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).

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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.

147 thoughts on “A Three-Year Retrospective

    1. I’d forgotten about this interview, done shortly after the election (via Skype, with me sitting at the dining table of our winter place on the Caribbean coast of Mexico). I watched it again, and mercifully there are no predictions that turned out to be woefully wrong; it’s mainly information about Fannie, Freddie and the financial crisis that I thought Julia’s viewers probably didn’t know and would find useful. And I haven’t changed my view that having the reform process led by a former investment banker with a practical knowledge of the U.S. mortgage finance system–and contacts with both litigating and non-litigating shareholders of the companies who can tell and have told him how they work and what their true roles in the financial crisis were–greatly increases the chances of a successful outcome, compared with putting Fannie and Freddie’s fates in the hands of Congress.

      Liked by 4 people

  1. Tim, Adolfo Marzol is now the Principal Deputy Director of FHFA. Ostensibly he was picked by Calabria, though I cannot find this particular position title in HERA. I also cannot find this position title on FHFA’s org chart. The title makes it seem like Marzol will be the second-in-command, or close to it. Is this correct?

    https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Adolfo-Marzol-as-Principal-Deputy-Director.aspx
    https://www.fhfa.gov/AboutUs/Pages/Leadership-Organization.aspx

    Also, do you think choosing Marzol gives any insight into the direction Calabria wants to go, and if it has any other significance? I know that in the past you had said that you believe Marzol is very knowledgeable and would be a good choice for FHFA Director.

    Liked by 1 person

    1. I’m glad to see that Adolfo has been offered, and has accepted, this position at FHFA. I don’t know that it makes him “second in command,” but he almost certainly will have substantial influence at the agency. And if Adolfo’s appointment “provides any insight into the direction Calabria wants to go” it’s not apparent to me what that would be. I just think–having worked with him at a senior level at Fannie Mae for six years, and having him as a direct report for another two years–that Adolfo’s knowledge, experience, pragmatism and perspective will be of great value to Director Calabria, whose exposure to Fannie and Freddie to date has been removed and largely academic. Having Adolfo in the top ranks at FHFA will in my view lessen the chance of inadvertent policy or implementation error as the agency and Treasury work together on the plan requested last month by the president to remove the companies from conservatorship.

      Liked by 4 people

    1. Thanks for posting this; I think readers will find it interesting and informative.

      I won’t repeat my views on the POTUS memo (readers can find both mine and ROLG’s below), and I agree that a victory in Collins is the best and cleanest way to remove the net worth sweep as an impediment to Fannie and Freddie recapitalization. As to HOW to do the recap, I decided some time ago to leave that to the investment bankers, who will have a much better sense than I do for what combination of tools in their inventory will be best suited to address the unique challenges (economic, political and investor reassurance) that a Fannie-Freddie recap presents.

      Liked by 1 person

      1. This is not a “development;” this is a TV journalist speculating about statements he claims were made by unnamed third parties. We should expect to see a lot of this sort of non-news in the coming weeks and months.

        Liked by 1 person

  2. Tim & ROLG – Long time follower, appreciate all your insight for the last 5+ years. Perhaps I missed your comments on it, but while we all patiently wait for the 5th circuit ruling… Do either of you think there is any merit to FHFA’s argument that the sweep was implemented by an “acting director” who is removable by the President and therefore the sweep should not be vacated?

    We all have high hopes for a positive outcome in the 5th circuit and I have zero law experience, but I see the logic in this argument.

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    1. I thought plaintiffs’ counsel addressed the “acting director” argument well in their December en banc brief. Here is what they said: “For the reasons explained in Plaintiffs’ earlier briefs and adopted by the panel, acting Director DeMarco was removable only for cause. Reply Br. 4-5; Collins, 896 F.3d at 656. But even if the en banc Court disagrees, that would not provide a basis for avoiding the merits of the constitutional question this case presents. The Net Worth Sweep has been sustained, implemented, and defended by FHFA under the leadership of Director Watt—a Senate-confirmed FHFA Director who indisputably enjoys for-cause removal protection under 12 U.S.C. §4512….Moreover, whatever the President’s authority to fire Mr. DeMarco, he could have only been replaced by one of Mr. DeMarco’s own deputies—individuals who agreed with Mr. DeMarco and not the President about key housing finance issues.”

      So, no, I’m not too concerned about losing the Collins appeal on this argument. Besides, I think the claim that FHFA violated HERA in its implementation of the net worth sweep is more likely to be the basis for an opinion from a majority of the Fifth Circuit judges favoring plaintiffs in this case.

      Liked by 2 people

      1. @AK
        I would only emphasize from Tim’s response the phrase “and adopted by the panel”. this argument was rejected by the merits panel and while it was reiterated by FHFA in rehearing, I dont recall that much was made of it by the court en banc in the rehearing oral argument. as collins counsel pointed out in briefs, it would have come as a shock to POTUS Obama to learn that he could have fired DeMarco.
        rolg

        Liked by 2 people

  3. Tim

    I have been thinking about the potus memo, and I want to focus on process over substance for a moment. I would contrast the process laid out in this memo with the process employed by potus in connection with the immigration ban that potus adopted soon after his inauguration. that seemed to be slapped together by miller and Bannon with no other administration input, and bad process led to an unsuccessful result, apart from what anyone may think about its substantive merits.

    by contrast, this potus memo process is holistic and comprehensive, including provision for a HUD plan with a GSE plan (both of which mnuchin has always said is necessary to address housing reform), and asking the plans to parse between what objectives the administration can accomplish administratively and which objectives require legislation (so as to identify immediate action points). It solicited wide input by being addressed to many cabinet members (though I am not sure that the secretary of agriculture will have much input). And it instantiated a point person, kudlow as head of economic policy, to collect the HUD and Treasury plans. it makes sense to have someone to receive both plans and to make sure they work together, cover all of the issues necessary, and address all of the objectives set forth in the memo. Clearly it would be highly disadvantageous if kudlow has a veto such that he would could read Treasury’s plan, dislike it, and send it back to Treasury for revision. If this is Kudlow’s role, this would be upsetting, but notwithstanding the vagueness of the memo, it doesn’t seem to me that kudlow will play this substantive role. but someone needs to play the point person role, and I suppose chief of staff had enough on his plate already.

    but from 30,000 feet, one can compare this administration memo, and the HUD and Treasury plans that will be produced, to Sen. Crapo’s two-page “plan” (with XXs to be filled) (and add to this senate work product that the HFSC has nothing on the table), and conclude that one branch of government is taking housing reform seriously and the other branch of government has nothing bipartisan to offer (and given the political division, nothing bipartisan seems likely). This process simply makes the administrative plan more likely to be implemented since it is the result of a serious process that congress is in no position to dispute, from a process point of view. and that this process reserves for congress an eventual role to pass reform suggestions further eliminates the likelihood that congress can have serious objection. there has been no usurpation, though you may still hear senators claim this (because talk is cheap these days in DC).

    as to the substance, I suppose we must wait for the plans to be produced, but the potus memo is unambiguously calling for the GSEs to be released from conservatorship with capital restored. this seems to me to be unalloyed good news. There are “ghosts” in the memo; at one point, there is reference to the GSEs “or successor entities”, which indicates to me that this memo’s first draft was likely an earlier OMB report, but the structure and substance of the balance of the memo seems to indicate that it is indeed the GSEs that are to be released and recapitalized, not some aftermath of a risky liquidation/reconstitution (you would think if this was a possibility, the memo would have more pointedly addressed this possibility). whether competitive guarantors is another such “ghost” or not is immaterial at this point since that would be a congressional to-do item, and the further the administration proceeds with administrative reform, the less likely congress will adopt competition (something about trains leaving the station).

    there is the issue as to how can the GSEs raise $150B of capital under uncertainty whether the GSEs will have competition or not. this seems to me to be an unforced error, such that if one seeks to raise this kind of money this question should be eliminated first. But even given the prospect of competition (if congress can achieve that bipartisan result), remember that the GSEs represent highly profitable companies with huge competitive moats. I can think of no other industry where a new entrant would face such daunting odds, starting up a capital intensive business that requires massive diversification in order to prosper, where the two incumbent competitors are two of the largest financial institutions in the world. competition is a great idea in theory, and will be audacious to implement in practice.

    rolg

    Liked by 2 people

  4. Tim: You’re spot on that Kudlow wrote the Memorandum. While I recognize that it will be difficult to pass legislation in Congress on housing reform, I share your concern regarding administrative officials who have been hostile to the GSE framework, past and present, having a say in administrative reform. Perhaps Mnuchin can be the pragmatist, but that remains to be seen. If the report that states that Otting mentioned the capital rule being put forth in late July or August is correct, then the administration doesn’t seem too concerned with a potential 5th Circuit ruling prior to such time. I suspect, as you have suspected, that a favorable ruling there will help give cover to administrative reform that is more favorable than it otherwise would be. I also think it’s important to have U.S. jurisprudence establish a precedent that a conservator cannot unilaterally take action inconsistent with rehabilitating its ward.

