-depth examinations of two  related subjects—the appropriate capital standards for credit guarantors and the folly of substituting credit risk transfer transactions for upfront equity capital.

Much of what I’ve written on these topics was published some time ago, however, so I thought that in this post I would give readers a brief guide to where they could find the most complete or accessible expressions of my views, by category. I’ve done this below.

 The facts and the law in the legal cases. I’ve put up five posts whose focus was the court cases challenging the government’s treatment of Fannie and Freddie in conservatorship. Three of them addressed the fact pattern in these cases, which overwhelmingly favors the plaintiffs, while two discussed the implications of specific court decisions.

My first live post was Thoughts on Delaware Amicus Curiae Brief (February 2, 2016), whose most valuable part I think was the link to the amicus itself. Reading about all of Treasury’s actions from before the financial crisis to the net worth sweep, it’s impossible to escape the conclusion that its takeover of Fannie and Freddie was a preplanned nationalization. The Takeover and the Terms (February 23, 2016) is an early piece about the challenge to the conservatorships by Washington Federal, in which I imagine judge Sweeney reviewing the facts in the case and saying to Treasury, “You abused your regulatory power by taking Fannie and Freddie over without statutory authority and for your own policy purposes, then conspired with a conservator you controlled to run up their non-cash losses, forcing on them senior preferred stock they didn’t need and you wouldn’t let them repay, whose purpose was to transform massive, temporary and artificial book expenses you’d created for them into massive, perpetual and real cash revenues you’re taking for yourself.” (She may yet get a chance to say this.) A Pattern of Deception (July 31, 2017) was written after Sweeney released a number of documents showing that “to execute its plan [to take over Fannie and Freddie and replace them with a bank-centric alternative], Treasury has had to be untruthful about virtually everything having to do with [them]—their health going into the crisis, the reason for taking them over, the source of their losses in conservatorship, and why the net worth sweep was imposed.”

While the facts in the cases clearly favor the plaintiffs, the law has been another matter. In Getting From Here to There (May 2, 2016) I first give some historical perspective on Fannie and Freddie’s path to conservatorship, then discuss the appeal of Judge Lamberth’s decision in Perry Capital case. I thought plaintiffs would prevail in this appeal, but they did not. In The Path Forward (June 6, 2017) I address the implications of the adverse decisions in the Perry Capital appeal and several other cases for the reform process going forward—fairly accurately, as it’s turning out.  

The majority of my writings about the legal cases have come in response to comments made by readers, which in turn were triggered by news items or events in a particular case. A determined person interested in my view about some specific legal development can find whatever I may have said about it by (a) noting the date of the item or event, (b) looking on the right side of the blog for the “Archives” column, then clicking on the month (and year) of the event, (c) seeing which of my posts were live at or around that date, and finally (d) after clicking on the comments for that post, scrolling through them until you get to or somewhat after the date in question, and see what’s there. (The same approach will work for finding my views on non-legal events or news items.)

Key principles for mortgage reform. Most of my posts in some way relate to the mortgage reform dialogue, but three of them take a “big picture” look at the topic, from somewhat different perspectives. A Solution in Search of a Problem (September 7, 2016) contrasts the approach to reform taken by banks and their supporters—blatantly mis-diagnosing the problem, then proposing a self-serving remedy that “solves” the problem they invented—with the actual challenges now facing the mortgage finance system. Economics Trumping Politics (January 4, 2017) discusses why the misinformation-laden approach to mortgage reform adopted by banks may be a strength in a legislative process but is a liability in an administrative one. And in The Economics of Reform (November 30, 2017), I make the economic case for reforms that benefit consumers rather than banks by documenting the dramatic changes that have taken place in mortgage finance since Fannie and Freddie were put into conservatorship—much greater interest rate risk, far more use of government guarantees, and the greatly increased reliance on the Federal Reserve for funding 30-year fixed-rate mortgages—and noting that consumer-oriented mortgage reform would reverse these negative trends.   

 My ideas for mortgage reform. Three posts were devoted to my ideas or recommendations for reforming the mortgage finance system. The first was Fixing What Works (March 31, 2016), written in response to a request from the Urban Institute for its “Housing Policy Reform Incubator” project, in which a number of contributors were asked to write 2000-word essays about the future of housing finance reform. This was my submission, and there is little in it that I would change today. A Welcome Reset (December 12, 2016) was written shortly after Treasury Secretary-designate Steven Mnuchin told Fox Business that “we gotta get [Fannie and Freddie] out of government control…and we’ll get it done reasonably fast.” In this piece I offer administration negotiators three pieces of advice—”pick the best model, get the capital right, and be realistic about the role of government”—and elaborate on each point. Finally, I wrote A View on Affordable Housing (May 3, 2018) in response to a request from a Democratic member of the Senate Banking Committee to put in writing my recommendations for doing mortgage reform in a way that provides maximum benefits to the affordable housing community.

