Assessing the FHFA Capital Rule

A persistent theme of this blog has been the crucial role that a revised capital standard for Fannie and Freddie will play in determining how effectively and efficiently the companies will be able to carry out their traditional function of profitably providing large volumes of affordable mortgage financing to a wide range of borrower types in a post-conservatorship world.

Since the conservatorships, opponents and critics of the companies have insisted that any future version of them as shareholder-owned companies include the requirement that they hold “bank-like” amounts of capital. This demand has been couched in terms of safety and soundness (“more capital is better”), but in fact the goal of advocates of this approach is to burden Fannie and Freddie with capital requirements that are far out of proportion to the risks of the mortgages they finance, forcing them to raise their guaranty fees to levels that make their secondary market activities overpriced and less competitive, to the benefit of primary market lenders. As I’ve often noted, there is no economic or regulatory reason why Fannie and Freddie’s capital should be equal or anywhere close to that of commercial banks. Fannie and Freddie are not multi-product and multinational lenders; they are mono-line insurance companies, limited to a single asset type—residential mortgages—whose historical credit loss performance has been dramatically better than banks.

Last June, FHFA put a Proposed Rule for Enterprise Capital out for comment. I was among many who submitted one. While I didn’t say this in my comment letter, it was clear to me that in its specification of the risk-based standard mandated by the Housing and Economic Development Act (HERA), FHFA had used a combination of unrealistic structural elements and conservative assumptions to push Fannie and Freddie’s calculated capital requirement substantially higher, to 3.24 percent as of September 30, 2017. My comment addressed the elements and assumptions I thought were unjustified—including not counting guaranty fees as offsets to credit losses—and I suggested ways that FHFA could and should improve the quality and accuracy of its risk-based capital specification to align it much more closely with the risks of the mortgages the companies are guaranteeing and the way their business works. A number of other commenters made similar observations.

FHFA’s revised capital proposal is due to be released shortly, so it was with considerable concern that I read the recent spate of comments by the new FHFA Director, Mark Calabria, repeating the general (and insupportable) assertion that “Fannie and Freddie ought to operate under essentially the same capital rules as other large financial institutions.” These statements raised the possibility that he had chosen to side with the companies’ opponents on the capital issue, but I also thought he might not know the facts about the differences in risk between Fannie and Freddie’s business and that of commercial banks. So last week I wrote a two-page note for the Director and sent it to FHFA General Counsel Alfred Pollard, asking him to submit it both for the record and to Calabria. Here is what the note said:

“A recent interview with Fox Business News quoted you as saying, ‘I think our objective over time is that you have capital levels at Fannie and Freddie that are comparable to other large financial institutions,’ and that 4.5 percent capital was ‘kind of in the neighborhood of where we’re looking at.’

While I agree that Fannie and Freddie’s capital should be comparable to that of other large financial institutions, comparable is not the same as equal. Capital must be related to risk, and if FHFA engineers its risk-based capital standard for Fannie and Freddie’s credit guarantees to produce an average capital percentage equal or even close to banks’ Basel III risk-weighted capital percentage for residential mortgages of 4.5 percent, the companies’ capital standard would be far more stringent than banks’, because: (a) the delinquency and default rates of single-family mortgages owned or guaranteed by Fannie and Freddie have been less than one-third those of residential mortgages held by banks, and (b) bank capital also must cover the interest rate risk of funding mortgages in portfolio, whereas Fannie and Freddie’s capital standards treat credit and interest rate risks separately, and additively.

Historical data on single-family residential mortgage delinquencies and defaults for Fannie and Freddie versus commercial banks are readily available from the companies themselves and from the FDIC and Federal Reserve, and they tell a clear and consistent story.

During the time I was Fannie’s CFO from 1990 through 2004, the company’s rate of single-family serious delinquencies (90 days or more past due) averaged about 55 basis points, while over the same period the average serious delinquency rate for residential mortgages held on the balance sheets of commercial banks was 2.3 percent. Following the financial crisis both delinquency rates spiked, peaking in the first quarter of 2010—Fannie’s at 5.53 percent and banks’ at 11.54 percent. Both have since declined substantially, but banks’ 2.67 percent serious delinquency rate on residential mortgages in the first quarter of this year still was three and a half times Fannie’s 75 basis-point delinquency rate. In addition, Fannie now publishes its serious delinquency rate on the single-family loans it has guaranteed or purchased since the end of 2008, when it tightened its underwriting standards. These loans now make up 93 percent of Fannie’s total book, and their rate of serious delinquency in the first quarter of 2019 was only 33 basis points.

Post-crisis default rates tell a similar story. In the amicus curiae brief I submitted on July 6, 2015 for a court case involving Fannie and Freddie I noted, ‘Solid data now exist, and they show that, from 2008 through 2014, the average loss rate on residential mortgages owned or guaranteed by Fannie and Freddie was 0.45 percent per year. The loss rate for residential mortgages owned by commercial banks during this same period was 1.43 percent per year—more than three times as high.’

Most people are surprised to learn that single-family mortgage delinquency and default rates at commercial banks consistently exceed the comparable rates recorded at Fannie and Freddie, by a factor of three. I believe the primary reason is that banks finance a much greater percentage of home equity loans. But whatever the reason, banks’ much higher delinquency and default rates mean that Fannie and Freddie can provide an equal degree of protection against mortgage credit risk with one-third the capital that banks require.

A second critical consideration for determining what constitutes a level playing field on capital for banks and Fannie and Freddie is the fact that banks’ 4.5 percent Basel III capital requirement for single-family mortgages has to cover not just credit risk but also the risk of financing 30-year fixed-rate and capped adjustable-rate mortgages with consumer deposits and short-term purchased funds. Capital standards for Fannie and Freddie treat these risks separately; currently they have a 45-basis point minimum for guaranteed mortgages (now universally viewed as too little), and a 250-basis point minimum for mortgages financed in portfolio. The companies thus have to hold 205 basis points in interest rate risk-related capital for their on-balance sheet mortgages, even though they can and do match their durations with a combination of long-term debt and derivatives, and constantly ‘rebalance’ to keep those durations matched as interest rates change. Since banks have more interest rate risk in their mortgage portfolios than Fannie and Freddie, the capital required for the interest rate risk they bear should be higher as well.

A true level playing field on capital between banks’ on-balance sheet mortgage holdings and Fannie and Freddie’s single-family credit guaranty business, therefore, is nowhere near 4.5 percent. Banks’ 4.5 percent capital ratio properly applies to the companies’ portfolio holdings, making their credit risk capital no more than 2.5 percent (4.5 percent less at least 2.0 percent for interest rate risk), and the huge differential between banks’ and Fannie and Freddie’s historical credit performance should further reduce the companies’ required capital for their credit guaranty business—to a maximum of 1.5 percent, and arguably less.

For the above reasons, a very good case can be made for FHFA to set 1.5 percent as the minimum capital requirement for Fannie and Freddie’s credit guaranty business, and 3.5 percent as the minimum for their portfolio mortgages. More importantly, it would be a serious mistake for FHFA to employ layered conservative assumptions to push the capital percentage required by its risk-based capital stress test artificially high, in order to make it look more ‘bank-like.’ Doing so is unjustified, and would decouple the capital and pricing for the mortgages the companies guarantee from their true risks, making their services more expensive and less efficient for no good reason, to the disadvantage of the low- and moderate-income homebuyers Fannie and Freddie were chartered to serve.”

Once these facts about relative mortgage risks are known and acknowledged, it becomes obvious that it is incorrect to impose a bank-like capital standard on Fannie and Freddie. On top of that, as Fannie (and I) discovered more than thirty years ago, the correct way to specify a risk-based capital standard is nearly as obvious.

Prior to the early 1980s Fannie had done all of its business as portfolio purchases, funded with debt. Not long after I joined the company it began issuing mortgage-backed securities (MBS) using pools of newly-originated mortgages for which it bore the risk of loss, rather than having recourse to the originating lender. Fannie’s charter had been tailored for an entity that financed all of its mortgages on-balance sheet, so its new MBS, which for Fannie as well as Freddie were considered contingent liabilities and thus accounted for off-balance sheet, had no required regulatory capital. We had to determine how to capitalize, and then price, these credit guarantees ourselves.

The stress-test based approach we adopted was virtually identical to what FHFA should be doing to specify the risk-based capital requirement for Fannie and Freddie mandated by HERA. First, you use historical data to pick a defined degree of credit stress you want to be able to survive. (We initially picked a credit loss rate we deemed to have less than a one percent chance of occurring, later tightening that to a one-half of one percent chance; under HERA, FHFA gets to pick whatever loss scenario it wishes.) Next, you take your existing book of business with its fee rates, and break it into “buckets” of product types and risk combinations. Assuming no replacement business, you then simulate the performance of each of these buckets using different amounts of initial capital until you determine the exact amount of capital that, when combined with the guaranty fee income from the loans you project to remain outstanding during the stress period and allowing for projected administrative expenses, just allows that bucket of loans to survive the loss scenario you’ve chosen. Finally, you add a reasonable, clearly identified cushion of conservatism, and you have your required capital percentages. It’s that simple.

Unlike banks’ ratio-based standards, Fannie and Freddie’s stress-based capital calculations adjust automatically as the riskiness of their business changes, because they’re done at the risk and the product level. If FHFA wants to be even more conservative, it should pick a higher threshold of stress for the companies to meet (and defend that choice), rather than use unrealistic or unjustified elements to force the capital requirements higher. The latter break the link between capital and risk, and also affect Fannie and Freddie’s ability to attract a broad and profitable a range of business. FHFA’s decision in last year’s proposal not to count guaranty fee income in the stress test illustrates this problem. A properly designed risk-based standard permits the companies to trade off initial capital, guaranty fees and return targets to manage their mix of business, while remaining in capital compliance. For certain loan types it may make sense to charge a lower guaranty fee and compensate with higher initial capital (and thus accept a lower expected return); for other business a higher guaranty fee and lower initial capital may be the right choice. If guaranty fees are not counted in the stress test, however, this flexibility is lost. As a general rule, any significant distortions in the specification of the risk-based capital standard will constrain how the companies can do their business, sometimes in unpredictable ways.

There truly is a right and a wrong way to specify a risk-based capital standard, and the difference between the two is evident. When FHFA releases its revised capital proposal, therefore, there will be little doubt as to whether it has made a straightforward attempt to produce an accurate risk-based standard, engineered the exercise to produce a particular predetermined outcome, or tried to land somewhere in the middle.

Potential investors in a recapitalization of Fannie and Freddie should pay close attention to where FHFA comes out on this proposal, because it will be a window into the agency’s likely regulatory posture with respect to the companies post-conservatorship. At the one extreme, if FHFA makes only minor changes to its June 2018 capital proposal, this would strongly indicate that it intends to favor ideology and politics over economics in its future regulation, which should be a bright red light for any investor with a functioning memory. At the other extreme, a clean risk-based capital standard—which would result in the least amount of unnecessary capital, the lowest average guaranty fees, and the most flexibility to use cross-subsidization to broaden the companies’ product mix and support affordable housing—would be a green light for investment.

A middle-ground outcome on the capital standard, however, seems to be the most likely, and it will be the hardest for investors to evaluate. In this case, they will be well advised to closely examine the details of the proposed standard, assess the potential for any aspects of it to be used to their disadvantage, and insist that anything objectionable be remedied to their satisfaction before they agree to put new capital into the companies. Investors never will have as much influence in determining how the next version of Fannie and Freddie will operate and be regulated as they will prior to a first round of equity raising.

160 thoughts on “Assessing the FHFA Capital Rule

    1. You, and almost everybody else, are missing the context of these stress test results–both over time and in comparison to “other financial institutions” (i.e., banks)– because FHFA doesn’t give it.

      First the context over time. When FHFA published the initial Dodd-Frank stress test results for Fannie and Freddie in 2014, the credit losses it reported for the companies during the stress period totaled $94.2 billion, or 2.0 percent of the companies’ mortgages owned or guaranteed as of December 31, 2013. At that time, however, almost one quarter of Fannie’s mortgages had been purchased or guaranteed before 2009, with 12 percent coming from the disastrous 2005-2007 origination years. Since then, the size and influence of these very poor books of business have steadily declined. Today, only 4 percent of Fannie’s total book is from the 2005-2007 period, and the post-2009 loans have an exceptionally low 32 basis point serious delinquency rate. Freddie has seen a similar change in the composition of its book. This is the main reason the combined credit losses for both companies in the 2019 version of the Dodd-Frank stress test were only $12.8 billion, or 23 basis points of their total book of business as of December 31, 2018.