    Liked by 4 people

    1. In response to both comments above, I think the question is, “What practical impact is Wednesday’s White House memo likely to have on the administrative reform process?” For me, the best case is little to none, if Mnuchin does not let it affect what he already was intending to do. But it could slow the process down–whether by tying it to broader, more comprehensive reforms, or requiring vetting by and approval from a wider set of interested parties–or, in the worst case, add so many conditions or sub-requirements that administrative reform becomes undoable. I’m not predicting which of these is more likely; I’m simply saying that the skewed distribution of possible outcomes–where the best case is that you’re no worse off from where you thought you were before the memo came out–is why I view this as a negative development. Remember, on January 17 acting FHFA director Otting thought Treasury had something sufficiently concrete that according to Politico he told his staff, “In the next two to four weeks you’re going to be able to see some communication that comes out of the White House and Treasury that really sets a direction for what the future of housing will be in the U.S. and what the FHFA’s part of that will be.” I read that as indicating that Mnuchin had a specific plan that he was close to announcing. I believe Sherrod Brown and Maxine Waters read Otting’s remarks the same way, which is why they sent him their joint letter. The supporters of the large banks also seemed to view administrative reform as imminent, and they sprung into action as well. My personal view is that the administrative reform process has moved backwards since then. Whatever one might think of it, the White House memo isn’t a plan; it’s a “plan for a plan.”

      Liked by 1 person

      1. Very surprised you are minimizing a directive to exit conservatorships from WH which is totally new. But then pessimists have been correct so far.

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        1. You’re correct that this memo is the first official directive from the White House to end Fannie and Freddie’s conservatorships. While this by itself isn’t that significant (the alternative would have been a directive to keep the conservatorships in place), what IS important is the acknowledgement from the White House that Fannie and Freddie will continue to exist in some form post-conservatorship, rather than being “wound down and replaced.” Yet I don’t think too many participants in the reform debate were surprised by this; even the companies’ opponents and critics have given up on the notion that they can be replaced by a completely new secondary market mechanism. So the focus now isn’t so much on agreeing to end their conservatorships as on HOW to end them, and what changes to the companies’ regulatory regime or operations will be required in order to allow them to be recapitalized and returned to shareholder ownership. Here, as I’ve noted in other comments, I think the White House memo raised more questions than it answered.

          And I don’t view myself as a pessimist; I just try to “call ‘em as I see ‘em.”

          Liked by 3 people

      2. Tim, eventually I get to a question here, but I wanted to first say I always appreciate your (and ruleoflawguy’s) responses as they always seem so well reasoned and thoughtful.

        My initial thoughts and concern of the letter were quite similar to yours, however, after sleeping on it I’ve felt the letter really was intentionally written in a way that still offers all parties an opportunity to feel like they can “win” – however, those with a more heavily leaning anti-GSE bent will need to get most of their “wins” through legislative actions, which as we all know does not seem likely now given the dysfunction in Congress. I think your comment that it’s a “plan for plan” is spot on – we will all await the details.

        Additionally, I spent the last several days re-reading your book The Mortgage Wars which I’ve thoroughly enjoyed and would highly suggest to anyone else on this site. But each time I read it I come away with a heightened appreciation (and concern) of the vast and politically charged differences of opinions regarding the role and function of the GSEs on both sides of the aisle. It makes me wonder whether even upon finalizing an actual “plan” whether the current administration will actually get it done given the ultimate execution risks. With that said, what is the current administration’s real gain should they ultimately propose a recap and release scenario IF for some reason (and I’m not taking a personal position here) they determine they will not or should not exercise the warrants? I struggle with fully understanding if this current administration ultimately determines it is too risky (for various reasons) and there is no opportunity for monetary gains via the warrants, why they would take on the risks of such a reform administratively? I’m trying to understand politically what incents the current administration to act. Thanks for your (and rolg’s) thoughts.

        Jack

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        1. There’s no mystery about the administration’s incentive to end Fannie and Freddie’s conservatorships. Treasury Secretary Mnuchin told us what it was even before he was confirmed, saying on Fox Business back on November 30, 2016, “It makes no sense that [Fannie Mae and Freddie Mac] are owned by the government and have been controlled by the government for as long as they have,” adding, “we gotta get them out of government control….and in our administration it’s right up there in the list of the top ten things we’re going to get done, and we’ll get it done reasonably fast.” The “top ten” designation and “reasonably fast” pledge make this unfinished business, and since then another reason has been added, at least in my view: the increasing likelihood that the government will lose one or more of the lawsuits challenging the net worth sweep, eliminating the administration’s financial rationale for keeping hold of the companies.

          Liked by 5 people

  5. For those that want to read the whole memo that is to be signed today, here is a link:

    https://www.whitehouse.gov/presidential-actions/memorandum-federal-housing-finance-reform/

    Tim suspected correctly that the big banks got their delay on administrative reform.

    What I find interesting are the spots such as Section 1. (xi)(C)(c) …

    “For each reform included in the Treasury Housing Reform Plan, the Secretary of the Treasury must specify whether the proposed reform is a “legislative” reform that would require congressional action or an “administrative” reform that could be implemented without congressional action. For each “administrative” reform, the Treasury Housing Reform Plan shall include a timeline for implementation.”

    This to me reads like they kept the door open for a Moelis like administrative plan as well as the MBA type legislative plan and intend to provide a framework that includes both legislative and administrative reforms. However, the administrative reforms will have a definitive timeline to implement them. If congress can’t move on legislation in time, then the big banks had their opportunity and failed. I don’t think congress is capable of action. So I will be most interested in what is proposed administratively. In particular, any “if” “then” triggers for administrative actions that happen if legislation fails to happen before said deadlines.

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    1. I’m going to be traveling for most of today, so I may not see the memo until several hours after it is released. Without seeing it, though, my suspicion is that the bank lobby has succeeded in convincing someone senior within the administration (not at Treasury) to request a study of Fannie and Freddie reform with the intent of putting at least a temporary roadblock in the way of any recap and release initiative Treasury and FHFA may have been working on. If that interpretation is correct, it would mean Fannie and Freddie very likely will be required to make their March sweep payments.

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      1. Tim

        you may be right that this is bank-induced stall tactics at work. also, it just may be that someone senior looked at the “admin plan” referred to by otting as being worked on, and determined this was not yet ready for prime time release. I would think anything the admin releases should be detailed, consider alternatives and explain costs, benefits and risks of various paths and reasons for the path adopted or recommended. so my take on this is that at a minimum, this at least confirms the seriousness of the admin in finally taking housing reform on, using treasury’s and fhfa’s ample statutory authority, even though you would have thought this work product would have been completed by now.

        rolg

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          1. This is the link to the ACTUAL memo and not just the bullet points on the White House website.

            I think the priorities imply that a plan is already written. In addition, it reads to me like Fannie & Freddie aren’t going anywhere if Treasury’s priority is getting paid for an implicit or explicit guarantee.
            https://t.co/MYJtcA7EO2

            Liked by 2 people

          2. I’ve finally had a chance to read this memo from the White House on Federal Housing Finance Reform. Two things about it jumped out at me.

            First, Larry Kudlow, the head of the National Economic Council and the Assistant to the President for Economic Policy, has managed to insert himself into a process that heretofore had been the purview of the Secretary of the Treasury, Steven Mnuchin. This memo almost certainly was drafted by Kudlow, as it includes the directive that “The Treasury Housing Reform Plan shall be submitted to the President for approval, through the Assistant to the President for Economic Policy, as soon as practicable.” I don’t know how Mnuchin will react to that. It could produce some fierce infighting.