Bank-centric proposals for legislative reform. Since the first attempt at legislative mortgage reform—the Corker-Warner bill introduced in June 2013—there have been a number of proposals put out that would replace Fannie and Freddie with credit guaranty mechanisms that look and operate differently from the companies. I commented on four of these in three of my posts.

Getting Real About Reform (October 25, 2016) analyzes two proposals made earlier that year—“A More Promising Road to GSE Reform” from the Urban Institute and “Toward a New Secondary Mortgage Market” by Michael Bright and Ed DeMarco from the Milken Institute—that rely on risk sharing arrangements as a substitute for upfront equity capital; it concludes that they are unworkable “theoretical fantasies.” In Narrowing the Differences (April 25, 2017) I give the Mortgage Bankers Association credit for supporting the entity-based credit guaranty model of Fannie and Freddie, endorsing a risk-based approach to guarantor capital, and reversing their previous advocacy of mandatory credit risk transfers, but take issue with their insistence that legislation is required to achieve their “three major objectives” of reform (which I support). Waiting for Mr. Corker (February 5, 2018) critiques a draft of what then was called “Corker-Warner 2.0,” asking and answering the question: “how is it possible that a process begun almost a decade ago, which has had so many people working on it so intently for so long, could produce a result so empty and unimpressive?”  

The importance of capital. This is a topic I’ve addressed frequently, from two perspectives: the benefits of a properly designed and implemented risk-based capital standard to holding down guaranty fees and making them affordable and accessible to as broad a range of potential homebuyers as possible, and the negative consequences of requiring credit guarantors to hold excessive and unnecessary capital. Supporters of banks consistently have advocated that the credit guarantors of the future hold “bank-like” amounts of capital, using the arguments of a level playing field and taxpayer protection in support of their position. I’ve pointed out in numerous posts why bank-like capital is unwarranted for entities that take only mortgage credit risk, and also discussed how applying bank capital standards to single-family credit guarantors would force them to set guaranty fees at arbitrary and artificially high levels unrelated to the risk of the underlying loans, making them less competitive, raising mortgage rates, restricting access to affordable housing and driving more business to banks and Wall Street firms (which is what they want).

In The Right Choice on Capital (June 26, 2017) I explain in some detail why a true risk-based capital standard—and not a bank-like fixed capital ratio—is the only defensible choice for a single-family credit guarantor. This post was written with a specific audience in mind: the investment bankers, investors, and the professionals at Treasury and FHFA who would be involved in any effort to recapitalize Fannie and Freddie and release them from conservatorship. Comment on FHFA Capital Proposal (September 12, 2018) was aimed at essentially the same group of people. In June 2018 FHFA put out its proposal for a risk-based standard for Fannie and Freddie. I thought FHFA made a version of the mistake I warned against in The Right Choice on Capital by adding many elements of conservatism to push the companies’ total capital percentage unjustifiably close to bank levels, and in this post I discuss where and why FHFA’s initial effort needs to be changed before its capital regulation is made final.

Securitized credit risk transfers. The proposed mandatory use of securitized credit risk transfers (CRTs) by credit guarantors is another topic I’ve addressed often; I’ve done seven posts discussing CRTs, and made comments on them in many others. This frequency was driven by the fact that I was learning about Fannie’s Connecticut Avenue Securities and Freddie’s Structured Agency Credit Risk programs as I was writing about them, and also by my great concern that so many of the early reform proposals relied heavily on mandatory CRT issuance as a substitute for equity capital in a way that I knew was dangerous and ultimately unworkable. Fortunately, the more recent bank-supported reform proposals do not give CRTs such a prominent role, so I’ve had less reason to keep writing about them. Readers can get a good general summary of my views on CRTs from Risk Transfer and Reform (September 27, 2017), while the more technically inclined also may be interested in the data and analysis in Risk Transfers in the Real World (March 20, 2017).

*                                                *                                                   *

Howard on Mortgage Finance enters its fourth year with the same issues being discussed as when the blog began, but in my view with more clarity on the path to their resolution, due to two recent developments. The first was the mid-term elections last November, which moved the House under Democratic control, and the second was the decision by the Fifth Circuit Court of Appeals to hear the Collins case en banc. Divided control of Congress all but rules out legislative reform before the next presidential election, while the judges’ reaction to the oral argument in Collins all but assures that the legality of the net worth sweep will be decided by the Supreme Court, where the plain text of HERA and the undeniable fact pattern in the case will carry much more weight than they did in the lower courts.