      You also can compare Fannie and Freddie’s stress credit losses with the credit losses of the large commercial banks that are subject to the same stress scenario. In 2014, the average credit loss rate for banks subjected to the Dodd-Frank stress test was 6.7 percent. In 2019, the average stress credit loss rate for banks was lower, but not by that much–it still was 5.7 percent of banks’ total loans outstanding, a decline of 17 percent from 2014. In contrast, over those same five years Fannie and Freddie’s combined credit loss rate fell by 89 percent. This meant that in 2019, Fannie and Freddie’s combined credit loss rate of 23 basis points was one-twenty fifth banks’ 5.7 percent credit loss rate. In spite of this exponential difference in stress credit loss rates, however–which is there for anyone to see–supporters of banks continue to insist that Fannie and Freddie should hold “bank-like” capital. It is ludicrous that so many people are making this claim seriously.

      Liked by 4 people

      1. Hi Tim,

        I must not be seeing what you’re suggesting ROLG is missing. That the quality of loans has improved and 2005-2007 loans are less a factor, isn’t ROLG’s objective observation along with his subjective opinion still correct?

        There appears to be (objectively) $13B combined FnF credit losses through the adverse stress period, which, as a matter of (subjective) opinion, is small. Yes?

        Thanks!

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        1. Yes, $12.8 billion in credit losses during a stress test ($7.2 billion for Fannie and $5.6 for Freddie) is a very small amount. The context I was attempting to provide was to add that (a) that’s only 23 basis points of the companies’ total mortgages; (b) back in 2014 (the first Dodd-Frank stress test run for the companies) the credit loss rate was 200 basis points, but this was not a “normal” result because of the effect of losses from the very poor 2005-2007 books, while going forward stress losses are likely to be close to what we’re seeing now, and (c) Fannie and Freddie’s 23 basis points of stress losses are a miniscule fraction of bank’s 2019 Dodd-Frank stress losses 5.7 percent.

          Both the FHFA and Fed Dodd-Frank stress tests are stylized, but they nonetheless provide useful information about the riskiness of the entities that are subjected to them. And in the first quarter of next year we will get another useful risk assessment: banks’, Fannie’s and Freddie’s estimate of their lifetime expected credit losses, which is required by the current expected credit loss (CECL) standard mandated by the Financial Accounting Standards Board (FASB), scheduled to take effect on January 1, 2020. Taken together, the Dodd-Frank stress test results and CECL lifetime loss estimates will add an element of realism to the current discussion about the appropriate capital standards for Fannie and Freddie compared with commercial banks. As I’ve noted repeatedly, capital must be related to risk. If Fannie and Freddie are being required to hold ten times their average Dodd-Frank and CECL credit losses, while banks are required to hold, say, three times the same average losses, that will be a strong real-world argument that FHFA has set the former too high, to the detriment of the business the companies it regulates is supposed to be able to conduct for the benefit of the homebuyers they were chartered to serve.

          Liked by 2 people

          1. The timing of the new FnF stress test results is interesting. Could it be a subtle way leading to the soon to be released administration’s “plan” that FnF wouldn’t need as much capital requirement as publicly stated before, and paving the way of retaining quarterly profits as early as the next quarter to build up the capital?

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      2. Tim

        compare the FHFA published 2018 stress test results:

        https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2018_DFAST_Severely-Adverse-Scenario.pdf
        where there is set forth a projected draw amount on the treasury commitment (p. 6), with

        fhfa published 2019 stress test results:

        https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf
        with no projected draw amount (p. 6)

        I wonder why the commitment draw line item is set forth in 2018 but not set forth in 2019? do you have a view?

        rolg

        Liked by 1 person

        1. I hadn’t noticed that omission when I took a quick look at the 2019 results. In checking, FHFA included a highlighted section of PSPA funding commitment, Treasury draws required, and remaining PSPA commitment in each of the five previous Dodd-Frank stress test reports. It’s not in the 2019 report, but I don’t know why.

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          1. Tim

            this is speculation of course, but leaving out the commitment draw line item in 2019 stress test report is consistent with the notion that during this stress period (through 2021) the GSEs will be recapitalized and no draw will be required. clearly, if there is to be no recap and the GSEs capital level remain at $3B each, a commitment call would have been required and the line item presentation would have been proper.

            in the relative silence at fhfa/treasury since the treasury plan was (apparently) delivered in June, it is somewhat heartening to see this 2019 presentation. since I expect fhfa used the 2018 report as the basis for drafting the 2019 report, I suspect the omission of the commitment draw line item was advertent.

            rolg

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          2. The omission of the commitment draw line item clearly was advertent, and perhaps your speculation is correct. But FHFA wouldn’t need to just assume that Fannie and Freddie would be allowed to recapitalize during the stress period, it also would need to assume that they would successfully pull off equity offerings that would raise more than the $43.3 billion they are projected to lose in the scenario that has then establishing a valuation reserve for their deferred tax assets (less the $10.9 billion they had as shareholders equity as of June 30, 2019). Is it really reasonable for FHFA to assume that investors would put up over $30 billion in new capital just to have it consumed by stress losses? In addition, the timing seems off; Calabria recently has been talking about a fairly lengthy period of recapitalization through retained earnings before a new equity raise would take place. In a stress environment, there would be no retained earnings–more than all of the companies’ revenues would be consumed by losses. Having said this, though, I don’t have any other explanation for why FHFA would have omitted any mention of stress-related draws from Treasury.

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          3. @Tim

            “Is it really reasonable for FHFA to assume that investors would put up over $30 billion in new capital just to have it consumed by stress losses?”

            I don’t think this is the right way to look at it. The investors would be putting in money to make a return on it, presumably via ownership of two very profitable and safe companies. A risk of losing $30B would exist but the investors would just price that in during the offering. If that money was guaranteed to be lost, as opposed to being a “severely adverse” (and therefore improbable) hypothetical, it would be difficult to impossible to line up investors at all.

            Also, the more capital the companies have, the less risk to the companies losing that $30B represents. While you correctly point out that capital levels that are too high are bad for homebuyers and the economy, there should be a happy medium between the stress test results and Watt’s proposal that gives investors an incentive to participate.

            “Calabria recently has been talking about a fairly lengthy period of recapitalization through retained earnings before a new equity raise would take place.”

            I thought I had been following Calabria’s public comments closely, but I do not recall this one. Where did you hear or read about it?

            @ruleoflawguy

            I think there is another possible explanation for the omission of the PSPA draw stuff: the PSPA funding commitment might be gone by then! This is independent of the companies having enough capital to withstand the scenario, it could be either or both of these reasons.

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          4. @midas

            as I recall, there is no termination date for the treasury commitment. the commitment ends upon the occurrence of certain events, like full repayment, but there is no certain end date.

            because the treasury line is deemed appropriated by congress by express language in HERA, and it will be unrealistic to assume that congress will act to appropriate any other form of governmental backstop, I am most interested to see how the treasury plan deals with this existing commitment. I expect it will become an important backstop for the transition from status quo to restored private capital, although I also expect the commitment fee to be restored as well.

            as to the omission of the commitment draw line item, I think this is diagnostic. I simply think fhfa (and treasury) has reached a mindset where it wants to fund the GSEs with retained earnings/private capital rather than additional treasury draws. when you make a change to a 2018 document that you are using as a template for a 2019 document, you dont make this sort of change without consideration. none of this says anything about the ability to execute a recap, but I think it does say something important about the intent to pursue a recap. just my reading of the tea leaves.

            I concur that I haven’t seen calabria refer to an initial lengthy retained earnings period before capital raise…this was Layton’s contribution to the discussion. reading between the lines, I think Layton was insinuating that the capital raise will be harder than calabria might think if there is no prior substantial build up of retained earnings.

            rolg

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          5. “I concur that I haven’t seen calabria refer to an initial lengthy retained earnings period before capital raise…”

            ROLG,

            Not in so many words, but saying he isn’t under any time constraint – even five years, must mean something.

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          6. @ron

            I understood calabria to say that he was under no time constraint for the release from conservatorship, such that it is within his discretion as conservator to release companies at any point in time in the capital building process, or only after the capital level he has approved has been met, or perhaps even after some other reform has been implemented. when in this process new capital is raised is something that I hope is a financial markets decision, driven by advice he receives from retained investment bankers, and not a political decision.

            rolg

            Liked by 1 person

          7. ROLG,

            As I’ve noted now several times, I think it finally occurred to Calabria that (i) the capital requirements aren’t as severe as he thought and (ii) he can’t successfully secure investors given his “competition” mantra. I believe both those factors point to retained earnings. We’ll have to wait and see.

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          8. I am weighing in on this exchange a little late (I’m still in Africa, and spending even less time on blog-related matters than I thought I might), but I did want to clarify my comment about capital raising during a stress scenario.

            The reason I made this point is that I continue to be concerned about how realistic FHFA is being about the way the capitalization and capital management process for Fannie and Freddie works in practice. FHFA’s June 2018 capital rule tied their capital requirements to the market values of their loans, which would force them to raise tens of billions of dollars while stress events are occurring. That won’t be possible. As the 2008 financial crisis was unfolding, no financial institution raised a nickel of capital; a company needs to raise its capital before a downturn has become a crisis, or else it will fail (or need to be bailed out). I and many other commenters made the point to FHFA that it had to change this pro-cyclical aspect of its capital standard in the next version, but as of yet it’s given no indication that it will.

            It’s in this context that I’m assessing how FHFA might be treating capital in the most recent Dodd-Frank stress test. In its stylized scenario, sharp declines in GDP and increases in unemployment begin on January 1, 2019 and they continue through the third quarter of 2020. FHFA is writing about the results of this test in mid-2019, and Fannie and Freddie start the test with only $10.9 billion in capital. If FHFA really thinks that with this tiny amount of initial capital and the cascading losses assumed in the stress test the companies won’t need draws from Treasury because they’ll be able to convince investors to provide them with the capital necessary to cover their stress losses, this would indicate to me that at this late date it still isn’t thinking realistically about how the companies’ capital management process works. That would be very worrisome, and I hope it’s not the case.

            Liked by 1 person

          9. Tim

            The stress test is of course a pro forma exercise: what would the company results look like under the assumed stress scenario. I just find it interesting that fhfa added to the pro forma assumption of stress for two years beginning in 2019 a pro forma adequate capitalization to withstand the resulting losses. there is no other way imo to interpret the absence in the 2019 presentation of a line item treasury commitment call, as we know all previous stress tests did not assume pro forma adequate capitalization. what this implies is up for debate. safe travels.

            rolg

            Liked by 1 person

  1. Question for ROLG:
    What is the absolute longest period of time it can take for the 5th circuit to publish their decision regarding the Collins en banc rehearing?
    When do you think the decision will be published (tough question I know)?

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    1. @Daniel

      there is no answer to your question. there are 2 difficult claims, APA (NWS not within conservator’s authority) and constitutional (single director removable only for cause). if court finds constitutional violation, then will relief be granted (Ps cite to a SCOTUS case, Bowsher, and the APA Section 706)? there are 16 judges, so there are many possible majority, concurring and dissenting opinions to write on these claims. this is a high profile case and there “should” be an incentive for well-crafted opinions, which take time. and there may be jockeying over language for one judge to join a particular opinion…multiplied among multiple judges. I suspect the decision will be rendered “soon”…

      rolg

      Liked by 2 people

  2. Layton: GSE Reform: None or Mostly Done? August 2019

    https://www.jchs.harvard.edu/sites/default/files/harvard_jchs_gse_reform_none_or_done_layton_2019_0.pdf

    “In a 17-page paper published on Monday – titled “GSE Reform: None or Mostly Done?” – Layton reveals a conversation he had a few months ago in a meeting with an unnamed senior official in the Department of the Treasury who told him: “GSE reform has already mostly happened.”

    rolg

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    1. Layton (Executive Summary):

      “Summary: Over the past decade, Congress and most housing finance policy developers and commentators have overwhelmingly focused on reform of the government-sponsored enterprises (GSEs) in terms of comprehensive reform, meaning major changes in the design and structure of the housing finance system, which would require legislation by Congress. Because no such legislation has been passed, GSE reform appears, based on this expansive understanding of reform, to be the still-unfinished business of the 2008 Financial Crisis. But with a more limited concept of incremental reform – i.e., fixing the major weaknesses in the existing system of housing finance – the reality is that almost all of the major flaws of the pre-conservatorship GSEs have been successfully addressed while the companies have been in conservatorship. And these incremental reforms can easily be carried forward and completed to apply to the GSEs upon an exit from conservatorship, even if that exit is done only by administrative means. On this view, which I share, reform has been “mostly done” already, quietly and competently, during conservatorship, and so a program of “reform, recap and release,” if the administration pursues it, is very much in the realm of the possible.”

      rolg

      Liked by 1 person

      1. I agree with Layton that there are no obvious “reforms” of Fannie and Freddie that need to be done before they can (and should) be released from conservatorship. I don’t agree with his assessment of the reforms that already have taken place, however (and note that he omits what I believe is the most significant one, that’s not limited to Fannie and Freddie–the QM and ability to repay standard), and I also was disappointed to see that in his discussion of Fannie and Freddie reform he makes a number of misstatements of fact and repeats several readily disprovable myths about the companies, which isn’t helpful in reaching consensus on the best way to complete the tasks of recapitalization and release that he agrees are now within reach.