            Second, Kudlow makes clear that he is going to advocate for the banks’ multi-guarantor approach through (a) having as the second goal for housing reform (after “Ending the conservatorships of the GSEs upon the completion of specified reforms”) “Facilitating competition in the housing finance market,” and (b) later on listing as a sub-objective for housing reform “authorizing the Federal Housing Finance Agency (FHFA) to approve guarantors of conventional loans in the secondary market.” The multi-guarantor model is the opposite of the utility model advocated by the community banks, affordable housing groups and others. Kudlow in this memo effectively is telling Mnuchin, “forget the utility model; you’re going to do it this way.” Again, I wonder how Mnuchin will react to that.

            In sum, I view this memo from the White House as a major development in the mortgage reform process, and not a positive one. And I do think the big banks are behind it.

            Like

          3. Tim

            I largely disagree with you.

            I think the things that can be accomplished administratively are favorable to GSEs and, with the imprimatur of potus himself, it is a large positive that administrative reform will begin…a big development given that to date all we have to go on was an off the cuff otting talk. as for the competition aspects, this will be placed in the congress to do list, which is good for two reasons: first, it respects congressional participation which as an intramural matter is a necessity, and second it relegates that congressional to do to an after-administrative reform timetable which, given congressional partisanship, is likely never to get accomplished. and this is not the kind of competition that Crapo envisions (no GNMA control etc). so potus (kudlow) is saying to congress, do your work, here is the remit (and it is circumscribed), administrative reform is not waiting for you anon one should hold their breath that you will ever agree on anything. so net net, a big positive development. now the hard work of raising capital can eventually begin

            rolg

            Liked by 1 person

          4. We do have a disagreement here. I see this memo as Larry Kudlow (who, while he IS firmly on the record as a critic of the net worth sweep, is not a friend or supporter of Fannie and Freddie, and never has been) attempting to take control of the agenda of administrative reform, and defining that agenda in a way that will make it much less likely to succeed. This is what the bank lobby wants: to have it look like something is being done administratively, but then having it not quite work out so that they can go back to making their case for bank-centric legislation.

            For me, there’s a “tell” on this in the very first paragraph of the memo, which states that Fannie and Freddie “suffered significant losses due to their structural flaws and lack of sufficient regulatory oversight.” That’s the bank argument: the companies had a “flawed business model” and a weak regulator. No, they had (and still have) the best business model—as evidenced by the fact that credit losses on the loans they owned and guaranteed were one-third the losses of loans originated and held by banks, and one-tenth the losses of loans financed through private-label securities (PLS)—and the insufficient regulatory oversight was on originators of high-risk, unrepayable or fraudulent residential mortgages and the PLS securitization process. The White House memo follows a script I called out in the current post: deliberately misdiagnosing the problem you say you have to solve, in order to solve it in a way that meets the objectives of a favored constituency.

            This memo makes “facilitating competition” among credit guarantors a core objective, rather than an option to be assessed. Given the reality that Fannie and Freddie were forced into conservatorship, first stripped of all their capital (through artificial or accelerated non-cash expenses booked by FHFA) and then stripped of all their net income in perpetuity (through the net worth sweep), reforming, recapitalizing and releasing them successfully always was going to be a balancing act. How do you get investors to once again trust the political and regulatory systems to treat them fairly? The next version of Fannie and Freddie will require much more capital (a to-be-determined percentage of assets set by FHFA) which together with the Treasury warrants will significantly dilute shareholders, and it also will subject the companies to more stringent regulation, which will reduce their business opportunities. What will shareholders get in return? My answer has been utility-like regulation: the promise of a fair return on their capital if they follow the rules set by the government for providing this essential service, in exchange for protection against loss of market share.

            The multiple-guarantor model, however, doesn’t give new shareholders much of anything: they get higher required capital, more intrusive regulation, and the threat of new entrants if and when they do their business successfully. How would two businesses structured in this manner be able to raise $100-150 billion in capital?

            In his brief comment on the White House memo Mnuchin said, “We support a system that provides for access to lending for hardworking Americans, while also protecting taxpayers from risk.” Note the two objectives he referenced—broad and affordable access, and additional capital—and also the one he did not, “increased competition.” I believe Mnuchin knows he’s been given an impossible circle to square, and I wonder how he will react to that.

            Liked by 5 people

        1. Tim

          One thing I found curious in the potus memo is provision for a paid-for explicit or implicit federal guaranty. I have never seen reference to a paid-for implicit guaranty before, and certainly wouldn’t know how to price it. but this reference seems to imply an appreciation for the difficulty of congressional passage of an explicit guaranty, which also may characterize the administration’s expectation for congressional passage of competing guarantors. also, it would negate the constant worn-out refrain of GSE critics (private gains, public losses), since any implicit public exposure will no longer be free.

          rolg

          Liked by 1 person

          1. Far be it for me to disagree with the biggest brain in the GSE wars, but I’ve been writing government policy for 30 years and I see positive signs here. First, the part about competition falls under Section A, which are merely GOALS. Further, the competition goal for the Plan starts tellingly with “FACILITATING” competition in the market, not “ENSURING” it will exist. Hell, I’m facilitating reform by typing this message, knowing full well it won’t accomplish squat. Lastly, the real meat comes in section B, which says the Plan SHALL include reform proposals to achieve outcomes. The competition requirement comes well after the requirement to maintaining equal access for lenders of all sizes, charter types, and geographic locations.

            There lots of room here to do the right thing. There is no point, when asking for a plan, to do so in a way that pokes a stick in the eye of the very people that can make your life hell. Plenty of time for that fight downstream.

            Like

  6. Tim

    I see prof. Adam Levitan is slated to testify at the senate banking committee hearing on 3/27. I expect that he will address the government guarantee element of sen. Crapo’s two page “plan”. the last time he testified in front of this committee (2011), he also addressed the need for an explicit federal guarantee: https://www.creditslips.org/files/levitin-senate-banking-testimony-9_13_11-1.pdf (alluding to the need to consider what structure an explicit federal guarantee should take).

    I sense that sen crapo is seeking to develop his two-pager into an actual proposed bill, and that this will take awhile. I have read a report that he thinks that housing reform legislation may be ready in 2020. certainly if this is accurate reporting, that timeline is not something that comports with what Mnuchin has stated was his time line for action.

    the elephant in the room during these hearings is what the administration will do in the meanwhile, and while I will be on the alert to see if any senator discusses this with any witnesses, I note that there are no witnesses slated from treasury/fhfa to speak at these hearings. strange, no?

    rolg

    Liked by 2 people

    1. I don’t find the absence of Treasury or FHFA witnesses at this hearing strange at all. Senior officials at Treasury, and probably FHFA, almost certainly are talking with Crapo and his staff behind the scenes. There is nothing to be gained by them in agreeing to testify at a hearing where members could ask them questions they’re not prepared or don’t yet want to answer. So they tell Crapo they don’t wish to be asked to testify, and they aren’t.

      Liked by 1 person

      1. Tim

        come to think of it, when Otting’s “pep talk” to fhfa staff leaked out, it was D’s brown and waters who sent him a letter, not R crapo. so your thought that the administration and crapo/banking committee staff are keeping each other at least somewhat up to speed makes sense. I guess i find the whole process about as understandable as kabuki theater.

        rolg

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  7. Tim – Just to clarify – you’re saying that the lines given from the UST that they now owe and can never repay were never used as a back door bailout for the banks’ then very cheap MBS holdings as referenced in this article?:
    https://www.reuters.com/article/us-usa-housing-bailout/unlimited-credit-for-gses-seen-as-backdoor-bailout-idUSTRE6044YU20100105

    because the assertions therein are being referenced as recently as yesterday as fact:
    https://www.rollingstone.com/politics/politics-features/2008-financial-bailout-809731/

    It is my understanding based on your prior comments that to your knowledge, that never actually happened but I wanted to make sure I had read you correctly.

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    1. I’ve addressed this issue before but it was a while ago, so let me review it again.