These developments intersect in a way that is positive for a constructive conclusion to Fannie and Freddie’s ten-year old conservatorships. As I’ve discussed often in my posts, the strategy of the banks and their supporters to replace a secondary market mechanism built around Fannie and Freddie that works for consumers with one that works for themselves was dependent on banks convincing Congress of their false definition of the problem and the merits of their proposed solution to it. This deception is much less likely to work in an administrative reform process. The anti-Fannie and Freddie crowd knows that, which is why they now are kicking up so much dust trying to stall the process recently announced (perhaps prematurely) by acting FHFA director Otting. Opponents of the companies also know that the increased likelihood of the net worth sweep being reversed has put pressure on the administration to move more quickly.

In administrative reform, as at the Supreme Court, the facts will matter. I see the reform process over the next two years as being fundamentally a political exercise, with economic and legal constraints. The political challenge will be to come up with terms and conditions for the eventual release from conservatorship of Fannie and Freddie that are acceptable to whatever set of constituencies the administration believes it has to please (I wish I knew which those were) but that also work economically. In contrast to Congress, the senior staff at the Mnuchin Treasury and the investors who filed the lawsuits against the net worth sweep—and whose hand in my view has been strengthened by the oral argument in Collins—are highly unlikely to sign on to a proposal to recapitalize and release Fannie and Freddie that won’t work. This fact-based “real world” discipline will rule out many of the simple compromises now being written about, such as requiring Fannie and Freddie to hold 4 percent capital while subjecting them to utility-like return limits and restricting the scope of their business to significantly “reduce their footprint.” A company so constrained would have little if any chance of attracting the necessary new capital required for its release, and Treasury, its investment bankers and current investors understand that.

As the process of formulating a reform proposal that works politically, economically and legally plays out over the course of this year and perhaps the next, I will continue to put up blog posts when I have something new or different to say, and to respond to questions and observations from readers in the comments section. But followers of the blog also may benefit from rereading many of the posts identified here, because the facts, analyses and dynamics discussed in them won’t change, and will remain relevant.

51 thoughts on “A Three-Year Retrospective

  1. An FHFA Director who believes the NWS is illegal is soon to be the defending the legality of the NWS in court. How can the center hold?


  2. Tim

    I look forward to your thoughts on Calabria’s confirmation hearing testimony, but i find it interesting that when Calabria said he hasn’t seen an Admin plan, and therefore couldn’t have “signed off” on it, in one senator’s phrasing, as per Otting’s reported comment to fhfa staff, there may be various reactions, beginning with the thought that “there is no Admin plan period”.

    recall that fhfa director watt told congress that as fhfa director, he would not proceed on “GSE reform”, and that this was solely congress’ job. Otting could have just been referring to calabria’s “signing off” on the concept that the admin should proceed in the (likely) absence of congressional action.

    however, seems to me that leaving opaque the whole Calabria” signing off” is probably best at least until Calabria is confirmed.


    Liked by 1 person

    1. I watched as much of the confirmation hearing as I could but unfortunately missed several key parts of it (I’m currently out of the country, and experienced a number of brief internet outages while the hearing was taking place). I did, though, see the exchanges with Senators Brown and Van Hollen about the administration’s plan to release Fannie and Freddie. Calabria tired to duck the issue when Brown first brought it up by saying that Otting might have taken Calabria’s “long-standing support for reform” as being a “sign-off” on the administration’s plan. But that explanation fell apart when in response to a query from Van Hollen he said he hadn’t “seen anything that looks like a plan.” So what do we make of that? I see three possibilities. One, there IS a plan, Calabria did sign off on it, and he’s wasn’t being truthful to the Committee. I’d give that a very low probability. Two, there is no plan, even though Otting said there was one during a closed all-hands meeting at FHFA. I think that’s more likely than the first possibility, but not by very much. What’s the third possibility? There IS ( or was) a plan, but Calabria hadn’t been told about it when Otting said he (Calabria) had signed off on it, because both he and Mnuchin had every expectation that he would. That would be my choice. And it’s not like we haven’t seen this before. That’s exactly what happened between Hank Paulson and Jim Lockhart before the conservatorship, which was a Treasury idea that Paulson told Lockhart about at the last minute, only to learn that Lockhart’s FHFA staff had just sent Fannie and Freddie letters saying they were adequately capitalized, causing Paulson to have to get Lockhart to make his staff do a quick 180, which it did. I think the “plan” was developed by Treasury, and communicated by Mnuchin to his former One West colleague Otting when he became acting director, but they hadn’t found it necessary to tell Calabria yet, since corporate restructurings are not Calabria’s expertise and there was no reason to expect that he wouldn’t “sign off” on the Treasury plan when he heard about it. But now everything’s on hold, and the principals are struggling to reconcile the very different versions of what was supposed to have been the same story.