        Liked by 2 people

  3. Tim,

    Today, the Trump administration announced its intent to not renew the QM patch.
    https://www.foxbusiness.com/economy/trump-fannie-freddie-mortgage-lending

    The article notes both that the patch expires on the earlier of January 2021 and the end of the conservatorships, and that the Trump administration has expressed a commitment to end the conservatorships anyway (presumably during this presidential term while they have the power to do so).

    Is this news impactful, and if so how much and why? Is the patch expiration just a side effect of releasing Fannie and Freddie or is it a goal in and of itself?

    Liked by 1 person

    1. The announcement by the Consumer Financial Protection Board (CFPB) that it does not intend to renew what is called the QM (Qualified Mortgage) Patch–which allows Fannie, Freddie and depository institutions with assets less than $10 billion to guarantee or hold mortgages from borrowers whose monthly payments exceed 43 percent of their income, while still retaining the legal protections of a Qualified Mortgage as defined by the CFPB–when the Patch expires in January 2021 is related only tangentially to the issue of removing Fannie and Freddie from conservatorship. First of all, this is an initiative taken by the CFPB, not FHFA, although Mark Calabria supports it in the name of creating a “level playing field” for mortgage lenders. (Calabria has not said anything that I’m aware of, however, about the fact that both the FHA and the VA still will be able to make QM loans with debt-to-income [DTI] ratios over 43 percent after the Patch expires, because they have a different definition of Qualified Mortgage than Fannie, Freddie and depositary institutions do.) Second, the CFPB hasn’t yet decided HOW to eliminate the Patch; it could decide to drop the 43 percent DTI restriction altogether, or to allow higher DTI loans to be QMs when these loans meet other specified requirements. Whether the elimination of the QM Patch has a negative impact on Fannie and Freddie’s business, or the mortgage market in general–and if so by how much–will therefore depend on how these higher DTI loans are treated in the future.

      I also will make one point about the QM Patch and the “level playing field” argument. Under FHFA’s proposed risk-based capital rule, unlike all depositary institutions (including the smaller ones to whom the Patch also applies), Fannie and Freddie would be required to hold more capital for loans that have higher DTIs. The June 2018 version of the capital rule defines a “normal” mortgage as one with a DTI between 25 and 40 percent. Loans with DTIs lower than 25 percent get a 20 percent break on required capital, while loans over 40 percent have a 20 percent capital surcharge. This, I presume, is based on historical loss experience–or at least it should be; and it’s also interesting that the “cut” on DTI in the FHFA rule is 40 percent, not the CFPB’s 43 percent. I wonder if Calabria is aware of any of that (I suspect he is not). In any event, this is yet another example of where Calabria seems to want to make Fannie and Freddie subject to bank-like rules and regulations, yet also give them unique, customized capital standards and regulations to which banks are NOT subjected.

      Liked by 2 people

      1. Tim

        I found this thought useful, and I am almost embarrassed to say I read it in IMF: “Instead of avoiding the GSEs because of a high DTI ratio, lenders instead, could use 80-10-10 structures where a first-lien (under the 43%[sic] cap) could go the agencies with a second lien being originated and placed elsewhere. The possibilities are endless. Mortgage bankers are a creative lot…”

        in other words, if there are buyers for second lien paper on these high debt to income mortgages, then these senior mortgages can become QM, with some lenders taking a higher yield junior slice. just confirming, to your knowledge, would the GSEs take this senior piece with a junior lien underneath, and would the mbs market not be fussed with lurking junior lienholders (and is the whole premise correct, that the DTI is measured against only the senior piece to be bought by GSEs)?

        rolg

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        1. With the caveat that I haven’t been directly involved with the mortgage industry for almost fifteen years–and that lending and disclosure practices may have changed since I was–80-10-10 loans shouldn’t be a way around the DTI limit. An 80-10-10 mortgage is a loan with a ten percent down payment, an 80 percent LTV first mortgage, and a simultaneous 10 percent LTV second mortgage. Typically, 80-10-10s are used by borrowers who want to avoid paying private mortgage insurance, which is required (by statute) by Fannie and Freddie for loans with LTVs over 80 percent, and who are willing and able to bear the higher cost of the 10 percent second. They shouldn’t work to get around the DTI restriction, however, because borrowers applying for a first mortgage are supposed to disclose their indebtedness on all mortgages they have to the holder of the first (precisely so it will have an accurate assessment of the borrowers’ DTI, for underwriting purposes). Or at least that was the case when I was at Fannie.

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          1. Tim

            have a great trip!

            another quote from IMF that I thought you might clarify:

            “Meanwhile, Rob Zimmer, director of external communications for Community Mortgage Lenders of America, said just because the patch expires that doesn’t necessarily mean the GSEs can’t fund the loans. The patch currently accounts for as much as 30% of single-family mortgages purchased by Fannie Mae and Freddie Mac.”

            if non-QM loans and loans no longer protected by the “patch” are bought by FnF, what are the implications/consequences? thanks!

            rolg

            Like

          2. The QM rule was designed to protect lenders from (a) lawsuits from borrowers who claim they were extended unsafe loans (if the loan is QM a borrower can’t make this assertion), and (b) requests from investors to buy back the loan, on the grounds that it was imprudently originated. The QM patch allows lenders to be protected against both types of claims if they make loans to borrowers with DTIs higher than 43 percent AND either Fannie or Freddie finance those loans.

            I’m speculating here (and perhaps there are lenders among the readership with more recent experience than I have), but if the QM Patch were done away with I imagine Fannie and/or Freddie still could buy the loans and give the selling lenders a special exemption from their buyback policies; lenders who make these now non-QM loans would remain subject to lawsuits from the borrower, however–although I wonder how significant that risk would prove to be. Also, it’s too bad that Twitter and the preference for sound bites have such a pervasive influence on the way people state their views today. Rob undoubtedly has reasons for saying that eliminating the patch wouldn’t “necessarily mean the GSEs can’t fund the loans,” but I suspect nobody asked him what those were, and, given that, he didn’t see any compelling need to volunteer them. (Let’s all play our favorite game of guessing what he might have meant, instead of asking him.)

            Liked by 1 person

          3. tim

            thanks for reply. as you know, after the FC, the GSEs recovered tens of billions of dollars from sellers on representations and warranties (while PLS sponsors were able to avoid significant recoveries for what were probably greater R&W violations). if FnF were to exempt originators on high DTIs from some elements of R&W exposure, I imagine that business would continue after patch expiry (though FnF’s underwriting algos would need to be effective).

            rolg

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          4. The majority of the rep and warranty violations that were occurring prior to the crisis, mainly with private-label security issuers but also with Fannie and Freddie, were deliberate violations of underwriting standards and were knowingly withheld. There always had been some fraud among originators–which the companies generally caught in their post-purchase reviews–but the scope and extent of the pre-crisis fraud was unprecedented, and went largely undetected by everyone until it was too late. If Fannie and Freddie were to give buyback waivers to lenders on non-QM high-DTI loans, they very likely would do so only on loans that had compensating factors balancing the risk from the higher DTI ratios, and they would retain the right to go against the lender for fraud.

            Liked by 1 person

          5. Tim

            right. in my reading, I am surprised at the number of financial journalists who believe that once the patch expires, no non-QM can be bought by GSEs, and since this is some 30% of current GSE originations, this will adversely affect GSEs etc. and of course, many dont appreciate that the patch might be amended (say, to a seasoning requirement such that all mortgages not in default after X length of time are deemed QM) as opposed to just left to expire. this is not even that complicated, but it is remarkable that these journalists seem to accept being fed by GSE antagonists rather than doing a professional job.

            rolg

            Liked by 1 person

      2. Top of the morn…….If bored by the sea, indulge us if you will in how UST might convert GSE’s to a utility model. Would also confirm TSY’s very public “no straight RnR” quote, as if to suggest someone actually asked him.

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        1. At the moment I am not “by the sea,” but this might be a good time to inform readers that on Thursday I will be leaving for three and a half weeks in East Africa, where (a) I will be spending a considerable amount of time away from the blog, and (b) when I do respond to questions or comments it will be in a time zone seven hours ahead of Eastern Daylight Time. My most likely reading and posting times during this period will be between 5:00pm and 9:00 pm EDT, and again in the early morning (before most people on the east coast are awake). I’m expecting that the summer doldrums and the typical August exodus from Washington will keep things quiet, but we’ll see.

          Different people seem to be thinking different things when they refer to a “utility model” for Fannie and Freddie. When I use the term, it refers to three combined characteristics: a limited number of companies providing a valuable or essential service; these companies having some sort of special charter or relationship with their regulatory agency, and there being limits on the returns the companies can earn. Fannie and Freddie currently have the first two, but not the third. In my version of a utility model, this would be added not by legislation but by a fourth amendment to the Senior Preferred Stock Agreement (SPSA), to which the companies would be parties, that also ended the net worth sweep. Others who are talking about or proposing a utility model for the companies need to be clear on what they mean by the term, what changes they view as necessary to achieve that status, and how those changes would be made. It’s not possible to evaluate the merits or feasibility of anyone’s “utility model” recommendation without those details.

          To answer your specific question, Treasury could achieve my version of the utility model by publicly endorsing the charters of Fannie and Freddie, making it clear that it views multiple credit guarantors as being inconsistent with the utility model it supports and thus a bad idea, and entering into a Fourth Amendment to the SPSA with FHFA, Fannie and Freddie in which limited returns for the companies were a component.

          Liked by 1 person

          1. Certainly would seem to kill quite a few “tweeting” birds with one $5T stone, from shareholder concerns of future c-ships, to regulated, g’teed risk based mtg’s/returns, to gov’t oversight to name a few. Anyways, also as you noted, on verra. Thank you for all your time. Bon Voyage….

            Like

          2. Tim,
            AIC Kijabe Mission Hospital in Kijabe, Kenya, is the Hospital I work at in Kenya (I am Stateside for 2 months, otherwise if you were in the area- and I was there -I would invite you to dinner. My wife is a great cook!). Should you have a problem, consider going there. It is 1-1.5 hours west of Nairobi. They will take good care of you.
            Jon

            Like

  4. Seems to me, FHFA “wants” massive public offering. Of course that runs contrary to Treasury’s interest in maximizing warrants, which can only come to some degree through retained earnings. FHFA has also stated that they’d like to see Treasury reduce its stake in the GSEs.

    A “compromise” would appear apparent. Treasury agrees to reduce its percentage of warrants in exchange for a less “massive” public offering. Therefore, retained earnings bears more of the capital burden.

    The outcome will be a blend of Ackman and Moelis.

    Liked by 1 person

    1. @ron

      there is to be a negotiation between calabria and mnuchin…calabria has even referred to it in his numerous interviews. this is the question I am asking myself: what does fhfa do if collins en banc decision results in some sort of P win? does it appeal to SCOTUS?

      a P win is adverse to treasury as creditor, although not necessarily adverse to its interest in reform of the GSEs to the extent that includes their recapitalization. is a P win adverse to fhfa?

      calabria has stated that his remit is to recap the GSEs…and pursue additional reforms. a P win in collins is an unmitigated benefit in seeking recapitalization (holding would improve his bargaining position, as it would eliminate senior pref so that he wouldn’t have to negotiate to remove it). why would fhfa want to appeal to SCOTUS?

      in effect, fhfa will have two constituencies, existing GSE shareholders who benefit from a P win (improving share price relative to the re-IPO price), and new investors that are required in order to execute the recap, which benefit from a P appeal and eventual P loss (which would depress price and afford new investors a higher proportionate interest in the GSE future cash flows).

      this is an odd situation.

      rolg

      Liked by 2 people

      1. However, wouldn’t a P’s win in Collins potentially result in tax credit (the overpayment of 10%) for both Orgs? Wouldn’t that ultimately help any recap, as taxes paid could also be retained?

        Like

        1. Yes, a win for the plaintiffs in Collins, if not appealed, would result in Treasury needing to refund net worth sweep overpayments to both Fannie and Freddie. I don’t have the exact numbers at my fingertips, but as I recall it would be about $10 billion to each as of today. It is most likely that these payments would be made not in cash, but as tax credits applied over time. Either way would help a potential recap, with a cash payment doing so immediately and a tax credit over three years or maybe a little longer (taking into account the likely effect of the requirement for both companies to implement the Current Expected Credit Loss accounting standard in 2020, which will lower net income that year).