      The idea that Treasury required Fannie and Freddie, post-conservatorship, to purchase tens (or hundreds) of billions of dollars worth of toxic assets from commercial banks has gotten into the water system to the extent that journalists now feel free to simply cite it as fact, as Matt Taibbi does here: “Raising the caps [Treasury’s line of credit] allowed the two mortgage giants…to be used as a ‘backdoor TARP’ to ‘purchase toxic assets at inflated prices.’ In other words, the government took over Fannie and Freddie and used the duo in a way private shareholders would never have allowed, as a landfill in which banks could dump bad assets at high prices.”

      Taibbi cites no evidence for this statement, however, which is just as well, because there isn’t any. To the contrary, there is ample and compelling evidence that Fannie, at least, did NOT purchase toxic assets after it was placed in conservatorship, and I’m sure the same is true for Freddie.

      I was responsible for Fannie’s financial reporting for 15 years, and know what data the company makes available. It publishes monthly information on its mortgage purchases and MBS guarantees, quarterly data on the risk characteristics of its purchases and guarantees of whole loans, and before the conservatorships it began publishing quarterly data on its investments in private-label securities (PLS), broken into subprime and Alt-A (i.e., low- or no-documentation loans). All of these sources confirm that the claim of massive amounts of toxic loan acquisitions is false.

      There is no unexplainable surge in Fannie’s business volumes. The average LTVs and credit scores of the whole loans Fannie purchased or guaranteed in 2009 and 2010 were notably better than the company’s last two pre-conservatorship books, 2006 and 2007—with an average 67.5 percent LTV and an average 761.5 credit score for the later two books versus 74.0 percent and 716 for the earlier two. And the subsequent credit performance of the 2009 and 2010 books has been excellent. Finally, Fannie’s holdings of subprime and Alt-A PLS fell from an unpaid principal balance of $57.8 billion at June 30, 2008 to $40.7 billion at December 31, 2010. Had Fannie truly bought or guaranteed toxic mortgages from banks post-conservatorship there would be evidence of that somewhere, and there simply isn’t. In fact, you see the opposite: the credit quality of Fannie’s whole loan purchases and guarantees gets much better, and its holdings of “toxic” PLS fall by 30 percent. That SHOULD close the books on the “toxic asset purchase” myth, but I’m not holding my breath.

      Liked by 2 people

        1. This article by Henry Blodget from October 2008 was not reporting on purchases that had occurred, it was forward-looking, saying that as a component of TARP (the Troubled Asset Relief Program) Treasury Secretary Paulson was ordering Fannie and Freddie “to buy $40 billion of garbage a month.” That may well have been Paulson’s original intent. But Treasury never could figure out how to make ITS toxic mortgage purchase program work (instead it decided to use the bulk of the $700 billion in TARP money authorized by Congress to inject capital into troubled, and some not-so-troubled, banks), and when that purchase program was dropped so would any similar program intended for Fannie and Freddie have been. In any case, as I discuss above there is no disputing the fact that no waves of toxic assets ever showed up on Fannie or Freddie’s balance sheets.

          Liked by 2 people

      1. “Fannie’s holdings of subprime and Alt-A PLS fell from an unpaid principal balance of $57.8 billion at June 30, 2008 to $40.7 billion at December 31, 2010. Had Fannie truly bought or guaranteed toxic mortgages from banks post-conservatorship there would be evidence of that somewhere, and there simply isn’t.”

        What if all toxic assets acquired by Fannie Mae plus some of Fannie’s own subprime and Alt-A PLS were processed through mortgage modification or refinancing and foreclosure?

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        1. Modifications are only done on loans the company owns or guarantees (and that already are on its books); a refinanced loan shows up as a purchase or a guaranty. There are no backdoor, or secret, ways for Fannie or Freddie to acquire assets and thus disguise what they’re doing.

          Liked by 2 people

      2. If I remember the timeline correctly from your book, the Alt-A and subprime loans that were on Fannie’s books happened after your departure in 2004, when the GSEs effectively lost control of the origination markets as a result of rating agencies getting overconfident in their modeling or being shopped by PLMBS issuers (whatever) and the GSEs had to chase the origination market to maintain any market share.

        Any any ‘toxic’ assets were on the books because of the regime that was trying to maintain or regain control of the broader market lending standards but because the size of the problem got so large with PLMBS exotic products – they were unable to tow the line.

        Which leads me to believe this is why you were careful in wording your response about them not buying these assets AFTER being put into conservatorship. From 2005-2007 they did buy those type of assets under the purview of the managers that were then in place.

        Liked by 1 person

        1. It’s not accurate that Fannie did not buy subprime or Alt A PLS while I was there; we did. We bought them for two reasons—because there were times when they were profitable spread assets to put in our portfolio, and particularly in 2003 and 2004 we felt we needed to buy some of these securities (at “okay” spreads) in order to meet the very aggressive housing goals we were given for those years by HUD. We didn’t publish our holdings of PLS during those years (at the time the focus was on our $8 billion of manufactured housing securities, and we gave considerable detail on those) so I can’t say how much PLS we had. I do recall that we bought mainly “super senior” AAA-rated tranches, and that in 2004 we began to require that regular AAA tranches have some form of supplemental bond insurance. We felt our risk of credit loss on the PLS tranches we held was minimal, and to the best of my knowledge none of the PLS purchased while I was there suffered any actual credit losses.

          In my answer above I didn’t say that Fannie did not buy any PLS securities after it was put in conservatorship (I don’t know that for a fact). I simply pointed out that its PLS holdings fell by 30 percent between June 2008 and December 2018, which is not consistent with having been directed by Secretary Paulson to buy $20 billion a month in “toxic” whole loans or PLS from banks.

          Liked by 2 people

    2. Newbie here….I’ve been following your writing for the past year and first would like to say, THANK YOU!

      It occurred to me that if the GSE’s are going to be released a financial advisor in some form or another needs to be brought in so even if the NWS is not vacated an encouraging signal for the administration moving forward outside of the en banc might be found here. Correct me if I’m wrong, recently a gentlemen by the name of Adolfo Marzol was recently shifted into a role involving FNMA. Am I completely off base thinking he might fill that void. Again apologies if I’ve wasted anyone’s time, I’ve learned to follow two variables in politicly charged issues, money & people.

      Liked by 1 person

        1. My mistake evidently the “rumor mill” is churning out the following on Inside Mortgage Finance – “In a few weeks, the full Senate likely will vote to confirm Mark Calabria as the next permanent director of the Federal Housing Finance Agency, ushering in a new era at the agency. When that happens, Bob Ryan – who holds the title of special advisor to the director – will bid adieu and be replaced by Adolfo Marzol, who currently serves as senior advisor to Housing and Urban Development Secretary Ben Carson. At least that’s the scuttlebutt in Washington these days. As one veteran industry lobbyist put it: “It’s common knowledge that when Calabria goes to FHFA, Adolfo will more than likely replace Ryan.” Of course, sometimes the rumor mill is wrong… ”
          If this rumor is right am I correct to assume what I asked in the last post?

          Liked by 1 person

          1. As I was writing you…One West compadre Brian Brooks is back on the FNMA board. That’s quite the circle…Mnuchin, Otting, Brooks, and soon Calabria?…If Adolfo grabs a seat as the rumor mill suggests…
            Fannie Mae Names Two Technology and Financial Services Executives to the Board of Directors
            Google Executive Karin J. Kimbrough and Coinbase Global, Inc. Executive Brian P. Brooks Will Complement Experienced and Diversely Skilled Fannie Mae Board

            Liked by 1 person

          2. If Ryan is indeed leaving, Adolfo would be good replacement. But I don’t see this as connected with releasing Fannie and Freddie from conservatorship. Release won’t occur without recapitalization, and it would be Treasury, not FHFA, who would assemble the financial advisors and investment bankers to help with the recap.

            Liked by 1 person

      1. This allegory by Rule of Law Guy is an excellent and accesible discussion of the January 23 rehearing of the Collins case by judges in the Fifth Circuit en banc, and how the decision in this case ties in with and affects the potential recapitalization of Fannie and Freddie. I share ROLGs view that the decision in Collins is likely to go the plaintiffs way, resulting in the invalidation of the net worth sweep. The main question is whether the administration concedes or anticipates such an outcome and announces the revocation of the sweep and a plan to reform, recapitalize and release Fannie and Freddie before the Fifth Circuit rules, or if it waits for the ruling.