      There were other interesting aspects of the hearing (at least the parts I was able to watch), but one in particular caught my attention: Senator Warner coming out of seemingly nowhere to tell Calabria that requiring Fannie and Freddie to hold “bank-like capital will significantly increase the cost of mortgages for low-income borrowers,” citing African-Americans in particular. I was very surprised, and also very pleased, to hear Sen. Warner say that. I have no idea how he latched on to this issue, but one possibility, believe it or not, has to do with this blog. I know a number of people very close to Warner and with financial backgrounds get the blog, read it, and are fans of it, and some of them may well have taken it upon themselves to “educate” the senator on how capital for Fannie and Freddie needs to be assessed and determined differently from capital for banks, and that applying bank capital to mortgage credit guarantors would have the negative consequences I’ve written about (most recently in the current post). Whatever the source of Warner’s focus on this topic, however, it’s very much welcome.

      Liked by 3 people

      1. Tim

        Warner up for reelection 2020, with Va. D party not in best shape statewide now; many FnF employees are Va. voters. one surmises that given ex-sen. corker’s powers of persuasion are now absent, Warner reverts to self preservation.


        1. That’s a variant of my option two–there wasn’t a real plan on which Calabria could have signed off. I think my option three is more likely: Mnuchin was close to announcing something that he thought would define the discussion about Fannie and Freddie reform that would follow (including by both Congress and the bank lobby), but that Otting “screwed the pooch” (to use a colorful phrase from Tom Wolfe’s “The Right Stuff”) by talking about that plan in what he thought was a closed-door meeting at FHFA. So now Mnuchin and Treasury have to backtrack.


          1. what Calabria did say (and maybe this is option 5) was that he put on a sort of “cone of silence” once he realized that he would be nominated (fall 2018) to preserve “independence”, so that all discussions that he was a part of, whether or not yet organized into a plan of action, were no longer his to be privy to…so one might think he has a very good idea of what the plan is (or is about to become), even while now being able to disclaim that he is a signed off plan participant



          2. Tim

            clearly senate banking committee staff reviewed calabria’s past writings extensively and senators asked some questions about this research. but the glaring omission was any questioning of calabria’s white paper with krimminger that NWS is illegal. no questioning as to whether Calabria still believes this. sort of a relevant and important question.

            I suppose senators didn’t want to hear calabria’s answer. how can anyone seriously think congress has the capacity to legislate in this area when they are afraid to ask the central question in an inquiry?


            Liked by 3 people

  3. ROLG,

    I’ve listened to the en banc hearing for about the 5th time, because something is bugging me. I think it’s because FHFA lawyers’ arguments are all from the standpoint of the treasury, and not as a conservator. Logically, how can the FHFA even argue against this case? What is the downside for the FHFA as conservator if they lose? It’s clear at the 29:30 mark, where the lawyer said something along the lines of, he does not think the funds should be returned and the company should not be recapitalized in that way. In my mind that should be enough evidence to the FHFA is not acting as conservator or at an “arms length” from the treasury. Shareholders and the FHFA should be on the same side in this case.

    Is there some reason that the word “collusion” has not come up in any case? It would seem to me that it would be easier to argue the cases if we claimed collusion, instead of arguing against two “independent” arms length agencies, who both disagree with us.

    Liked by 5 people

    1. @Andy

      FHFA and treasury are parties to a contract, the NWS, that they are seeking to enforce, and Ps are trying to stop enforcement. while the monetary beneficiary of NWS is clearly treasury, fhfa benefits insofar as the only reading of HERA that supports the NWS is a reading that empowers fhfa with almost limitless and unreviewable power. for a governmental agency, power is its coin of the realm. so the NWS benefits both parties, and it is not surprising that they will present whatever arguments they can in support of NWS enforcement, and that such arguments would blend and overlap.


      Liked by 1 person

  4. Tim, thanks so much for all your efforts and your clarity.

    I recall that you had made mention about what had happened in 2008 when they cooked the books in order to take over the companies. Can you give us a similar level of clarity/synopsis as you’ve done with the net worth sweep? What I’m suggesting is, if the charter was set for FnF to only deal with non-risky mortgages on the secondary market, how did they somehow “nationalize” them in order for them to absorb the toxic adjustable rate mortgages from the banks’ portfolios?

    If this was truly the case, then how come this argument isn’t being addressed at the same time? Is it that it would be too big of a fight or that the JPS legal team doesn’t feel that they have any skin in the game.

    Wouldn’t this fight somehow rewrite what happened there by bringing the companies back to their status quo, albeit with maybe some charter modifications?

    Dr. John

    Liked by 1 person

    1. I still think the best summary I’ve done of “what happened in 2008 when they cooked the books in order to take over the companies” is the amicus curiae brief I did for the Jacobs-Hindes case in Delaware. As I say in this post, you’ll find a link to this amicus in the first live post I published, “Thoughts on Delaware Amicus Curiae Brief.”