          Liked by 1 person

          1. Tim

            agreed. in effect a P win in collins promotes recapitalization (ignoring how existing and new GSE shareholders split the pie). treasury as creditor would have an optics issue not seeking appeal, but I can’t fathom how fhfa would want to appeal given its desire to recap, and Calabria’s personal historical views regarding NWS.

            rolg

            Liked by 1 person

      2. rolg,

        I found your perspectives above interesting. Regarding whether FHFA were to appeal if P’s win, my reaction to MC’s letter in the 5th a couple weeks ago defending fhfa’s constitutionality, I viewed it as a possible attempt by MC to “signal” the court FHFA would likely appeal if the P’s win on the constitutionality issue, but would likely not appeal if P’s win under APA or other remedies. Do you think that thought has any merit? Thanks for your, Tim’s, or others, replies.

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        1. @jb

          interesting take. yes, I could see Calabria preferring to lose on APA claim, if fhfa is to lose.

          as to requesting a writ of certiorari, there is a 90 day window after entry of judgment. so time enough to settle the litigation and avoid a SCOTUS hearing on fhfa’s constitutionality…but SCOTUS is hearing a separation of powers case in the Puerto Rico financing board that, if decided broadly, may affect fhfa’s single director removable for cause structure.

          rolg

          Like

  5. Tim,

    Your post mentions future guaranty fees may warrant capital consideration. Would the same line of thought apply to balance sheet items, like the liability for net unamortized premium/discount of the trust liabilities?

    If my understanding is correct, this liability amortizes into revenue over time. It seems like this would have the same effect as future guaranty fees… Both would stand to bolster retained earnings (and therefore capital) simply with the passage of time?

    Like

    1. If you’re talking about the treatment of guaranty fees in a risk-based capital stress test, then, yes, the stress test also should accurately reflect how purchase premium and discount would be amortized during a stress environment. But to be clear, amortization of purchase premium and discount affect net income (and retained earnings) in opposite ways: the amortization of purchase discount increases net income, while the amortization of purchase premium decreases it. Both purchase discount and premium are known numbers. What is unknown is how quickly each will be brought into the income statement as either income or expense; that depends on the prepayment rates of the loans with which the discounts and premiums are associated.

      Like

    1. As I’ve said on previous occasions, I will wait to see Treasury’s housing reform plan and FHFA’s revised capital rule before drawing any conclusions about the likely course and timing of Fannie and Freddie’s journey out of conservatorship. Having said that, though, Calabria certainly seems to be sending signals that the way in which he intends to set capital standards for and regulate the companies is not likely to result in large numbers of investors wishing to put new money into them.

      I’ll also stick with my longstanding policy of not speculating on the impact of potential policy choices on the common or preferred share prices for either company.

      Liked by 1 person

    2. My diffident take on that..

      “If I can end the sweep, reach some changes to the share agreement with Treasury, we can get them out of conservatorship, we can start to build capital” Mark Calabria

      We also know Calabria wants to initiate some sort of secondary offering of commons in order to recapitalize the GSEs.

      Yet Mnuchin enjoys the OI afforded him by the NWS (even though he noted the unethical opportunistic-nature of the previous administration in this regard.) He also wants to maximize warrants for future OI.

      The compromise is a much reduced IPO, allowing warrants to increase in value. Consequently, retained earnings will bear more of the recapitalization burden, hence the nod toward a possible five more years.

      Another feature could be ROLG’s idea of a new class of preferred shares, allowing for an immediate infusion of capital in exchange for some portion of the warrants. Obviously this would reduce earnings as it relates to commons pps, but it gets the Tsy out of the mix faster, eliminating any delay that would come with reaching some predetermined strike price.

      Like

    1. I had high hopes for Layton’s ability to make useful and substantive contributions to the reform dialogue, but this piece was very disappointing in that regard. In it, he presumes to speak for Fannie as well as Freddie, but then goes on to give a simplistic and inaccurate description of the role and functions of both their on-balance sheet portfolio and off-balance sheet credit guaranty businesses. He also gives FHFA credit for “creating” an approach to pricing credit guarantees that balances risk and return, which I know Fannie did thirty years ago, and I’m sure Freddie had something similar.

      I never met Layton, but he came to Freddie as CEO in May of 2012, after a career spent at JP Morgan Chase. Not having worked in the trenches at Freddie, I now wonder if he ever really learned or understood the details of how its two business worked, or if he was able to gain an appreciation for the differences between the operating histories of his company and Fannie.

      Layton’s description of the two companies’ portfolio businesses–use cheap borrowing to make easy money by buying higher-yielding mortgages and your own company’s MBS–sounds like something you’d read in the Wall Street Journal. Doing the portfolio business improperly almost killed Fannie in the early 1980s. Before we could begin growing it again, we had to reinvent the agency debt market–introducing in the late 1980s option-based, or callable, debt that provided a much better match to the optionality of the mortgages we were buying. We only bought mortgages when the option-adjusted spreads between those mortgages and the blend of debt we used to fund them equalled or exceeded “bright-line” hurdle rates, and we constantly rebalanced our liability mix (using derivatives) to keep a duration match between the mortgages and our debt. Yes, the portfolio business was profitable, but our buying mortgages whenever their yields got too far above our debt costs also kept mortgage rates down for consumers. Treasury never liked our portfolio business, however, and when Fannie and Freddie were forced into conservatorship the first thing Treasury required of them was to shrink their portfolios by ten percent per year–even though at the time those portfolios were hugely profitable, and provided large amounts of net interest income that helped the companies absorb credit losses from their credit guaranty businesses. (Freddie, by the way, did not get into the portfolio business until the early 1990s–and then only because Fannie had developed the agency callable debt market, and showed them that this business could be done safely.)

      Fannie also didn’t run its credit guaranty business as an afterthought to the portfolio business, as Layton seems to think Freddie did (but I doubt it did either). We did compete with Freddie on price, but we did so knowingly. At Fannie, at any rate, we had a concept we called the “guaranty fee gap”–which was the difference between what our credit pricing models told us we should charge for the business we were doing, and what our single-family business managers charged their customers. We rigorously tracked the “gap,” and used it as a discipline against excessive price-cutting. The historical 60-40 market share differential between Fannie and Freddie that Layton cites wasn’t the result of aggressive pricing by Fannie; it was a consequence of the inferior payment structure of Freddie’s PC (which FHFA has now fixed by having both companies pay $2 billion to create a common security that makes Freddie’s payment delays to investors the same as Fannie’s). Duopoly pricing worked–it kept fees low for lenders (who passed them through to borrowers) and it didn’t lead either company to price foolishly. We don’t have to speculate about that. There is history, if remembered correctly.

      So no, Don, Fannie and Freddie before you arrived weren’t just watching the money roll downhill to them because of their favorable charters; Fannie, at least, had very sophisticated business operations and it ran those businesses well. The leaders at FHFA like to say that they’ve modernized the companies’ business operations, and Layton seems to agree with that. Perhaps they, and he, are thinking of the single security and securitized credit risk transfers (about which I’ve expressed my opinion many times). But on the basic credit guaranty business I don’t think FHFA has added anything, and if it puts too much conservatism in Fannie and Freddie’s new capital standards it will push that business backwards by breaking the link between the risk and the pricing of their credit guarantees, and restricting the companies’ ability to use cross-subsidization to attract a wider range of business.

      Liked by 2 people

      1. Mr Howard

        You just stated: “Fannie, at least, had very sophisticated business operations and ran those businesses well.” My question is this no longer the case today, and if not, how can they be properly regulated going forward if only a small number of people truly understand their business?

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        1. I have no reason to suspect that the sophistication and quality of Fannie’s business management are any less today than they were when I was there. I was responding to what I took to be Don Layton’s characterization of them, which I believe is uninformed. Since he came to Freddie well after it was put into conservatorship (and only three months before the net worth sweep was imposed), it’s possible that he views himself as a partner of his FHFA conservators, and thus in order to make the decisions made by FHFA to which he was a party seem more important or consequential, he needs to present the pre-conservatorship Freddie as being more problematic or bumbling than it actually was. But facts are facts, and Layton’s opinions won’t change them.

          Liked by 1 person

          1. Tim

            I have no doubt that you are right as to the historical issue, but what troubles me is that on the issue of competition v. utility-like regulation, calabria seems to have arrived at fhfa with a preconceived idee fixe that competition and additional charters is a solution to the risks presented by a duopoly, as opposed to utility-like regulation. Layton is simply pointing out Calabria’s tunnel vision, imo. as an aside, calabria will likely have enough regulatory power to put into place something that amounts to a lite version of utility-like regulation, and he may even come to realize that.

            now one can be cynical and posit that congress will do neither soon and so what’s the point of the discussion, but I believe it is possible that the idea of utility-like regulation will percolate so that at some point in time, congress may actually seriously consider it. just not holding my breath.

            role

            Liked by 1 person

          2. I’ll admit to not having read HERA from beginning to end, but I’ve read the critical sections of it and found nothing that gives FHFA the authority to set prices or return limits for Fannie and Freddie’s credit guarantees. FHFA does that now as conservator, not as regulator. So when people talk about FHFA imposing “utility regulation” on the companies, absent legislation I don’t know what they mean.

            I’ve long been an advocate of setting a limit on Fannie and Freddie’s returns, but in administrative reform this would need to be done by a fourth amendment to the PSPA to which the companies were parties. For Fannie and Freddie to accept a limit on their prices or returns, I believe they would need “consideration,” or something of value, in exchange. I know what I’d ask for if I were in charge of Fannie, but it will be up to the companies’ current top leadership to make that determination. Without either legislation or the companies’ concurrence, however, I don’t believe FHFA can put limits on their pricing or return targets.

            And this gets to the heart of what bothers me about the Layton article. Fannie and Freddie’s critics have been very successful in creating the impression that, if released from conservatorship, the companies won’t be capable of managing themselves properly without heavy regulation by FHFA. Layton seems to subscribe to that view, and his blog post is written in a way to justify it. I strongly disagree. FHFA should update the companies’ capital standards (to protect taxpayers), and set goals for the percentage of affordable housing loans they finance (to ensure the companies serve their target constituents), but leave HOW to meet those standards and goals to company management. I believe that one of the biggest deterrents to getting new capital into the companies will be the degree to which current FHFA leadership insists on appropriating for itself decision-making authority that other financial regulators properly leave to the management of their regulated entities, and that FHFA also should leave to Fannie and Freddie management.

            Liked by 1 person

      2. And what would the yield have been on FNMA debt if there was no implied government guarantee? I believe that is Mr. Layton’s point.

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        1. I hope that wasn’t Layton’s point; if it was it would put him in the same category as those who claim that Fannie and Freddie’s unique federal charters somehow make their business operations illegitimate. As to what the yield on the companies’ debt would have been without the implicit guarantee, that’s an unknowable hypothetical. So, too, is this question: “what would commercial banks have to pay private insurance companies to guarantee their consumer deposits, and what yields would consumers demand from banks if their deposits were insured by private companies, rather than the federal government?” The only difference between these questions is that the former is asked all the time, while the latter never is.

          Liked by 5 people

          1. It’s weird that the same people who rail against the GSE charters never equate the banks’ FDIC backing isn’t it? It’s almost like they’re paid not to.

            Liked by 1 person

          2. From John Carney/Twitter:

            Weird that Howard says we don’t ask about the appropriate cost of deposit insurance. Gets asked all the time.

            Like

          3. Carney, probably knowingly, misrepresents the point. I don’t question whether banks’ FDIC insurance is properly priced, and I know the correct premium to charge for this insurance is discussed all the time. The point I’m making is that FDIC insurance is an enormously valuable benefit granted to banks by the federal government, which supporters of banks refuse to acknowledge while at the same time claiming that Fannie and Freddie’s charters give them inappropriate or unfair advantages. Framing the FDIC insurance question as I did– how much more in premiums would banks have to pay for private insurance compared with government insurance, and how much higher an interest rate would bank customers demand on deposits insured by private companies rather than the FDIC–makes the inconsistency and hypocrisy of this double standard of government benefits being good for banks but evil for Fannie and Freddie apparent, and indefensible. Someone should ask Mr. Carney to respond to THAT point.

            Liked by 5 people

  6. Tim,

    I have seen some speculation that releasing Fannie and Freddie might be difficult because it could cause ratings agencies to downgrade the MBS, potentially shaking up the market ahead of election season. This seems to either ignore the fact that Treasury’s line of credit is limited to around $200B ($400B from the SPSPAs minus the amount already drawn), i.e. that there is not an unlimited government guarantee in place right now, or it makes the assumption that the government will make MBS holders whole no matter what while Fannie and Freddie are in conservatorship but might change their minds if the companies are released.