        I have for some time thought the latter was more likely. But we may get a clue on this in a couple of weeks. On or before March 31, FHFA will need to tell Treasury whether it has requested Fannie and Freddie to remit the retained earnings from their fourth quarter 2018 comprehensive income ($3.2 billion for Fannie, $1.9 billion for Freddie) under the terms of the net worth sweep, or if it will allow them to keep this capital on their balance sheets (while increasing Treasury’s liquidation preference by the amount of the income not remitted). An announcement by FHFA that Fannie and Freddie will be allowed to keep their fourth quarter 2018 income as capital would, for me, be a signal that Treasury and FHFA do not think the sweep is sustainable–whether for legal or economic reasons (you can’t recapitalize the companies as long as the sweep is in place)–and that they wish to both “freeze” the amount of money Treasury will owe Fannie and Freddie as tax credits when the sweep gets reversed (as of the fourth quarter of 2018 those amounts were $7.1 billion for Fannie and $9.1 for Freddie, and they will grow with each subsequent sweep payment) and get a head start on a potential Fannie and Freddie recap.

        Conversely, a decision by FHFA to have Fannie and Freddie make their March sweep payments would in my view indicate an unwillingness by Treasury (who I believe has the lead in Fannie and Freddie-related issues for the administration) and FHFA to send any sort of signal on administrative reform absent either concurrence from the leaders of both parties in Congress (which is highly unlikely) or a decision in one of the court cases (most probably Collins). And in that event, we’ll be back to our judicial vigil.

        Liked by 4 people

  8. Tim, I’m wondering if you believe can we expect anything new from the hearings that Crapo is holding next week on GSE reform? From my perspective there has been a slow march by many stakeholders toward some kind of reform all can live with. I think that the possibility of administrative action is prompting Congress to act. As we know they don’t usually act until they feel they must and this feels no different. Their dialogue may lead them to something down the road that they can agree on after administrative action has started to move the ball down the court toward recap release in some form. They can signal and influence the administration about what they may find acceptable via these public hearings.

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    1. No, I do not expect to hear, or learn, anything new from the Crapo hearing. I think its witnesses (who to my knowledge have not yet been announced) will be the “usual suspects,” who will say what they usually say. I believe the basic theme of the hearing will be, “administrative reform will be very difficult to get right, holds many dangers, and is inferior to a Congressional solution to the issues identified.” In other words, let’s keep waiting for Godot.

      Liked by 1 person

  9. Tim

    I do not understand the competition issue raised by banks; why a competing mbs insurer cannot be formed by banks absent legislation (and a govt guarantee), assuming this is a business that banks want to pursue.

    I understand the banks’ anti-GSE animus that you have lived through and explained, and that the GSEs cant lobby now to make their case, but anyone with a finance background can see that if the business is attractive to banks, they can pursue it (especially with respect to nonconforming loans with respect to which the GSEs cant compete). What is to prevent them?

    WSJ (https://www.wsj.com/articles/private-investors-encroach-on-fannie-and-freddies-domain-11552132801?mod=searchresults&page=1&pos=1) just ran a column about the (so far relatively minuscule) re-emergence of PLS, including to a limited extent for conforming loans. banks will no doubt point out that these PLS have a hard time competing for mbs buyers without a guarantee.

    so fine, the banking industry can form a mutual PLS mbs insurer. This mutual insurance company could enter into facilities and management agreements with banks whereby the financial analysis and managerial services required to conduct the business (price the mortgage insurance, service the insured PLS mbs etc.) could be provided by one or more banks. as for the capital required by the mutual insurance company, this could be supplied through reinsurance agreements with the banks as well.

    payments by the mutual insurance company to the bank suppliers of these financial, managerial and reinsurance services could be an additional nice profit source for the banks. while the mutual insurance company would have to pay state taxes (unlike GSEs), it wouldn’t be subject to a low income housing finance requirement. on balance, that is probably a trade banks would gladly make.

    rolg

    Liked by 1 person

    1. If I understand your comment correctly, you’re suggesting that the private-label mortgage-backed securities (MBS) market might have a better chance of increasing its market share if it were to switch from its current form of credit enhancement—allocating credit losses to the subordinated tranches of a structured transaction—to a model in which one or more large banks provides a full guaranty to a pool of single-class MBS, as Fannie and Freddie now do.

      It’s an intriguing idea. Private label securities (PLS) using the senior-subordinate means of credit enhancement have to structure their credit guarantees at the pool level, which is a fundamental competitive disadvantage compared with entity-based guarantors. To protect the buyers of its AAA- and AA-rated tranches against loss of principal, the issuer of a PLS must “size” the subordinate tranches for each pool to absorb the credit losses that would occur in an extreme stress environment. An entity-based guarantor (like Fannie or Freddie) does not need to do this; it can price its entire book of credit guarantees to a much lower level of expected losses, relying on excess fees from its better books to subsidize the losses on its poorer-performing ones, and also on its ability to tap the capital markets for more equity if needed. A structured PLS is a “one-decision” guaranty: if the sizing at time of issuance proves to be inadequate, the holders of the senior tranches are the losers; there is no cross-subsidization from investors in higher-quality PLS, and no way to bring more capital into the structure.

      A bank-backed issuer and insurer of PLS could grade and price the credit risk of a pool of MBS the same way Fannie and Freddie do now. Of course, THEY (the bank-backed issuer/insurer) would have to take that credit risk, as opposed to passing it all on to the holders of the security tranches (generally the subordinated ones, but potentially the seniors as well). Nothing is stopping banks from using the entity-based guaranty model today, however, but they obviously haven’t chosen to do so. It may be that the concentrated risk and low margins inherent in this business—and the difficulties of managing a highly specialized credit guaranty company owned by a group of large banks that otherwise are competitors—have prevented this approach from becoming a market reality, at least to date.

      Liked by 1 person

      1. Tim

        thanks for reply.

        all of the municipal securities “monoline” insurers (Assured Guaranty, MBIA, Ambac etc) established a second line of business before the FC, insuring non-municipal securities (mbs, but also cdos and various derivatives), and got their heads handed to them. they didn’t understand the risks sufficiently, but more so they all competed against each other in a race to the bottom within this “fertile” new line of business. I believe only Assured Guaranty came out of this episode with its non-municipal portfolio outside of rehabilitation (though it is not writing any more wraps).

        my point is that policy makers (eg crapo and the departed corker) who believe it makes sense for the government to intervene in the mortgage finance secondary market to create multiple mortgage insurers to compete against GSEs are ignorant of this “race to the bottom” history. however, my point also is that this doesn’t mean that the PLS business opportunity is not present, if structured by banks in a way that makes sense (and I would think a multiple bank-sponsored PLS mutual insurer would be the way to do it).

        This would help the PLS market, serve as a profit source for the banks that supply the facilities, management and reinsurance services, and leave the GSEs to do what they do best (and frankly what they only can do).

        rolg

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        1. I don’t think that MBIA’s non-muni business ended up in rehabilitation either (at least not yet) but it required the NY Department of Financial Services to approve a number of aggressive transactions (including spinning out the muni business and various intercompany financings) plus the concerns about the non-muni business being headed for rehab allowed MBIA to settle some of its existing policy obligations on favorable terms.

          Like

      2. BASEL 3 capital rules for banks providing such protection would far exceed the 50% risk weight banks currently have from holding mortgages on their balance sheets.

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          1. I have deleted several posts in this string because they’d become a back-and-forth that wasn’t giving any verifiable answer as to how a bank-owned credit guaranty company would have to be capitalized. I do not have the answer to that myself, although I’ve always assumed that the credit risk retained by banks as guarantors would have to be capitalized according to the Basel III standards. (That would be consistent with banks’ insistence that Fannie and Freddie be required to hold “bank-like” capital. Even though this does not make sense given the credit risk of residential mortgages compared with the average bank asset, it would allow banks to enter the business on a “level playing field.” albeit one that grossly overcharges homebuyers, to banks’ benefit.) If any reader has an answer to this capital question supported by some regulatory cite or other evidence, it will be welcomed.