      Fannie and Freddie never did buy any “toxic…mortgages from the banks’ portfolios,” although there is credible evidence to suggest that it was Treasury’s intention to have each company buy $10 billion of these loans per month as part of the toxic asset purchase program it said it was going to undertake after TARP was authorized by Congress. Treasury never could figure out how to design and manage such a program, however, so it substituted a “voluntary” bank capital infusion program instead, and Fannie and Freddie never were required to buy toxic mortgages from banks post-conservatorship.

      Only one lawsuit has been filed against the government for its takeover of the companies in 2008, and that was by Washington Federal in the Court of Federal Claims in June of 2013. This lawsuit is stuck in the queue behind all of the net worth sweep-related cases, however, and most legal analysts believe the firm that filed the case–Hagens Berman Sobol Shapiro of Seattle, Washington–does not have the resources to litigate it to a conclusion. Because none of the net worth cases filed to date challenge the original conservatorship, and the government has little incentive to settle Washington Federal, there is no clear legal path to “bringing the companies back to their status quo.”

      Liked by 2 people

  5. Tim,

    Very helpful. If I may, I’d like to summarize what I believe you to be saying and ask you to make some final comments on my distilled observations.

    1. You’re not concerned about unworkable legislation because (a) gridlock will prevent any congressional legislation and (b) Tsy grasps what’s needed to recap the GSEs. (So, if Tsy does act unilaterally, it’ll act sensibly in that regard.)

    2. The ever-lurking danger is that Congress might continue (as they have) to do the banks’ bidding, in which case Tsy would have to oppose congressional input, something the Trump administration would be *reluctant* to do (though not out of the realm of possibility).

    3. A favorable court ruling *might* be necessary for the administration to act unilaterally. (A major ruling would certainly help.)

    Some observations below as I try piecing this together and handicap the situation. I’d very much appreciate your final comments on this front.

    * Otting’s recent remarks seem to suggest that the administration is prepared to act, apart from Congress and opinions of the courts (past or future). But with a flurry of new plans – some possibly yet to come and all unworkable – Otting’s forward looking remarks might too have to be dialed back (as have Mnuchin’s these past two years).

    * If the upcoming hearing goes well and sensible recapitalization principles can be brought to light, maybe Congress will be forced to ratchet down the glaring obstacles to sensible recapitalization and consequently finally desist from recirculating the same MBA and Crapo type plans.

    Liked by 1 person

    1. Ron: What I wrote in response to your earlier question was analysis, and you’re now asking me to speculate or predict. I can, but with the caveat that it’s just that.

      To begin with, Treasury is driving this train, not FHFA. And I suspect that when FHFA’s acting director Otting told his team at an “all hands” meeting on January 17th that FHFA would “announce a plan within weeks to take [Fannie and Freddie] out of conservatorship,” Treasury had the outline of a “recap and release” plan it was comfortable with announcing. Otting did not expect his remarks to be reported externally, however, and when they were, and key members of Congress reacted the way they did, Mnuchin and Otting had no choice but to hit the pause button so they could consult (or seem as if they were consulting) with Congress. That gave opponents of administrative reform an opening to try to slow, stall or kill it by beginning a new round of public proposals that contained their ideas for what a reformed and released Fannie and Freddie should look like. Since those ideas can’t be accommodated and still leave Treasury with companies than can successfully raise capital, I think we’re now at a point where Treasury will need to “blow through” Congressional opposition to get Fannie and Freddie out of conservatorship–whereas before the Otting staff meeting it might have been able to put a plan out there and effectively dare opponents to come up with something better. And Treasury probably will need the cover of a favorable ruling in a court case to take that step now.

      I don’t see next week’s hearing on Mark Calabria’s nomination (if that’s what you’re referring to) as having much bearing on this. This is pure speculation, but I think Mnuchin supported the Calabria nomination for two reasons–to placate the banks (because Calabria has a history of opposing Fannie and Freddie’s role in the mortgage market), and because Calabria is on record as asserting forcefully that the net worth sweep is illegal. Since Treasury has to cancel the sweep in order to do a recap of the companies, having a director of FHFA who claims it’s illegal makes that easier. But I don’t think Calabria has played, or will play, a significant role in the recapitalization plan itself, so I wouldn’t expect him to give us much if any guidance or insight on it in next week’s hearing.

      Finally, I don’t expect Congress to “ratchet down the glaring obstacles to sensible recapitalization,” because so many of its members are beholden to the banks, and the banks won’t back off until they’re beaten.