    As rolg has correctly pointed out in a Twitter response to Christopher Whalen, right now Fannie and Freddie have around $6B in capital ahead of a $200B line of credit with Treasury. If FHFA and Treasury are able to raise their desired level of capital while keeping the line of credit intact (with Fannie and Freddie paying a commitment fee for it, in keeping with the presidential memo), there would be $150B, or whatever number Calabria decides on, of private capital ahead of the same $200B Treasury line of credit. I fail to see how this would warrant a ratings downgrade. If anything, that would be cause for an upgrade! I would appreciate your thoughts on this. To me, it’s just another big bank false narrative with the aim of either slowing down or stopping recap and release.

    Liked by 1 person

    1. If Treasury wants to release Fannie and Freddie from conservatorship there are a number of types of contingent support arrangements it could arrange with them–including a paid-for backstop facility, triggered by a loss of capital to some minimal threshold level–that would maintain the credit ratings on their debt and MBS as well as ensure that these securities remain eligible investments for international investors (as they are now). The “ratings-downgrade-if-released-from-conservatorship” is another hair-on-fire scare story cooked up by those who don’t want the companies released.

      Liked by 3 people

      1. Gee, such a ‘contigent support arrangement’ (otherwise called an ‘explict guarantee’) would require Congressional action. Unless you beleive SecTsy can appropriate funds to the GSEs without Congressional approval.

        Like

        1. Not necessarily. If Treasury were to endorse the new FHFA capital standards as making the risk of the companies losing all of their capital “extremely remote,” I believe a further layer of catastrophic insurance could be arranged with private reinsurance companies for a very reasonable annual premium.

          Liked by 2 people

        2. @egar

          let’s be clear here. read HERA. it says that the current existing treasury backstop is “appropriated”. there is some $200B of remaining congressionally funded backstop for the GSEs THAT IS ALREADY IN PLACE. I do all caps because the MBA group (which may or may not include you) doesn’t seem to get it. congress doesn’t need to do anything!

          read the statue!

          rolg

          Liked by 2 people

          1. @egar

            from Fannie’s 2018 10K: “As of the date of this filing, the maximum amount of remaining funding under the agreement is $113.9 billion.”

            there is a “savings provision,” in Section 1117 of HERA, that makes clear that all amounts drawn under the line shall be deemed appropriated by Congress (“Any funds expended for the purchase of, or modifications to, obligations and securities, or the exercise of any rights received in connection with such purchases under this subsection shall be deemed appropriated at the time of such purchase, modification, or exercise.”).

            now, this line of credit would have to be amended to provide a commitment fee and, presumably, make it clear that the securities issued to treasury in respect of any future draw shall not have a NWS. treasury and FHFA have authority to amend the line of credit in all respects except increase treasury’s maximum obligations thereunder.

            rolg

            Liked by 1 person

  7. Cooper & Kirk Lawyers
    A Professional Limited Liability Company
    David H. Thompson
    (202) 220-9659
    dthompson@cooperkirk.com
    Via ECF 1523
    New Hampshire Avenue,
    N.W. Washington, D.C. 20036
    July 15, 2019

    Lyle W. Cayce
    Clerk of Court United States Court of Appeals for the Fifth Circuit
    600 S. Maestri Place New Orleans, LA 70130-3408
    (202) 220-9600
    Fax (202) 220-9601

    Re: Collins v. Federal Housing Finance Agency,
    No. 17-20364

    Dear Mr. Cayce:

    It is no coincidence that since the current President took office the Department of Justice has had one position on FHFA’s constitutionality and FHFA has had three. FHFA’s latest switch, prompted once again by a change in leadership at the agency, only further underscores how this agency’s novel structure places vast executive power in the hands of a single individual who is wholly unaccountable to the President. Humphrey’s Executor blessed the FTC’s independence because in that case independence—combined with leadership from a commission whose members serve staggered terms—was thought to promote continuity and expertise at the agency. In FHFA’s case, independence achieves the opposite of continuity by leaving critical policy decisions up to the whim of whichever individual happens to sit atop the organizational chart of an agency that answers to no one. FHFA was right the second time, not the first or the third.

    Respectfully submitted,

    /s/ David H. Thompson

    Liked by 1 person

    1. @Brian

      a particularly effective piece of advocacy, that points out that D’s conduct makes P’s argument for P.

      while I expect it is too late to affect the en banc decision making (though the argument could be tucked into an opinion before publication), Thompson’s point addresses a concern held by at least one 5th circuit judge (Higginbottom) that leans to the govt side. in the All American oral argument he asked P counsel (in context of the CFPB) where to draw line; is single director removable only for cause the constitutional flaw, or do you also need insulation from congressional appropriation etc. he said that if the court were to advise congress on where the constitutional line is to be drawn (which is not the court’s duty in the exercise of its Article III judicial power), what would be the answer.

      by pointing out to the court that the FHFA single director before the court switched positions two times in a full 360 spin during a single argument, Thompson is able to show the judges inclined to follow Higginbottom that the single director insulated from removal doesn’t produce the expertise development and continuity benefits thought to underlie the multi-member commissions in the original SCOTUS case examining insulation of directors from POTUS removal.

      rolg

      Liked by 2 people

  8. Tim

    today we have two news pieces: https://www.bloomberg.com/news/articles/2019-07-12/trump-team-grows-wary-of-fannie-freddie-fix-before-2020-election and https://www.marketwatch.com/story/fannie-freddie-overhaul-could-mean-windfall-for-preferred-stock-analyst-says-2019-07-12?mod=mw_share_twitter

    the first is written by a partisan (anti-GSE) Bloomberg news organization that, I have read, pays more money to its Bloomberg journalists for moving markets. the second is written by a securities analyst who makes more money by making money for his firm’s clients.

    I dont know which article is or will prove more prescient, although I think you can find no better example as to how politics and finance are ill-suited dance partners than this comparison.

    rolg

    Liked by 2 people

    1. I saw the headlines, but haven’t yet been able to read any of the stories. I’ll be traveling back to the U.S. today and won’t have have any informed commentary on anything until sometime tomorrow. In the meantime, I’ll remind readers that mere expressions of opinion (or frustration) about recent developments, without either new information or insightful analysis, will be deleted once I re-engage with the blog, so you may wish to consider saving time by not posting them in the first place.

      Like

        1. Great update to that article 25 mins ago:

          ““The president earlier this year instructed the Department of Treasury to develop a comprehensive plan for bold reform,” White House spokesman Judd Deere said in an email statement. The National Economic Council, Treasury, Federal Housing Finance Agency and others “continue to work together on this presidential priority and anything to suggest otherwise is false,” Deere said.”

          Bloomberg seems to like to print things first from anon sources, only to have the parties involved correct them after the market has moved on their earlier reporting. Bonus achieved.

          Liked by 1 person

          1. This clarification from the White House was helpful in clearing up the confusion created by the original Bloomberg article, but there are two cautionary elements in it. The National Economic Council (NEC), headed by Larry Kudlow who is no friend of Fannie and Freddie, is mentioned first in the list of those who “continue to work together on this presidential priority,” and consistent with that, the group’s efforts are described as developing “a comprehensive plan for bold reform.” The idea that you can’t remove Fannie and Freddie from conservatorship without a bold and comprehensive overhaul of the (“old, flawed”) system has been the pretext for keeping the companies under government control for over a decade. The NEC, at least, seems to be sticking with this playbook. We should know in fairly short order whether their influence prevails within the administration.

            Liked by 2 people

          2. Tim

            “bold” reform caught my eye as well. I concluded that if both admin and congressional reform was achieved (based upon Mnuchin’s desire for bipartisan congressional involvement and Calabria’s suggestions to congress), the result would be bold…including fed mbs guaranty and multiple charters. if just admin reform, less bold.

            rolg

            Liked by 1 person

          3. On legislation, Senate Banking Committee Member Mike Rounds was quoted this past Thursday 7/11 saying regarding congressional GSE Reform efforts, “I wish I could say it was going somewhere. It ain’t.” Per a Thursday 7/11 tweet from ACG Analytics (@ACGAnalytics). A google search indicates Rounds spoke that day at a Venable LLP Event. Interesting to hear this now from a Republican member of the Senate Banking Committee.

            Liked by 1 person

          4. No one expects legislative mortgage reform in the foreseeable future. The question now is: what form will the administrative reform piece take? If Mnuchin and the Treasury are driving the process, I would expect it to be consumer- and investor-friendly, and be designed to result in the removal of Fannie and Freddie from conservatorship in a manner that still could be described as “reasonably fast.” If, on the other hand, the anti-Fannie and Freddie forces within the administration, led by NEC Director Kudlow, have taken control, I would expect the process to be bank-friendly and take much longer, allowing for more opportunity for potential future legislative changes.

            What would pro-bank administrative reform of Fannie and Freddie look like? It would start with few significant changes to the capital standards promulgated by FHFA in June 2018, which were engineered to produce much higher required capital than warranted by the risks of the companies’ business. There then would be an agreement between FHFA and Treasury to cancel the net worth sweep, followed by Treasury’s conversion of its warrants to acquire 79.9 percent of the companies’ common stock. Next, FHFA would direct the companies to come up with plans to achieve their new required capital percentages, which when met would trigger their release from conservatorship. If, given the regulatory and capital requirements FHFA intended to impose upon Fannie and Freddie, investors were willing to put new equity into them, great; if not the companies would remain under FHFA control until they could achieve their target capital percentages through retained earnings, which would take many years but could be done more quickly by “shrinking their footprints.”

            I’m not predicting that this bank-friendly approach to administrative reform will be the one chosen—indeed I dearly hope it’s not. But I do believe there are strong advocates for it.

            Liked by 2 people

          5. Tim

            ex-Freddie ceo Layton just laid out that “baseline” in a WSJ article:

            “Four or five years of retained earnings, then do an IPO of more-likely digestible size that would be contemporaneous with the conservatorship ending and with the shareholders getting their full rights. That’s the baseline. I know a lot of people who would love to accelerate from that, but then they have to deal with all of these trade-offs. That acceleration is one area that’s hard.”

            https://www.wsj.com/articles/former-freddie-mac-ceo-plans-to-keep-hand-in-housing-finance-11562932800?mod=searchresults&page=1&pos=1

            but of course, if the first stage of the recap process can be a re-IPO at the beginning, then the process accelerates and disincentivizes MBA-moral hazard. can the re-IPO occur upfront while GSEs are still in conservatorship? Layton seems to be inclined to think not, but then again, the GSEs have generated >$200B in free cash flow while in conservatorship, so it would seem prudent to give it a shot.

            rolg

            Liked by 1 person

          6. I read the Layton interview. In the spectrum of outcomes I described in the current post for the upcoming revision of the FHFA capital rule–from a “straightforward attempt to produce an accurate risk-based standard,” to one “engineered…to produce a particular predetermined outcome” [favored by the banks], or an attempt to “land somewhere in the middle”–the scenario described by Layton would fall between the middle and the bank-desired alternatives.

            The administration SHOULD do the Fannie/Freddie capital and regulatory reforms in a way that meets rigorous safety and soundness standards comparable (but not equal) to those imposed on other financial institutions, while leaving the companies in the best position to provide the lowest-cost mortgage credit guarantees to the widest possible range of potential homebuyers. That would be best for consumers, the economy, and our financial system. But unfortunately competitive, ideological and political considerations all but rule out the optimum outcome. So now we wait to see how far from the “most homebuyer friendly” towards the “most bank friendly” end of the spectrum Treasury and FHFA elect to go. The point I’ve tried to make with my last few comments is that the amount of new equity supplied by investors will decrease, and the length of time it will take to complete the recap will increase, the further from homebuyer-friendly toward bank-friendly Treasury and FHFA’s “reforms” for Fannie and Freddie end up.

            Liked by 3 people

  9. Tim interesting comment from Paul muoulo
    pmuolo@imfpubs.com, bivey@imfpubs.com

    “If you’re wondering why everyone in the mortgage industry is waiting with bated breath for the new capital standards for Fannie Mae and Freddie Mac, it’s simple: Those standards, once cast in stone, will give the Federal Housing Finance Agency a powerful tool. One GSE observer who used to work on Capitol Hill told IMFnews those standards will give the FHFA legal cover to declare Fannie (or Freddie, take your pick) “critically” undercapitalized. Once that determination is made, the agency can move to terminate the conservatorship and enter into a receivership…

    The next step might be to create a limited liability regulated entity (LLRE) which would succeed the GSE. After that, the LLRE (once capital is raised) becomes a new company and the charter is sold to new owners. From what we understand, the FHFA has the legal power to sell the charter. We also understand that the Treasury Department under former Senior Counselor Craig Phillips was well aware of all of this. More to come in the weeks ahead.”

    Care to comment?