            Liked by 1 person

          2. John Carney of Breibart replied, ” As I understand it, the bank owned credit guarantee outfit would be treated as a consolidated subsidiary that is a seller of credit protection.”

            Like

          3. The risk weight for QM mortgages is 50%

            The risk weight for QM mortgages where the first 5% of default risk has been transferred drops to 20%

            If a bank retains any of the first loss default risk (i.e., the 0% to 5% tranches in a securitization) or provides gurantees on this first loss (as it would in a PLS insurer) the risk weight goes as high as 1250%.

            Googling FDIC / SSFA will provide links to spreadsheets that will show this calculation.

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          4. Tim and Don

            Without belaboring, the principal objective of my humble idea was to call upon banks to create their own captive insurer to insure PLS mbs in order to put them on a more equal credit footing with GSE-insured mbs. It seemed to me that a govt guarantee was unnecessary to introduce competition to the GSEs.

            As Tim intimates, the PLS trust securitization objective is to provide credit support for the senior tranches sold off to institutional investors, and this is usually done through overcollateralization of the senior trances by means of a waterfall of cash flow (or a L of C) so that these senior tranches get rated AAA. As I understand the PLS market post FC, institutional investors are gun shy of the securitization credit support mechanism internal to the securitization trust and distrust the AAA rating (depending of course on the quality of the securitized assets and the degree of overcollateralization). My suggested idea was simply to have a bank-created financial guarantor insure the senior and senior-sub tranches that are sold into the institutional market (making them more attractive to the institutional market), not the first loss subordinated tranche(s) as I think Don thought I was proposing. These risky tranche(s) would remain risky and be sold to credit HFs or simply retained by the securitization sponsor, as is currently done.

            rolg

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          5. Having any guarantor (whether bank-owned or not) insure the senior and sub-senior tranches of a structured private-label security issued by a different entity brings in another complication, besides how a bank-owned credit insurer would have to be capitalized. Fannie and Freddie can price to their average credit loss experience because as both issuer and guarantor they can (and do) set a single guaranty fee that determines the profitability of both activities, and they diversify their risk over time (being willing to absorb the cost of a few bad books in exchange for the profits from many more good ones). When you divide the “sizing” activity of a private-label security issuer and the insurance function of a separate credit guarantor, you create competing interests. The issuer will want to have as small a percentage of subordinated tranches as possible on every deal, because that will lead to greater yield spread premiums (the excess of interest paid by borrowers of the mortgages in the PLS structure over the aggregate amount of interest the issuer has to pay to all tranche-holders), while the guarantor will want greater amounts of subordination, because that will reduce their risk on each insured deal. I believe the existence of these competing interests will keep the credit sizing, the insurance cost, or both, too high relative to what a single issuer-guarantor, like Fannie or Freddie, would be willing to accept.

            Liked by 2 people

          6. Tim

            thanks for reply. there would definitely be a vigorous premium/structuring negotiation between the PLS issuer and the insurer, and the result may be higher costs than the market can bear.

            I want to add one thing regarding the PLS market and the whole question of increasing competition to the GSEs. I studied rather intensively the litigation between insurers and banks after the FC (and MBIA v Bank of America (Countrywide) in particular) for some consulting work I did, and the biggest issue arising from the experience of institutional investors was the asymmetry of information as to loan quality between the securitizers (banks) on the one hand, and investors buying uninsured mbs and the insurers wrapping mbs on the other hand. Put perhaps too bluntly, notwithstanding extensive due diligence and data analysis prior to the securitization, loan quality was typically far worse than represented by the banks to institutional investors and insurers. Banks sold the loans to the securitization industry to avoid risk…until they were sued for tens of billions of dollars under their representations and warranties by the insurers and FHFA/GSEs. If the PLS market is too weak, banks only have themselves to blame and they doth protest too much.

            Institutional investors do not want to be left holding the bag again, they want someone else’s skin in the game (and yes a governmental guaranty would do this nicely). If banks want competition for the GSEs, let the banks become the insurer that the institutional investors are looking for. This would be the surest signal of mortgage loan quality to institutional investors.

            rolg

            Liked by 1 person

          7. I was still at Fannie when PLS became the dominant form of securitization. Investors were buying the ratings, finding high-yielding AAA- and AA-rated PLS too attractive to pass up. The rating agencies played along, using a risk-evaluation process designed to make the underlying collateral look less risky than it actually was. (To pick only one example, they used “momentum” models of home prices–in which home price growth might slow but prices never actually fell–to develop their stress scenarios.) Since Fannie was on the hook for the risk as a credit guarantor, we were much more conservative (or realistic) with our modeling, and at least until I left refused to use price to try to regain market share lost to the PLS issuers. Only later on–when issuers realized that there literally were no regulators policing or even watching the business practices in the PLS securitization process–did the outright fraud (principally knowing misrepresentation of the attributes of the loans backing certain PLS) become widespread. One of the many outrages in the mortgage reform debate is that advocates for private-label securitization have successfully pinned the tag of “failed business model” on Fannie and Freddie, in their attempt to resurrect the TRUE failed business model, PLS. But as you say, investors, like Mark Twain’s cat, having sat once on that hot stove will be very reluctant to sit on it again.

            And I’m not sure that large banks really want to get into the credit guaranty business themselves. It’s the sort of concentrated-risk, low-margin-per-transaction business they typically avoid. I believe their real objective in mortgage reform is to use overcapitalization and overregulation to hobble the secondary market securitization process, leaving them with more underwriting and pricing latitude, and more volumes of fixed-rate loans and a greater percentage of adjustable loans at higher spreads in their portfolios.

            Liked by 2 people

  10. Tim

    the Securities Industry and Financial Markets Association approved the single securitization security platform for GSEs, so fhfa has freedom to implement. as someone who used to scriven securities transaction documents, I found that standardization is usually a good thing for the securities markets with respect to conventional securities, reduces transaction costs and improves pricing. on the other hand, one might think this is the camel’s nose under the tent of facilitating legislation for expanding number of competing mortgage insurers, as well as a platform that could be used by PLS issuers (which could be a profit source). in your opinion, is this a net plus or minus?

    rolg

    Liked by 1 person

    1. As the cliche goes, “it is what it is.” The common securitization platform (CSP) and securitized credit risk transfers were two initiatives Treasury and FHFA insisted the companies undertake after they were able to overcome the book losses imposed upon them from the second half of 2008 through 2011. Both were mentioned in FHFA’s 2012 strategic plan (titled “The Next Chapter in a Story That Needs an Ending”), and were undertaken with what we now know was the objective of winding down and replacing both companies in legislation. So, yes, the CSP could be enhanced to allow other entities to issue securities in competition with Fannie and Freddie–that was its original intent (along with eliminating the competitive disadvantage Freddie had vis-a-vis Fannie because of the remittance pattern of payments on its PCs, which has been changed in the CSP). But this doesn’t appear to the direction the administration wishes to go at the moment, and legislation is not in the cards through the 2020 election. So at least for now, the CSP is a net positive.

      Liked by 3 people

    1. I think this guidance from the FSOC will be helpful in bringing more rationality to the discussion of the appropriate capitalization of Fannie and Freddie.

      Several prominent critics and opponents of the companies have in the past argued that because Fannie and Freddie are systemically important financial institutions (“SIFIs”), they should have to hold the same levels of capital as large SIFI banks. This argument, in my view, was never about safety and soundness; it was about having a politically respectable rationale for overcapitalizing them relative to the risks of their business, to make them less efficient and diminish their market influence vis-a-vis large primary market lenders.

      The FSOC has now removed the mask of respectability from this prescription by adopting the correct (and obvious) stance that in the future it would apply the SIFI designation to a large non-bank financial institution (like Fannie or Freddie) only after doing an analysis of that institution’s likelihood of failure. A true risk-based capital standard for the companies addresses this issue directly, by linking their required capital to the actual risks they take in their business, to a standard of safety set by the government. If this approach to capitalization is properly designed and implemented by FHFA (and its June proposal erred in the direction of unnecessarily OVERcapitalizing the companies), there never would be a justification for giving Fannie or Freddie the SIFI designation, which in any event has been a blunt and counterproductive tool when applied to other large nonbank financials.