      Liked by 3 people

  6. Tim, in general your contribution to the knowledge base, fundamental mortgage debt understanding, in this unsung area will surely place you among the “Great Contributors” that far extends beyond the 10 trillion Mortgage industry. Ben Graham and the Founders of the Constitution would be pleased for different reasons . The balance of the GSE story will be fascinating to participate in and follow, I suspect.


  7. Who sets the G-Fees in all these ‘recap and release’ plans? I see in Moelis the G-Fees are set to go to 70 basis points. Banks have already reduced GSE execution at 50 bp G-Fees (I read where GSE delivery income is no longer even a line item for BofA). Only the Quicken Loans will deliver at 70 bp. The best quality loans will remain on bank balance sheets. The adverse selection risk to the taxpayer is massive.

    Combine the high G-fees with the punitive BASEL 3 treatment of servicing rights and you see the potential for even greater reduction in GSE execution by banks.

    If these companies are truly private enterprises, the management would drop G-Fees to 15bp to 20bp (to reflect historical loss levels). And at those levels, there goes the projected income in all these plans and the huge estimated share values.

    The retained portfolio provided the bulk of GSE income from 1981 to 2008. And that is why Fannie, in particular, was created — buy mortgages from depository institutions and manage the interest rate risk.

    Liked by 1 person

    1. There are many inconsistencies in virtually all of the legislative reform plans. The plans are written to gain the support of specific constituencies, who want different things. When all of them are put together–generally by consultants or lobbyists who have at best only a high-level understanding of the credit guaranty business they’re proposing to rework–the predictable result is either unrealistic or unworkable.

      The latest example of that is yesterday’s proposal from the National Association of Realtors. It has a 5 percent capital requirement (with half of that coming from the required issuance of credit risk transfer securities, which lose money when issued during good times and can’t be issued at all during bad times), utility-like limits on permissible returns, and a “super-regulator” which can control most of the key business decisions the companies make. Who would invest capital in a company like that? And as you point out, if capital requirements are set so that a guarantor has to charge 70 basis points to insure a pool of mortgages whose expected loss rate is 4 basis points, the guarantor will get very little low-risk business, mostly high-risk business, and a relatively modest amount of business overall, to the detriment of its going-concern value.

      Fortunately, the investment bankers who will be involved in any recapitalization of Fannie and Freddie understand all this. In the fifteen years I was CFO at Fannie, I participated in hundreds of meetings with investors and security analysts who were evaluating the company as a potential investment. They asked very informed, penetrating questions about how we were going to make the money we told them we could make, and how we would manage our interest rate and credit risks. They had good followup questions, and good followups to their followups. It makes me smile to imagine the authors of some of these goofy legislative reform proposals getting grilled by people like the ones I’ve faced.

      But those who ultimately propose a recap and release plan for Fannie and Freddie will have to face these people. When they sell the new equity they’ll have to do a “road show,” and they’ll have to have a very, very good story for why the new reformed companies are worth the share price the bankers are trying to sell them for. Vague promises, platitudes or we’ll-figure-it-out-as-we-go-along’s won’t cut it. Again, Treasury and the current investors in the companies (and litigants in the lawsuits) know this, which is why I’m very interested to see what sort of a proposal they ultimately will come up with.

      Liked by 2 people

      1. Tim

        What strikes me about all of these MBA/corker-warner/Crapo/Davidson/Realtors “plans” that have been proposed, all except the moelis blueprint, is how deficient they are from any real market sense and appreciation of what is necessary to implement these plans from a financial point of view, as if all housing finance reform is simply “policy analysis” that can be done in the abstract. Actually, no, it is about raising $150B of equity capital. Or finding a suitable alternative (which there isn’t–“TINA”).

        The reason to have hope that an administrative plan will be feasible and implemented is because there are real bankers involved in the process (Mnuchin, Phillips and now Otting who have participated in these road shows, pitch book preparations and investor one-on-ones that you refer to), and institutional investors have paid for the excellent work done by moelis (which as you suggest will be mirrored by the investment bank(s) that fhfa/treasury will hire). I see Calabria as being more regulator than banker. Hopefully, his role will be as interested observer until all of the capital raising is done. (By the way, a serious executive search needs to be done for both GSEs at the CEO level).

        When Crapo released his most recent “plan” with all of the XX blanks to be filled in, I couldn’t help but to cringe at how embarrassing this “plan” was. He would have been fired from any bank/law firm that released something like that for eyes outside the bank/law firm. and this from the chairman of the senate banking committee. (my mind reels).

        again, many thanks for your contributions.


        Liked by 3 people

      2. Tim,

        Given that investment bankers understand what a sound and sustainable recapitalization would look like and that they would never pay the share price that bankers would require but not be able to get due to inflated capital requirements (if not also regulated returns), then how do you suppose the saga might play out if the lobby (and their elected puppets), who would wittingly or unwittingly saddle the GSEs actually gets its way?