    Like

    1. This is a nothing story. The option for FHFA to put Fannie and Freddie into receivership has existed since it and Treasury decided to use book accounting entries to exhaust all of their capital back in 2008, and it was kept alive when FHFA and Treasury agreed to the net worth sweep in 2012 in order to keep the income from the end or the reversal of those book expenses from becoming retained earnings (i.e., capital) at the companies. FHFA has not put Fannie and Freddie into receivership during all this time for one simple reason–neither it nor Congress has been able to come up with a replacement for them. The pending capital standards don’t change either FHFA’s options or its likely decision with respect to those options in any way. Another scoop from IMF (“Hold the back page.”)

      Liked by 5 people

        1. Michael Bright, now at SFIG and the author of Corker’s legislation that called for receivership, is the only main GSE opponent left who used to work on the Hill.

          Some tigers never change their stripes.

          Like

    1. I am not surprised that Calabria would reverse Acting Director Joseph Otting’s decision in January to withdraw FHFA’s prior assertion that the agency was constitutionally structured, reverting to the original position that FHFA’s single director removable only for cause IS constitutional. (Among other reasons, the current structure gives Calabria more power to do what he wants, for the remainder of his term.) But I AM surprised Calabria also also defended the legitimacy of the net worth sweep (if indeed he did; the Breitbart article says so, but I’ve not seen the actual letter). As a private consultant, Calabria had been consistently and forcefully outspoken about the illegality of the sweep. If true, this would be a striking example of the maxim “where one stands depends upon where one sits.” It also would not be a good sign for FHFA putting itself behind an administrative release of Fannie and Freddie from conservatorship, without a court invalidating the net worth sweep Calabria now says he supports.

      Liked by 3 people

      1. Thank you Tim. I owe you a nice meal if you’re ever in the D.C. metro. You are incredibly insightful on this topic, and you are one of the good ones. Thanks

        Like

      2. Tim,

        Supporting the NWS would mean (a) supporting an interpretation of HERA that allowed for the NWS. It could also mean (b) supporting the NWS decision as a solution, at the time, to end the “circular borrowing.” However, and as strange as it is for Calabria now to support the NWS in those two ways, I don’t think such support would make it inconsistent with (c) supporting putting an end to the NWS so that the GSEs can begin to retain capital.

        (a) is strictly a legal consideration.

        (b) pertains to a (dubious) practical concern during a state of affairs specific to 2012.

        Whereas (c) is justifiable based upon GSE reform giving way to recapitalization concerns.

        Thoughts?

        Liked by 1 person

        1. These are plausible interpretations, but given everything else Calabria has said and done since he became Director of FHFA, it’s hard for me to view his letter to the Fifth Circuit judges as anything other than throwing more sand in the gears of administrative reform.

          Liked by 4 people

      3. This is the correct reading (from Wiggins on COBH):

        It makes sense that Calabria would reverse direction regarding the constitutionality of HERA, given that he helped write it and he keeps an original dog-eared copy of it. In that sense, perhaps he is merely arguing that an unconstitutional structure cannot be a reason for the NWS to be invalid. A key sentence supporting this is: “At all relevant times FHFA argued and continues to argue the issue does not affect the Third Amendment’s validity.”
        I believe his prior arguments against the validity of the NWS were based on the fact that it does not fall within the power of a conservator, i.e. the APA claim. He doesn’t speak to this in this latest letter. Does anyone else see it this way?

        Liked by 4 people

        1. first, this last minute about face by calabria on the separation of powers claim is completely amateurish and makes fhfa look foolish. the en banc 5th C judges have been twisted a full 360 degrees on this and must be laughing in their chambers. my bet is that the majority opinion(s) are written and the dissents are soon to be finished, so this embarrassing letter likely is to be given no weight by the en banc.

          second, calabria did not touch upon the APA claim. fhfa has always argued that no relief should be given for the separation of powers claim, first because removal of single director only for cause was constitutional, second because even though it was unconstitutional no remedy should be provided Ps, and third back to it was constitutional.

          why would Calabria do this? lots of possible reasons: make the deal with mnuchin look more at arms length between co-equal officials, protect himself and the recap/release beyond 2020 in case trump loses election, tell treasury that calabria has final say about capital etc.

          rolg

          Liked by 4 people

          1. Another question, why deny the constitutionality of FHFA in the first place? Would Otting have presumed to make such a decision on his own (especially in his temporary capacity)?

            It’s all so bizarre. I can’t even attribute a calculated scheme to this given all the flip flopping, even accusatory remarks regarding funding Obamacare and other programs. At least the previous two administrations were consistent in their takings.

            Like

          2. I’ve been traveling outside the country this week (returning tomorrow evening) and haven’t been able to follow either the most recent developments in the mortgage finance arena or the postings on this blog in anything close to real time. I finally read the letter Robert Katerberg wrote to the Clerk of the Court of the Fifth Circuit, and see that Breitbart did get the story wrong–Calabria did not reverse his position on the legality of the net worth sweep. That makes this filing less concerning, and for me at any rate merely curious, given that almost six months have passed since the oral argument before the Fifth Circuit and, as ROLG notes, the sixteen judges almost certainly have decided where they stand on the issues before them and why. Katerberg’s letter is unlikely to change any of that.

            Liked by 2 people

          3. @ron

            fhfa and treasury will soon, one hopes if not expects, be negotiating a deal to settle litigation, both against Ps, and to lay out the basis for a recap, fhfa in the capacity as conservator representing the GSEs as debtor and treasury in the capacity as creditor (though re senior preferred stock rather than debt).

            so fhfa and treasury optically should assume an arms’-length relationship, even as their interests are aligned…both want the GSEs out of conservatorship. yet the more treasury keeps the less the fhfa’s conservatorship wards retain, and so there is a diversity of interest as well. fhfa needs to assert independence at this point, so the thinking behind Calabria’s letter assumes, imo.

            Calabria’s letter is kabuki theater in courtroom setting.

            rolg

            Like

        2. I agree ROLG, this seems ridiculous to submit such a letter this late in the game. We know the legal team for FHFA is not run by amateurs and Calabria has been working in Washington long enough that he’s no amateur. It seems to me he would know very well how the letter would be received by the en banc court (or would have been advised on how it would be received) and did it anyways. Who knows what his reasons are? It feels like throwing the fight to me. “Hey 5th circuit, at this late hour, please provide a ruling on our flip/flopping poorly argued stance on structure of FHFA.”

          Liked by 1 person

  10. Tim

    Hamish Hume’s excellent article regarding how the recap must protect shareholders’ rights: https://www.americanbanker.com/opinion/recap-of-fannie-and-freddie-must-protect-shareholder-rights

    Hume points out that the overpayment beyond the 10% moment, which he calculates to be $18B, should be returned by Treasury to the GSEs, and he refers to how the reasonable expectations of GSE shareholders were violated by the NWS, which is the claim he is prosecuting in front of Judge Lamberth.

    Hume’s article tracks closely along the Moelis Blueprint, though Hume cautions against conversion of the junior preferred into common. On this I quibble with Hume. I expect some form of conversion to be proposed by Treasury and if 2/3rds of each class of junior preferred vote to convert, then there will be “exit consents” forcing the rest of the class to convert (as the consents will be to adverse amendments to the preferred). see section 7(c) of certificate of designation https://www.sec.gov/Archives/edgar/data/310522/000031052213000065/fanniemae201210kex415certo.htm. this coercive “force-along” provision will deprive any junior preferred holes of hostage or hold-up value, with the hurdle of getting 2/3rds consent being the protection for each holder that the conversion rate is fair.

    rolg

    Liked by 2 people

    1. ROLG,the only reason the Moelis’ plan called for Junior preferred shares to be converted to common was because the plan called for no dividends to be paid until recap is achieved. If dividends are stopped the value of the preferred shares is diminished. There is a lot of rhetoric out there saying if commons are worth a penny preferred shares are worth par, but this is in a liquidation scenario. In a going concern scenario preferred shares can be worth more or less than par since their value is based on the dividend percentage that is compared to the Treasuries.

      Liked by 1 person

    2. The only reason to convert the preferred shares to common will be to simplify the capital structure if the plan calls for recap issuing new preferred shares.

      Like

    3. I agreed with almost all of what Hume said in his American Banker article. On the issue of how to reverse the sweep, Hume’s method of re-characterizing quarterly sweep payments in excess of a 10 percent annualized dividend on the then-outstanding senior preferred stock as paydowns of the senior preferred balance is what plaintiffs are asking for as a remedy for the imposition of the sweep, and I think it’s the correct way to do it. The “ten percent moment” is an internal rate of return calculation popularized by Alex Pollock, and it would result in substantially less than an $18 billion refund going to the companies, essentially rewarding Treasury for having entered into the sweep. If the sweep was illegal it should be unwound, full stop. And I don’t have a view about whether or how the junior preferred stock should be converted to common; I’ve said from the beginning that I’m content to leave that decision to the investment bankers and the major institutional investors who have more expertise and more of a stake in that decision than I do.

      Liked by 1 person

      1. Along with his previous convictions?! “Where one stands depends upon where one sits” is a new proverb to me. I think I’ll keep it (along with Geritol).

        Like

  11. Tim,
    If at some point in this process the senior preferred are deemed paid and the parties are unable to convert the junior preferred to common shares under a recap and release, would the junior preferred be considered part of the companies’ core capital?

    Like

    1. Fannie and Freddie’s junior preferred is part of the companies’ core capital today. Fannie, for example, has shown $19.1 billion in junior preferred stock on its balance sheet since the end of 2011. (For the trivia buffs among the readership, Fannie had $21.7 billion in junior preferred outstanding when it was put into conservatorship in September 2008, but some of that was convertible. With the dividends shut off on all preferred stock–and it all being non-cumulative–holders of convertible preferred converted most their shares to common over the following three-plus years: $503 million over the balance of 2008, $874 million in 2009, only $144 million in 2010, and then $1.074 billion in 2011, before the conversion window closed. Some who converted may now wish they had not done so.)

      The reason you don’t see Fannie’s or Freddie’s junior preferred in the companies’ equity totals is that it’s offset by a combination of losses accumulated between 2008 and 2011 (which wiped out all of the companies’ capital, and more) and Treasury stock (common shares repurchased in pre-conservatorship years to boost earnings per share–which seemed like a good idea at the time, but in retrospect was not). Any who wish to know what Fannie’s equity account looks like–and how it changes from period to period–can go onto the company’s website and download any of its earnings press releases. At the very end all of them have a schedule titled “Condensed Consolidated Statements of Changes in Equity (Deficit).”

      Getting back to your question, if the senior preferred for each company were cancelled, their equity accounts would be unaffected: the component of their equity called “Senior Preferred Stock” would be reduced by the dollar amount of the cancelled senior preferred shares, and the “Accumulated Deficit” component would be increased (that is, made less negative) by the same amount. But then the companies could begin retaining earnings and raising new capital without fear of it being shipped to Treasury.

      Liked by 1 person

      1. Tim – many believe that the fear would still be there as there has been no court ruling saying what was done over the course of the conservatorship was illegal or even ultra vires from the conservators standpoint. I still fail to see how fears of capital recapture would be abetted given that there seemed to be no legal recourse for the investors the first time around.

        Yes they sued, but their pleas all feel on deaf ears even when the facts were loaded in the plaintiffs favor along the way.

        Further, the secrecy with which the gov’t attempted to, and at least partly successfully, operated with would also make it neigh impossible to discern what actually occurred and make a judgement on whether or not it would be able to defend its invested dollars here going forward. My view is that they would have 0 chance given comments from plaintiffs attorneys in public forums “because of what that would mean.”

        Further still, the media was very obviously in on the take along they way – with the likes of wsj, fox biz, brietbart, cnbc, all abdicating any responsible role the 4th estate is ostensibly supposed to fill but has clearly failed.

        I fail to see how any rational investor managing billions is going to look at the history and say hit the bid given the reality of what happened and the ever shifting sands in DC.

        How does one get comfortable here?

        Like

        1. @anon

          if I may, while I am sympathetic with this line of thinking, and indeed it formed the basis of the Perry amicus brief authored by Vartanian, also remember that the NWS was a conservator’s act, which (assuming it is not ruled authoritatively to be illegal) can only be repeated in conservatorship under HERA. once fhfa lifts conservatorship in connection with the capital raise, there would be no authority for fhfa or anyone else to repeat the NWS saga unless the GSEs were first put back into conservatorship. this may may be scant solace if there is no ruling by the 5th circuit invalidating the NWS…and even if there is, it is not likely that collins will be ruled upon by scotus prior to a release from conservatorship. a settlement is likely to be reached before that point.

          rolg

          Liked by 1 person

          1. Thanks for your reply rolg.

            I appreciate that something similar to the NWS MAY only happen again under HERA if the GSEs (are ever released and then) re-enter conservatorship.

            However this brings up another question about bridges.