      Like

    1. Any policy letter written to gain the signatures of 28 different interest groups has to be very general, and this one doesn’t disappoint. I see the MBA’s hand in stating upfront the need for legislation “to permanently address the structural problems that existed prior to the financial crisis” (without saying what those structural problems were), then going on to say that any administrative reforms that “some policymakers may recommend” must be “undertaken carefully” to avoid disruptions to the market. The MBA’s intent here, in my view, is to apply a standard of near-perfection to a form of reform it opposes, but it dovetails neatly with the rest of the letter, which is a fairly comprehensive list of all of the things each of its signatories would like to have happen as a result of reform. Of course, any reform initiative will include trade-offs, and administrative reform will have the added challenge of needing to meet the tests of the capital markets. Still, it’s nice to dream.

      Liked by 2 people

      1. Tim

        I have a very basic procedure when I read some policy consultant (or 28) describe in general terms housing reforms. I take out a blank sheet of paper to handwrite down practical real world steps that need to be taken to implement the reform (to the extent the proposal is understandable given its generality). this letter appears to be saying if fhfa does something to reduce the GSE footprint, do it carefully b ensuring that private capital (referred to as a minor participant) can take up slack. there is no way that fhfa can ensure that PLS can grow market size to pick up slack. PLS are not fhfa’s regulatory remit. so I basically write nothing on the blank sheet of paper after reading this letter.

        alternatively, regarding recapitalization, I write down moelis blueprint. nothing more needs to be written. there are other plans (eg Crapo plan) that could compete with moelis blueprint (if alternative mortgage insurers which dont even exist can be substantially capitalized), but if this letter admonishes fhfa to tread carefully in any attempt to reduce fhfa’s footprint, then that surely means that any plan that seeks to reduce GSEs’ footprint by introducing many new competitive mortgage insurers (also necessitating provision of a govt guarantee) also would be criticized by this letter as being too bold/risky with unintended consequences.

        I am no longer sure what alternative to GSE recapitalization could be seriously espoused by these 28 housing industry groups under the cautionary terms of this letter. my only question is that when administration comes out with its plan, will it be bastardized in an attempt to curry favor with congress and these industry groups (which begs the question that one would know what concrete steps that are prudent as per this letter one should add to curry this favor).

        rolg

        Liked by 1 person

        1. Clearly this letter is orchestrated by the mortgage bankers association
          In my opinion they had these other 27 entities sign on to try and demonstrate depth.

          Like

          1. @David

            disagree. the letter’s admonition to tread carefully can be applied to any substantial reform proposal, particularly the Crapo plan and especially the harebrained proposals MBA has championed in the past. in my view, the most careful proposal consistent with the do-no-harm thesis of this letter would be one that simply restores GSE capital, so that GSEs can independently do freed from conservatorship what they do now relying upon govt line of credit (after having already undergone substantial reform, such as wind down of whole loan mortgage portfolio). weaning from govt credit line after raising sufficient equity capital is most consistent with this letter imo. if I am otting and I take this letter to heart, I find that this supports GSE capital restoration; what are the unintended consequences of restored capital position?

            rolg

            Liked by 2 people

          2. This 28-group letter is (deliberately) written in a way that every stakeholder can interpret it as supporting their version of reform. That is one reason it will have no impact whatsoever on those trying to devise a workable administrative reform proposal, without mentioning its absence of any practical advice on the real-world issues that must be addressed and resolved in reforming, recapitalizing and releasing Fannie and Freddie.

            Like

    1. I have not followed all of the developments related to the common securitization platform (CSP), and do not claim to be an expert on it. I do know, though, that the “cash flow alignments” FHFA is insisting on between Fannie’s MBS and Freddie’s PCs relate to the remittance schedules of the two securities–when servicers make their payments of interest and principal to Fannie or Freddie, and when each company makes its interest and principal payments to security holders. Prior to the single security initiative, Freddie received servicer payments earlier than Fannie, and also made earlier payments to investors. But investors did not pay Freddie the higher price those earlier cash flows theoretically warranted, so Freddie had to cut its guaranty fees, relative to Fannie’s, to get people to use its security. Eliminating this economic disadvantage for Freddie (although at Fannie’s expense) was one of the main reasons FHFA directed the two companies to undertake the CSP. For the new common security, Freddie will change the remittance schedules for its PCs to match Fannie’s MBS.

      This change should bring Freddie’s return on equity (ROE) closer to Fannie’s, but it will not make the two equal. The companies will continue to have different customer bases, somewhat different underwriting standards and variances granted to lenders, different levels of administrative expense and probably also different prepayment speeds for their respective securities, all of which will cause them to have somewhat different ROEs.

      Liked by 1 person

  11. Tim,

    ROLG and I have discussed this, and would like to hear your thoughts if you don’t mind.

    It boils down to this: USC 4612(a) sets out the GSEs’ minimum capital requirement as “2.50 percent of the aggregate on-balance sheet assets of the enterprise, as determined in accordance with generally accepted accounting principles”, plus perhaps some other things.

    Fannie’s recent 10-K form shows $3,418.318B in assets, and 2.5% of that is around $85.5B. However, in the core capital discussion at the top of page F-50, they list the statutory minimum as $22.2B, with a note below it saying “(a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties”

    Does that “except” part really encompass the difference? Or am I incorrect in my interpretation of the statute? Both? Or something else entirely?

    https://www.law.cornell.edu/uscode/text/12/4612
    http://fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2018/q42018.pdf

    Liked by 1 person

    1. You’ve quoted paragraph (1) of USC 4612(a), which details Fannie and Freddie’s minimum capital requirement for “aggregate on-balance sheet assets.” Paragraph (2) of the same section adds the capital requirement for “outstanding mortgage-backed securities [MBS] and substantially equivalent instruments issued or guaranteed by the enterprise that are not included in paragraph (1)”, and specifies this requirement as “0.45 percent of the unpaid principal balance” of those MBS.

      These minimums came almost directly from a study completed for Fannie Mae in March of 1990 by former Federal Reserve Board Chairman Paul Volcker, in which he recommended a true risk-based capital standard for both Fannie and Freddie keyed to the amount of interest rate and credit risk they took, but also a minimum capital ratio of 0.50 percent for the companies’ off-balance sheet MBS—which took only credit risk—and 2.50 percent for their on-balance sheet mortgages—which had both interest rate and credit risk. (Volcker’s recommended 0.50 percent credit risk minimum was reduced to 0.45 percent by the Senate Banking Committee, and retained in the final legislation.)

      These ratios were applied directly to all of Fannie and Freddie’s on- and off-balance sheet items until 2010, when the Financial Accounting Standards Board changed the treatment of what are called “variable interest entities,” requiring them to be moved on-balance sheet from off-balance sheet. (There were good reasons for this change, one of which was the proliferation of “special purpose vehicles,” or SPVs, created by banks before the 2008 financial crisis, which contained risky and highly leveraged investments but were allowed to be booked off-balance sheet; when many of these SPVs failed, the banks elected to make good on them to avoid damage to the reputations of the parent companies, making a fiction of their “off-balance sheet” and bankruptcy-remote status.)

      Fannie and Freddie’s MBS are technically trusts, and they fell within the category of variable interest entities. So as of January 1, 2010 both companies began accounting for their MBS as on-balance sheet assets. But because their risk hadn’t changed, FHFA made the explicit exception to the companies’ statutory minimum capital requirements you noted, allowing assets that were “underlying Fannie Mae [and Freddie Mac] MBS held by third parties” to continue to be capitalized using a minimum ratio of 0.45 percent, not the 2.50 percent that applied to other on-balance sheet assets. So—“there’s no mystery if you know the history.”

      Liked by 3 people

      1. Now I feel justified having asked you about it! There is nobody else I know, and probably not on the planet, who knows more than you about these things. Your answers are always coherent, clear, well thought out, and representative of your deep knowledge of all things housing finance. This one is no different. Thank you for the response!

        I do have a follow-up question. HERA distinguishes between risk-based and minimum capital standards. As a matter of “common sense” (which many times is neither), this implies to me that the minimum capital standard should not necessarily be a function of risk. However, the history of the 0.45% you gave shows that that number was arrived at by taking risk profiles into account. Is this the way it was intended?