        In other words, what if the political landscape doesn’t allow for cooler heads (Mnuchin and Philips) to prevail? Can you envision an unworkable or unrealistic attempt to recapitalize the GSEs actually being pitched to analysts and investors and then these dead-on-arrival plans being sent back to the drawing board for major overhaul? What an embarrassment for Congress! One would hope that there’d be no guesswork and that the buy-side / sell-side would be modeled and teed up for success prior to pitching a plan in the market place. But, if not, then what? I’m hoping Congress yields to the Mnuchin A-team because a plan that cannot be sold to investors could take things in unimaginable directions. You don’t seem to be concerned is how I read you.


        1. The reason I’m not concerned about a flawed recapitalization plan being announced (and failing) has to do with the two “recent developments” I mentioned at the end of this post: the mid-term elections and the Collins oral argument. I think it IS possible that a flawed reform plan could come out of Congress (indeed, that’s the most likely outcome if anything ever were to be legislated, because Congress will do what the banks want, and the banks want a weak and hobbled secondary market that poses no threat to their dominance of the primary market). But with post-midterm control of the House shifting to the Democrats, there is no realistic chance of a reform bill passing Congress in the next two years. If we do get a plan proposed, it will happen administratively and be done by Treasury, which is tied in well enough with savvy investment professionals that it won’t propose something that will fail.

          No, the danger now is that Congress—again doing the banks’ bidding—keeps insisting that the administration include in its “recap and release” plan features or attributes that burden Fannie and Freddie with restrictions, handicaps or mandates that make them unattractive as investments for private shareholders. (This is what we’re seeing now with the flurry of special interest-authored reform plans being released in the last few weeks.) In that event, Treasury likely would be reluctant to move forward in the face of Congressional opposition, and we would stay mired in the status quo, with Treasury continuing to sweep Fannie and Freddie’s quarterly net income while it attempts to bridge the unbridgeable gap between what Congress says it wants and financial market reality.

          Except…this is where the Collins case comes in. As I said in this post, I now think the Supreme Court will invalidate the net worth sweep. The facts of what Treasury and FHFA did to seize Fannie and Freddie’ profits are undeniable, and I do not believe that five members of the Supreme Court will be able to bring themselves to do the sort of tortured reading of the plain language in HERA that justices Millett and Ginsburg did in the Perry Capital appeal, and that other judges in lower courts and appellate courts have rotely upheld.

          I have felt for some time that it would take a positive development in one or more of the court cases to get Treasury to move on administrative reform. That’s still the way I’d bet. Whatever this development turns out to be—whether it’s a ruling in plaintiffs’ favor by the Fifth Circuit judges en banc, a favorable ruling in the Supreme Court, or something else—at that point Treasury will be able to say to Congress (and others), “Look, what you’re asking us to do isn’t possible. We’re going to do it this way.” And we’ll be off.

          Liked by 2 people

          1. Tim

            the fear that some in congress may try to burden an administrative plan is real, but assuming that “fixing” GSEs is indeed a Mnuchin priority and the administration proceeds with a well-thought out plan (no blank spaces with XXs like Crapo) and with the cohesive support of many in the administration (I have read the rumor that even chief of staff mulvaney is part of the team), I would see the process moving forward.

            I say this for a few reasons: congress certainly is so divided that congressional reaction to an administration plan would necessarily also be divided…negative reaction would by no means be unanimous, and it seems to me that without corker and hensarling leading the charge, it may be rather weak. second, congress always moves on to the issue du jour (they’ve done it for 10 years after sticking a toe in the GSE waters) and after the initial and I think rather weak response, I expect to see weak follow through. Mnuchin has already intimated that while he would like bi-partisan support, I have not heard him to say that he requires it. so I expect that the administration expects some congressional pushback and will not be quick to recoil. and lastly, I expect any congressional requests that gain traction to be essentially “sidecar” provisions, which can be bolted onto the administrative plan should congress actually pass them (ie some kind enhanced competition and govt mbs guarantee). while these would affect the investor reaction to the plan, they should be more a pricing issue and not amount to be a death-knell.

            lets not forget that over past 10 years there has never been an administrative plan and congress still couldn’t get anything out of committee (during a time when both chambers were under single party control). why should we expect any more coherent congressional action under current circumstances?