            Many say that at this point in the saga that it is a bridge too far to completely reverse the conservatorship. However, we now know that the impetus for the conservatorship was based on ‘creative accounting’ (read: fraud) and assumptions of catastrophic losses at one point in time that were used to justify the takeover and of course those losses never came to fruition. No, in fact the profits were so enormous that the same people who were publicly saying it was going to be a death spiral were privately discussing a golden age of profitability just a couple short years later after massive amounts of gov’t stimulus was required to shore up the housing market and save the banks from their own malfeasance of PLMBS issuance and cubed CDOs.

            I think it is a bridge too far to expect, with the publicly available history that now exits here, that money is going to come in given the systemic problem the gov’t itself has shown to be.

            Now as Tim points out, many of the competing firms are continuing to desperately try to hamstring them any way they can so they can swoop in and take over the market, killing the 30 year and making SFR biz model rule the land and we’re supposed to think that they are going to be released by a former alum of the same firm that whose prior alum had peoples heads hitting the floor. I find this all very convenient and suspect and I would wager that many others do as well, so much so that barring an adverse ruling on this entire fiasco cutting all the way back to the actions in 08, there will be few takers today.

            Would love to get thoughts on why that line of thinking is incorrect as well. Truly I would. I’ve not seen any to date.

            Like

          2. ROLG, the companies were put in conservatorship while meeting all capital requirements imposed on them by their regulator. What guarantee do investors have the Treasury will not do the same takeover in the future and impose a new NWS? The plan in 2008 was to liquidate both companies and nobody was thinking how the Treasury actions would be interpreted by invesotrs, since nobody was thinking of recapitalizing the GSEs. Now it is catch 22.

            Like

          3. @anon

            one observation and a suggestion for Calabria (who could use a little help from his friends).

            Greece within recent memory was on life support, and is now selling sovereign debt at rates comparable to the US. memories can be short in finance.

            Calabria should make clear as fhfa director, in connection with the settlement of litigation, that the NWS was not valid under HERA. a 3rd A that accelerated repayment of interest and principal to treasury with a sweep mechanism would have been, for example, so long as the sweep was extinguished when the sr. pref was paid off…something along those lines. he can do that in connection with a settlement and full releases all around…and he can do that because as far as I can tell he believes that. that might go a long way to addressing the market concern.

            rolg

            Liked by 2 people

          4. I don’t have much to add to this discussion (which I’m seeing late, since I’ve been traveling). I only would emphasize that in the discussions between senior officials at Treasury and FHFA, investment bankers and major institutional investors that will have to take place before any serious recapitalization plan can be formulated, the past actions of Treasury and FHFA with respect to Fannie and Freddie will be one of the top concerns raised by investors, and it will be up to Treasury and FHFA to come up with a way to address those concerns to investors’ satisfaction. I don’t know how that will be done, only that it will need to be for a recapitalization of the companies to go forward.

            Liked by 1 person

  12. Tim

    as we await the treasury plan and the Collins en banc decision, I have tried to simplify the situation in my mind, and perhaps this might interest you and your readers. you can certainly weed out much detail when you simplify, and as well run the risk of dropping important details from the process. any feedback is appreciated.

    in my view, number one rule in finance (and business generally) is to try to engage in a course of action in which all parties to a transaction prosper. even better if that course of action is really the only feasible course of action.

    rule number two is that you almost never find transactions that satisfy rule number one.

    but consider this: the only way to raise $100B of GSE capital is to nuke the senior prefs. the only way to settle the lawsuits is to nuke the senior prefs. not saying this is sufficient, but it is necessary in each case.

    wow. it looks like we are pretty close to satisfying rule number one…nuking the senior prefs is the core course of action.

    now there are obviously a lot of details around this core course of action that need to be worked through, and i) fhfa will have its say (principally, capital), ii) treasury will have its say (how much more than the 10% return does it need from this saga…which affects whether the $20B+ it has received beyond the 10% moment will be put back into companies…remember that if treasury does this, it stands to gain 80% benefit from doing this through the warrants…and how much of the 80% warrants does it want to monetize…understanding that the more it monetizes the harder the capital raise), iii) the market will have its say because the market always has its say, iv) congress will have its say (but query if it will be more substantive than the usual grumbling, amounting to nothing), and v) the large junior prefs will have their say, given their prominent economic position (and the need to get 2/3rds of each class of junior preferred to convert into common as, I suspect, will be an aspect of the plan).

    so this will shake out slower than one might want, and since this is a dynamic non-linear process (one player’s move affecting the decision processes and moves of the other players), it will also shake out likely in a more unpredictable way than one might want. by simplifying one cannot make it more determinate.

    while this process is without precedent (no release from conservatorship/receivership of this magnitude before), which one might think adds to the uncertainty, I actually think this benefits the process insofar as decision makers will need to gravitate to the best solution on offer in the absence of precedent, and clearly the Moelis Blueprint is that roadmap. no other course of action that has been discussed over the past 7 years comes remotely close.

    now one culled detail that I want to reintroduce to the analysis is the tbtf bank effect on decision makers calabria and mnuchin. given the demise of SBC plans over the past few years that were neither well thought out nor feasible, it seems clear that Calabria’s suggestion to congress to pass a limited fed guaranty and charter competition is an accommodation to the tbtf banks. I feel certain this will not pass congress during the timeframe that calabria has discussed for the commencement of the administrative reform process. at some point once the administrative reform does commence, I believe the prospect of the tbtf banks being able to earn outsized underwriting/advisory fees will capture the attention of tbtf banks. nowhere but on wall street does money more focus the mind.

    rolg

    Liked by 1 person

    1. I’m not as sanguine as you are on the potential for the banks and their supporters to back away from their opposition to having Fannie and Freddie return as shareholder-owned guarantors in anything close to their pre-conservatorship form. Put differently, I don’t think they’ll renounce a lifetime of opposition to the companies for a one-time (or maybe two-time) underwriting fee, no matter how large. In my view the bank lobby will continue to ask the impossible of Treasury and FHFA in administrative reform: smother Fannie and Freddie with structural constraints, including excessive capital, and intrusive oversight, then go out and convince investors to put $100 billion or so in new money into two companies that will have to struggle to achieve middling financial performance. I believe Treasury and FHFA will have to make a choice between what the pro-bank crowd wants and what will work in the market. I don’t know what they’ll do, so I’m just going to wait to see what the administration’s mortgage reform plan and FHFA’s revised capital plan look like. Then I’ll know, as will everyone else, and we can take our analyses from there.

      Liked by 3 people

  13. Tim,

    Charlie Gasparino at Fox Business News reported today that JP Morgan held a meeting that included banks as well as FNMA FMCC top stock holders and Moelis today. I don’t fully trust his reporting, but he occasionally gets a truth nugget and this feels like one. Any thoughts on how such a meeting might have gone?

    Also, my sense is that rules of cooperative effects will soon start to take hold upon release of the administrations plan. At least one big bank will want the underwriting business of the largest public offering ever. That bank will need to support the recap and release against the will of the other banks. If this is imminent, wouldn’t they all start wrangling to be the chosen underwriter and thereby all start singing a new tune in support of recap and release? Or do you think that IPO is not enough business to warrant such a change in tone?

    Like

    1. @juice

      if I may, this capital raise will be large enough to require all investment banks’ participation, and the fees will be large enough to guarantee this widespread participation. while there are tbtf banks, all of which have capital markets investment banking divisions, which may oppose the GSEs at the C suite level and have contributed to the MBA lobbying effort against the GSEs, there is no way any of these tbtf banks are going to make their investment banking divisions sit this one out once it gets started. all big investment banks will want to participate in the underwriting syndicate.

      rolg

      Liked by 2 people

      1. I have no reason to doubt that the meeting Gasparino described did in fact take place. I would have liked to have been a fly on the wall there. (And, yes, I do know some of the people who were alleged to have attended, but I would not ask them about it, and if I did I’m sure they wouldn’t give me any details.) Breaking it into groups, you have the authors of the only public plan for recapitalizing Fannie and Freddie (the Moelis team), major institutional investors who will need to supply the capital that would make the recap a reality, and underwriters who will be responsible for structuring, marketing and pricing the deal. I doubt that any of these groups yet has a solid idea of what Fannie and Freddie are going to look like and how they will operate post-conservatorship, so my guess is that one key purpose of the meeting would have been to elicit the views of each party on the prerequisites for a successful capital raise, including the terms and context of a settlement of outstanding shareholder lawsuits, and what will be required from FHFA in the way of the capital rules and regulatory regime for the new companies to be able to successfully attract the volume of new equity needed to return them to shareholder ownership.

        Liked by 4 people

        1. Tim

          my question is why did JPM hold this informational meeting? or put another way, if the Moelis folks were the main presenters, why didn’t Moelis hold the meeting?

          one answer is that JPM has many institutional investor clients who JPM thinks may have an interest in an upcoming offering, and JPM was just doing right by its customers. moelis wouldn’t have pulled in an equivalent audience. in my experience, however, someone in JPM’s position would usually also have some relationship with the prospective issuer, so that the investment bank is sniffing a forthcoming fee. without that relationship, the investment bank is just prospecting without a client. why help out an issuer if the investment bank isn’t retained? it’s the expectation of a fee that usually sets activity in motion.

          which leads me to believe that JPM has some obtained a mandate in connection with this deal…which is my speculation based upon my experience.

          rolg

          Liked by 1 person

          1. I think there may be a simpler explanation for JP Morgan’s role in the meeting: JPM convened it at the request of one or more of the non-litigating shareholders who hired Moelis as their investment advisor, with the goal of trying to agree on how to structure and market a deal that will appeal to the much broader range of investors that will be necessary for a successful equity raise, but who are not nearly as familiar with what’s recently been happening with Fannie and Freddie as are the core group of litigating and non-litigating shareholders.

            The notion that JP Morgan already has been given the mandate to lead one or both companies’ capital raises at this early stage strikes me as a stretch. That mandate would have to have come from FHFA, acting for the companies it controls in conservatorship. Since FHFA has no experience in evaluating investment banks’ suitability for this role–and I doubt it would allow Fannie and Freddie’s management to make the choices–it will end up deferring to Treasury. That should indeed be what happens at some point, but I doubt it’s been done already. FHFA Director Calabria still is trying to exert influence over what the post-conservatorship Fannie and Freddie will look like, and in this regard seems at the moment to be more at odds than in alignment with Treasury on the recapitalization process. You don’t pick your horse (a lead investment bank) until you’re agreed on the size and type of the cart you’re going to ask it to pull, and FHFA and Treasury don’t appear to be at that point yet.

            Liked by 2 people

  14. Tim

    you and your readers might find this curious. this is a tweet by chris whalen to the effect that there can be no congressional passage of Calabria’s suggestions (charter competition and fed guaranty), based upon his attendance at a HFSC staff meeting, https://twitter.com/pgray41/status/1144608240501698560

    that tweet was then deleted. given that whalen holds himself out as a bank consultant, one wonders whether he was encouraged to delete the tweet by those who are eager to turn Calabria’s suggestions into roadblocks to delay admin reform.

    rolg

    Liked by 1 person

    1. Your theory about the deletion of the tweet certainly is plausible. Whalen’s statement that legislative mortgage reform is “[n]ever gonna happen” is hardly news–any objective observer knows this–but as you point out the pro-bank crowd has to pretend to believe it could happen in order to justify slow-walking, or opposing outright, administrative reform. Whalen’s slip-of-the-tweet apostasy leaves the pro-bank forces with no argument for opposing what Treasury is trying to do other than self-serving obstructionism, so, poof, the tweet is gone.

      Like

  15. Tim

    I watched the SBC hearing on SIFI designation for GSEs this morning. as far as I could tell only 6 senators showed up for it.

    why does Calabria continue to suggest that congress pass “GSE reform” when it is clear that the senate committee charged with GSE oversight has no interest in taking up the issue? the more calabria raises the issue of need for congressional action, the harder it is for him to supervise a successful capital raise.

    It is hard to imagine a regulator creating more harm (market perception of political risk) for less benefit (likelihood of actual congressional action). what started in my view as an intramural showing of respect by the executive branch for congress has now in my view morphed into a comedy of the absurd.

    rolg

    Liked by 3 people

    1. there was one interesting comment by senator brown during this SBC hearing. he stated that he and the other members of the committee were surprised at the number of speakers invited to address the committee who argued for “utility ” regulation of the GSEs. see for example https://www.creditslips.org/files/levitin-senate-banking-testimony-3-26-19.pdf.

      this is a rather explicit rebuke of Calabria’s call for GSE charter competition. one speaker in this hearing, Prof Wachter made the further point that competition doesn’t become effective, assuming it could be effective in the case of mortgage guarantors, until there are some 30-100 competitors. but she believes that mortgage guarantor competition in any event would have negative effects on the housing finance industry.

      here is the video of the hearing: https://www.banking.senate.gov/hearings/should-fannie-mae-and-freddie-mac-be-designated-as-systemically-important-financial-institutions

      rolg

      Liked by 2 people

      1. ROLG: I haven’t seen the SBC hearing video (and may have more to say if and when I do), but even without seeing it I’ll say that your two comments are related.