        Liked by 1 person

        1. Yes. Again, the foundation for the Fannie Mae and Freddie Mac capital standard included in the 1992 Federal Housing Enterprises Financial Safety and Soundness Act was the study done by Paul Volcker in 1989 and 1990 (which Fannie contracted and I participated in). Volcker believed strongly that simple “bank-like” capital ratios were inappropriate for companies like Fannie and Freddie, which take only two types of risk (interest rate and credit) on one product (residential mortgages) in one country, and that their capital should be a function of the (measurable) amount of risk that they incur—rising as those risks rose and falling as they fell. Working together, we and Volcker came up with stress tests that could be applied to Fannie and Freddie’s credit guaranty and portfolio investment businesses that would result in automatically adjusting capital requirements that met Volcker’s stringent requirements for safety and soundness.

          The risk-based requirements were designed and intended to be the primary capital standards the companies would have to meet. Volcker, however, also insisted upon statutory minimums for both the portfolio and MBS business. These minimums appear in the 1992 legislation with no explanation or legislative history, but I know why they’re there. While the interest rate and credit stress tests were based on data and ample historical experience, Volcker knew that historical relationships could change, and he also had a (well-founded) mistrust of the assumptions embedded in any model-driven exercise. For these reasons, he essentially said (I’m paraphrasing), “There must be some minimum percentage of capital the companies must hold for each business, no matter what the results of their stress tests are.” Those amounts, per Volcker, were 50 basis points for off-balance sheet MBS and 250 basis points for mortgages in portfolio, and that’s (almost) what went into the 1992 statute.

          I believe that conceptually Volcker got both of those components right in the study he did for us: the primary capital requirement for Fannie and Freddie should be an objective function of the amount of risk they take in their two primary businesses (now basically one—credit guarantees—since their portfolios have shrunk to a fraction of their former sizes), and there also should be minimum requirements that serve as a capital floor, and that are set at percentages below where the risk-based requirements would be expected to be under normal circumstances. And as I said in the comment I made to FHFA on its June 2018 capital proposal, FHFA should follow this same conceptual approach in its update of Fannie and Freddie’s capital standards, and resist the temptation to add unnecessary levels of conservatism that break the link between risk and capital for the companies, and by doing so render their business less effective and efficient for all stakeholders.

          Liked by 1 person

    1. This document from the Office of Management and Budget is “the Administration’s comprehensive plan for reforming and reorganizing the Executive Branch” of government. It recommends 32 broad “organizational reform priorities,” broken into three categories–mission alignment imperatives, management improvement and efficiency opportunities, and new capability requirements.

      One of the mission alignment imperatives is to “Transform the way the Federal Government delivers support for the U.S. housing finance system.” In this housing finance initiative, though, OMB elects to propose “legislative reforms [that go] beyond restructuring Federal agencies and programs,” including “ending the conservatorships of Fannie Mae and Freddie Mac [and] reducing their role in the housing market.” OMB’s ideas for accomplishing this are the same ones that have failed to gain legislative traction over the past ten years: eliminating Fannie and Freddie’s federal charters, having multiple private credit guarantors chartered and overseen by “a Federal entity with secondary mortgage market experience,” providing the securities issued by these guarantors with an explicit government guaranty, and replacing their statutory housing goals with federal programs financed by an annual fee assessed against the guarantors’ securities.

      So, no, this proposal does not “carry any weight;” it’s a tired recycling of off-the-shelf reform elements assessed and passed over countless times before.

      Liked by 3 people

      1. It was refreshing to hear a panel on mortgage reform hosted by the School of Public Policy of a university 2600 miles from Washington (Pepperdine), with participants who have practical knowledge about and experience with the subject matter they were discussing. Even though this session is long (about 80 minutes, and doesn’t start until around minute 24), readers of this blog will benefit from listening to it, and I encourage them to do so.

        What’s unique about this conference (in contrast to ones sponsored by advocacy groups) is that it addresses in detail why 10 years of legislative reform proposals have failed, and identifies the elements that have to be included, integrated and balanced in a successful reform package. As the panelists agree, there are four: a level of capital sufficient to address safety and soundness concerns but not so high as to cripple Fannie and Freddie’s abilities to use cross-subsidization effectively to support affordable housing (which is the second essential element in reform); a regulatory structure that defines the role of the secondary market in relation to the primary market, and a transition that treats existing shareholders fairly (essential in order to get new shareholders to buy the amount of new equity necessary for recapitalization).

        I have talked at length in this blog about most of these, although not so much about the regulatory component. On this, I thought a statement made by Mike Calhoun of the Center for Responsible Lending was insightful: whatever reformed regulatory structure Treasury, FHFA and the other interested parties (including Congress) agree upon, it has to have “political stability.” Investors won’t invest in companies whose roles in the market or permitted methods of operation can change based on which political party is in power. To prevent that, reformers have to address and somehow “lock down” the roles of government-sponsored credit guarantors in the secondary market and lenders in the primary market. That’s not easy, but I’m glad the group that’s working on administrative reform is aware of the issue and is working on it.

        As I listened to the session, the phrase that kept recurring to me was “TINA (there is no alternative) and the Warrants.” There really IS no realistic alternative to the Fannie and Freddie business model–as ten-plus years of failed legislative proposals have shown–so reformers have to build on what has proven to work. And the warrants are what give the administration the incentive not only to preserve the existing (and proven) system, but also to do so in a way that allows it to function efficiently and effectively for all stakeholders, including the affordable housing community, since that will maximize the value of the shares Treasury will own and be able to sell once it converts the warrants.

        Balancing all of the elements of successful reform won’t be easy, but we have a motivated group of principals now in place who are focused on their task and have the experience and credentials to pull it off. Let’s hope they can.

        Liked by 5 people

        1. Tim

          this was a panel of practical experts, not policy experts, in the sense that they understood the practical deficiencies of reform alternatives proposed in the past by GSE antagonists, and the practical challenges of recapitalizing the GSEs. which was why the program was so informative.

          I also was struck by the “political stability” requirement, and was thinking about it in the context of what the moelis blueprint chose as the foundational example for its analysis, the AIG restructuring. while AIG also suffered rough treatment at the hands of Treasury, there was never a policy-swamp chorus seeking to eliminate AIG as a “failed business model”. recapitalizing GSEs will be hard to execute just as a matter of a conventional large-scale financial mandate; creating safeguards for new investors that the carpet won’t be pulled out from under them is a whole additional layer of execution risk and challenge.

          which leads me to wonder how the administration will create these buffers to reduce political risk to the recapitalization. one additional comment from this panel was interesting: in effect, you would end the conservatorship at the beginning rather than the end of the recapitalization. normally, one would think the GSEs should be recapitalized before conservatorship is exited; however, since the conservator has been found by courts to have almost unlimited power and discretion, including for evil as future investors may fear, putting a silver dagger through the conservator heart at the beginning of the process may be a practical necessity to allay the legitimate new investor fear of political risk.

          rolg

          Liked by 4 people

  12. 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.

    rolg

    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.

        Like

        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.

          Like

          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

            rolg

            Like

          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?

            rolg

            Liked by 3 people

  13. 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.

      rolg

      Liked by 1 person

  14. 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

  15. 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

  16. 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.

    Like

  17. 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.

        rolg

        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.

        Like

        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?

            rolg

            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.

            rolg

            Liked by 1 person

  18. 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.

    Like

    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

  19. 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,
    Bryndon

    Liked by 3 people

  20. @midas

    I have a legal view on your posed scenario, if I may. I must say that if a court, such as the collins 5th circuit en banc, ordered that the NWS be vacated, of the two forms of relief (write down of senior preferred or treasury writing a check), I find the check remedy far less likely simply because it would be less attractive to both Ps and Treasury. but lets consider it.

    since the receipt of funds would permit the GSEs to exit conservatorship, the GSE boards of directors would be reinstated with their fiduciary duties. any advisor to the GSEs’ boards would make clear to the boards that given the senior preferred terms, the boards should engage upon a financing plan to refinance the senior preferred. the continued existence of the senior preferred would violate the directors’ duty of care given that far cheaper sources of financing would be available to the GSEs which would retire the senior preferred.

    rolg

    Like

  21. 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

  22. 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.

    rolg

    Liked by 6 people

  23. 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

  24. “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

  25. 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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