            Liked by 3 people

          2. Tim

            just one more thought if I may.

            in your comment above, you refer to scotus invalidating the NWS, which of course assumes that the govt would seek cert of an adverse collins en banc decision…and well they might initially.

            but one wonders when the switch will be flipped…when this administration will go from defending the NWS in court, an inherited task, to moving towards a recapitalization and release of the GSEs. one would think that once the admin presents a refinance and eventual release plan (we are told soon), and that plan views the senior preferred outstanding in its full preference amount as an obstacle to a $150B refinancing (as I believe it must), then one wonders how interested either the Ps or the govt will be in having scotus decide the case (as opposed to just getting the refinancing done).

            as a contra to this, all investors would benefit from a scotus decision invalidating the NWS (and pricing of new securities would benefit as well), and I suppose existing shareholders’ leverage might increase vis-a-vis the govt’s warrants in the new capital structure, but at some point this saga transitions from litigation to capital raising, and my thought is that point may be at the release of the admin plan.


            Liked by 1 person

  8. Everyone who reads and follows this Blog needs to Tweet and Retweet this as often as possible. Everyone needs to see this. Most people do not know, and do not care about this situation, even though it greatly affects their chances of upward mobility in their personal finances. The ability to purchase a home of their own. Do not allow the wishes of the TBTF banks and their paid shills to dominate this dialogue. We small shareholders need to find a way to make our voices heard. We just can not get it done posting on message boards and battling with trolls. Please everyone, get this out there and see if we can make some waves. Squeaky wheels get grease. Thanks to all for reading my rant. Let’s be heard. And most importantly, Thank You Tim Howard for your knowledge and incredible efforts. You are an American hero.


    1. There are a lot of odd things about the NAR’s proposal, not the least of which is their decision to outsource it to a professor from the Wharton school and an individual who works for a securitization consulting firm (and who predictably advocates for a major role in the capital structure of credit risk transfer securities, right after I said in this post that no one was doing that anymore).

      To me, this is just the NAR saying to its members and fellow trade groups, “Hey, we’ve got a plan for mortgage reform, too!” But because it involves changing Fannie and Freddie into “Systemically Important Mortgage Market Utilities” (or, SIMMU’s, the NAR’s signature “new idea”) and giving their securities explicit government guarantees, it will require legislation, which puts it in the same pile as the other legislative ideas that aren’t going anywhere in the next two years.

      I could make more comments about the NAR plan, but I really don’t see the point of it. I’d only add that I think we’ll see a number of other reform proposals from other sources in the coming weeks and months, as opponents of administrative reform seek to create an impression that there is “serious work” going on in this area that could lead to a breakthrough at any moment, so the administration need not be in a hurry to do anything on its own, without Congress.

      Liked by 4 people

  9. Dear Tim,

    Words are inadequate to express my deep appreciation for your steadfast allegiance to the truth, and for the impressive body of work you created – a true reference library on the topic. Thank you.

    Best regards,

    Liked by 3 people

  10. Thanks Tim. I’m in awe how you make the complicated issues of mortgage reform seem so simple and straightforward. Everyone in the House and Senate Banking Committees needs to read “A Three-Year Retrospective” to gain a better understanding on housing market reform.

    Liked by 1 person

  11. Tim

    this post serves as a concise explanation of how the Administration (and congress should it desire to do so) should properly proceed to release the GSEs from conservatorship, permitting the reader to drill down through the supplied links to past posts in order to understand all of the relevant issues, and to be able to distinguish fact from bank-generated fiction. it should be required reading for all members of the Administration working on the problem, as well as staff (and members) of the senate banking committee and house financial services committee.

    you have done a fantastic job.


    Liked by 6 people

  12. Thank you very much for doing this over the last 3yrs Tim. There are so many of us that really appreciate you giving us the incredibly deep insight you have gathered over the years. I know you have said in the past that you think it comes from a position of power if someone ask you for your input, but being where we are on the timeline, It might really be beneficial not only for FnF but the avg American, If you were to try to throw your hat in the ring, and offer your knowledge to the Admin. IMHO this administration has put together an incredibly knowledgable team that is VERY capable of reform, BUT the one ingredient they are missing is the perspective of someone who knows Fannie/Freddie. A different perspective could really help this admin in reform, not be bouncing around their echo chamber of lobbyiest/Think Tanks, But an actual person who KNOWs the companies and their effects.. Anyways just a thought, Thanks again Tim

    Liked by 3 people

  13. “My first live post was Thoughts on Delaware Amicus Curiae Brief (February 2, 2016), whose most valuable part I think was the link to the amicus itself. Reading about all of Treasury’s actions from before the financial crisis to the net worth sweep, it’s impossible to escape the conclusion that its takeover of Fannie and Freddie was a preplanned nationalization”

    How the courts could not see this leaves a sincerely bad taste in my mouth.

    STILL unbelievable.

    Liked by 3 people

  14. Thanks for a great/ well written retrospective. A great summary of the facts that will enable new readers/ followers of the blog as well as old timers to understand in layman’s term the bank-centric agenda to replace FNF

    Liked by 2 people

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