        The multiple guarantors idea is the latest in a long series of reasons invented by supporters of the large banks as a pretext for arguing that legislation “reforming” Fannie and Freddie is essential, and that anything less–including imposing sensible capital requirements and regulation on the companies–would be an unacceptable return to the “failed model of the past.” I won’t go over all the reasons why multiple credit guarantors is not a good idea–others have done that–but as you point out Congress simply isn’t going to give the banks what they want on this.

        Which brings me to Calabria. I had said from the time his appointment was announced that reconciling his ideological (and in my view uninformed) views about Fannie and Freddie with the facts and market realities of releasing them from conservatorship was a prerequisite to achieving the latter. I thought the way that most likely would play out would be for Treasury Secretary Mnuchin, his staff and financial team (including investment bankers) to essentially say to Calabria, “Your ideas about Fannie and Freddie may sound good in theory, but we won’t be able to get Congress to put them into practice, and even if we did they won’t work the way you think they would.” Calabria then would say, “Okay, so what should we do,” and the recapitalization process would begin.

        I don’t know what’s happened to change that, but my guess is it’s been the influence of the banks and their supporters within the administration. I strongly suspect they’ve been telling Calabria that his ideas on bank-like capital and multiple guarantors are absolutely on the money, and that he needs to see them through and not give in to what the greedy hedge funds want Treasury to do. And with Calabria digging in on these points, Mnuchin hasn’t yet come up with a way to overrule him without causing friction with the banks, who are Treasury’s historical allies.

        This is not a particularly optimistic reading of the current situation, but I fear it’s the correct one: Calabria is setting himself up as an obstacle to something that should and could happen (sensible recapitalization of Fannie and Freddie and their release from conservatorship) by becoming an outspoken advocate for something that shouldn’t and won’t happen (bank-centric legislative reform). Mnuchin has Treasury’s considerable institutional clout to draw upon in breaking this impasse, but so far he hasn’t seemed willing to do so. Perhaps a ruling from the Fifth Circuit in favor of the plaintiffs will give him the impetus he thinks he needs.

        Liked by 2 people

        1. I don’t think that Mnuchin feels all that differently from Calabria. The public comments that Mnuchin has made indicate that he supports multi-guarantor model. His former top advisor Craig Phillips has also made similar comments:

          “The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market.”

          No high ranking official in Trump administration has publicly advocated for simple Recap & Release plan.

          Like

          1. Mnuchin has always said he would prefer a legislative path to removing Fannie and Freddie from conservatorship, but the midterm elections effectively closed that off, leaving administrative reform as his only practical option. And we know from the leaked remarks made by Acting Director Otting to the FHFA staff in mid-January that there was an administrative proposal set be announced “in two to four weeks” that “really sets a direction for what the future of housing will be in the U.S.,” and that would require raising “probably somewhere, based upon their business models today, [in the range of] $150 to $200 billion.” Something happened to derail that plan, and I believe it was a swift and fierce show of opposition by the banks and their supporters. Perhaps we’ll learn the full story at some point.

            Liked by 1 person

          2. @homebound

            this is a statement of aspiration by Phillips. I agree that this is the preferred end result for the administration. my question is how long will the administration dither with resect to implementing administratively that which it can implement, leaving congress to its devices. the administration could plausibly think that no large capital raise can be executed with the political risk posed by a congress that “might” do something…except that Calabria has stated that there is a roadmap and milestones to a release from conservatorship (including a capital raise), and congressional action (fed guaranty and charter competition) can be layered on top of that.

            there does not appear to be any interest in the SBC to move on Calabria’s suggested congressional action (if you watch the last SBC hearing, it seems that Sen. Brown is addressing both Sen. Crapo and Calabria with respect to his comment regarding the surprising support for utility regulation), and the HFSC is extremely unlikely to do so (and that is an understatement). my own view is that Mnuchin is preoccupied by trade at the moment with Phillips’ work product likely sitting on Mnuchin’s desk. this is a very thinly staffed administration and it appears to me that the only official who can green light the delivery of the Treasury plan to POTUS is Mnuchin himself. and so we wait for Mnuchin (and perhaps for the HUD memo to be finished as well).

            rolg

            Liked by 2 people

  16. Tim,
    Thanks for your coherent and cogent analysis. It’s absolutely refreshing to read commentary not designed for a 5th grader, using words greater than 2 syllables and with a terrific attention to detail. I am a “Mom and Pop” investor who is greatly interested in the outcome of the GSEs.

    Liked by 1 person

      1. @BM

        no relevance to fairholme. elsewhere on the scotus front, scotus just granted cert on Aurelius, an appointments clause case that has some relevance to separation of powers claim in collins en banc (whether de facto officer doctrine/apparent authority bars P’s relief). will be argued in October. collins en banc enters its sixth month post oral argument, which is about the median time period for 5th circuit en banc rehearing rulings.

        rolg

        Liked by 1 person

  17. Tim. Thank you for all you do. Do you think they would set a capital standard so high (such as bank like), that they know the GSEs will never be able to raise, for an ulterior motive? Set them up to fail?

    Liked by 1 person

    1. I suspect there are some opponents of administrative reform within the executive branch who would like to see it fail, and requiring capital for Fannie and Freddie so excessive as to severely harm their business, and thereby scare off investors and make it impossible to raise that capital in the equity market, would be a way to produce that failure. I don’t think they’ll convince Treasury to sign on to that, though, because Treasury doesn’t have a “Plan B”. It knows Congressional reform is unlikely for the indefinite future, and it also knows the status quo of an indefinite conservatorship is not sustainable: the plaintiffs are likely to prevail in at least one of the upcoming court challenges to the net worth sweep, and the current director of FHFA believes the sweep is illegal, and I doubt he’ll support it much longer. And of course there is the value to Treasury of the proceeds from conversion of the warrants if it supports a successful recap.

      Liked by 5 people

  18. Tim, Many thanks to you for the great public service as a private citizen when public servants are trying to rob the public for the benefit of their cronies.

    Like

  19. Mr Howard

    Anyone reading this can’t help but come away knowing that you have left MC plenty of wiggle room politically and economically to implement what you propose. All concerned will never be able to repay you for your tireless efforts but universal gratitude I hope will have to do for now.

    Liked by 2 people

  20. Continued endless thanks for all you, and other major contributors, do to shed light on the corruption, greed and outright theft we have witnessed. Also, between a possible favorable en banc decision, the specter of a debt ceiling fight and early 2020 maneuvering, I could see the gov’t feeling some pressure to lock in their $100B windfall. But main message is one of gratitude – Thanks!!

    Like

  21. Potential new investors and investment bankers hired by the GSEs will eventually ask the same questions to make sure the GSEs are neither under-capitalized nor over-capitalized. GSEs and FHFA have to answer them.

    Liked by 3 people

  22. Thank you Tim. Your ability to provide clarity on complex issues such as this is truly invaluable to us mom ‘n pop investors. I believe Bill Ackman is arguing for the same thing as you regarding capital standards. I’m not sure if you and he are in touch with each other but I sincerely hope you are.

    Liked by 1 person

  23. “Finally, you add a reasonable, clearly identified cushion of conservatism, and you have your required capital percentages. It’s that simple.”

    If that is simply putting an extra X% cushion on top of a minimum risk-based capital calculation, what do you think would be a sensible range for the cushion?

    Like

    1. No, the “cushion of conservatism” is applied to the calculated risk-based capital percentage, not the minimum– to account for model risk, among other things. The proper range for the cushion depends on whether conservatism has been built into some of the other assumptions that are needed for the parameters of the test; the more of that sort of conservatism exists, the smaller the cushion needs to be. The minimum leverage ratio also should be set at a level where one would expect the risk-based constraint to be binding most of the time.

      Liked by 2 people

  24. Thanks for that. How about cc’ing Ken Moelis, too. Why only flavour the milk when you can also flavour the feed? Exclusively pitching FHFA is like erecting a fence around your burger so the cattle doesn’t wander off.

    Like

      1. We surely hope so. Just as MSM loves to tout benefits of ex intel officers maintaining clearance to aid in those efforts, ignoring your advice should be viewed as needlessly reckless while shaping housing. Excuse my ignorant cynicism as the only voices that seem to have the mic are opponents. Nice to know your efforts are wisely being consulted and considered. Even Zuck consulted the twins when launching FB’s crypto. Expertise is just that and avoiding it is akin to inviting one’s own peril. Adding your experience to FHFA Dir’s intelligence should make FHFA a formidable ally to US Homeowners bar none.

        Like

  25. Tim

    thanks for sending this letter to Calabria. as a professional economist, Calabria should be most interested in the data you have presented, and should either be persuaded by it, or be in a position to offer a rational, data-backed response to it.

    I would offer from my own experience an addendum to your thought at the end of the post that investors “insist that anything objectionable be remedied to their satisfaction before they agree to put new capital into the companies.” the investors’ cudgel is pricing, and if the capital proposal is set unrealistically high, the common stock will be priced correspondingly low, in order to consummate the capital raise.

    it is my expectation that fhfa and treasury are having (or should soon have) a conversation about capital levels, as the higher the fhfa sets the capital level the lower will be treasury proceeds from its warrant position. fhfa has no skin in this recapitalization game, while treasury has all of the skin in this game.

    so it would be my expectation (assuming treasury is pursuing its interest in the recapitalization) that treasury, more so than re-IPO investors, will bear the biggest burden, and therefore be in a position to make the most effective argument, with respect to an overly conservative, politics-driven capital level.

    rolg

    Liked by 3 people

    1. As I tried to point out in the post, it’s not just the level of capital that’s important, it’s also the way the risk-based test is constructed. Specifications that divorce capital from risk at a disaggregated level can hamstring the business in ways that aren’t immediately apparent to the layperson, but can be significant.

      Liked by 2 people

      1. Tim

        assuming that congress passes additional fhfa chartering authorization, would any of this capital analysis change for a new entrant? for example, do the sizes and operating histories of Fannie and Freddie affect them for purposes of capital in a way that is advantageous or disadvantageous when compared to how a capital analysis would be applied to a new and much smaller entrant without a past operating history?

        rolg

        Liked by 1 person

        1. It would be up to FHFA as to whether there would be any different capital standards or charges for new entrants. The core risk-based capital numbers shouldn’t change, since those are keyed to the product types and risk characteristics of the mortgages financed, not the guarantor. One could make a case for some type of management and operations risk capital surcharge for a new entity with no track record of being able to do its business with operational or technical competence or reliability, but since FHFA is the one pushing for new entrants I suspect it would view such a surcharge as a barrier to entry and not impose it.

          Liked by 1 person

          1. Tim

            my thought exactly, which in mind points to what I believe amounts to a conflict of interest on the part of fhfa/calabria. in my view, a new entrant without an operating history that is substantially smaller than Fannie and Freddie should have a more conservative capital analysis than Fannie and Freddie. whether Calabria’s ideological interest in seeking new entrants clouds this capital analysis for new entrants is something I hope we never have the opportunity to witness.

            rolg

            Liked by 2 people

          2. Tim and ROLG,

            Assuming that any capital standard applied to Fannie and Freddie would also apply to any new entrant, I would think FHFA would really want to get the standard right. If it hamstrings F&F, why would anyone else want to get into that business?

            Liked by 2 people

          3. I think this is a matter of theory and practice. Bank-like capital and multiple guarantors are ideological (and also pro-bank competitive) objectives, and most of those who advocate them don’t have the practical knowledge of the credit guaranty business to understand that they’re not compatible. FHFA got a lot of constructive feedback on their June 2018 capital proposal; we’ll see how much of it they incorporate into their revised proposal.

            Liked by 2 people

      1. I don’t see these as being in conflict. FHFA currently performs two roles: conservator and regulator. As regulator, Calabria believes that multiple guarantors would be better for the mortgage finance system. I disagree with him, but I don’t think his position on this conflicts with his duties as a conservator.

        Like

        1. Tim “Happy Holiday,” very much appreciate your work and insight. Would you care to comment on the news of Bob Ryan, senior Policy Advisor, leaving FHFA? Could this possibly signal a major change in the regulation of the GSEs’ financial standards?

          Liked by 1 person

          1. No. Bob joined FHFA to work with its then-new Director, Mel Watt, so it’s neither surprising nor significant that he’s leaving with Calabria having taken Watt’s place. (If anything, the surprise is that it took this long; Ryan’s fellow senior policy advisor to Watt, Eric Stein, left several months ago.)

            Liked by 2 people

  26. Thank you for your tireless work Tim! I check your blog every day to read any new comments (thank you for responding to everyone’s questions/comments) and responses from you. You are a vital advocate for the GSE’s and I thank you for that!

    Liked by 2 people

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