Comment on FHFA Capital Re-proposal

Yesterday I submitted my comment on FHFA’s May 2020 Fannie and Freddie capital re-proposal to its web portal, here. The full text of this comment follows.


The re-proposed “Enterprise Regulatory Capital Framework” for Fannie Mae and Freddie Mac put out for comment by the Federal Housing Finance Agency on May 20, 2020 takes a problematic capital proposal made by the agency in June of 2018 and, instead of improving upon it, makes it inarguably worse.

It is apparent that FHFA began with the intention of requiring Fannie and Freddie’s credit guaranty businesses to operate with the same 4.0 percent minimum capital requirement the Basel bank standards impose on commercial banks for the single-family first mortgages they hold in portfolio. FHFA then turned to the risk-based standard, where it added enough new capital cushions and elements of conservatism to the June 2018 version to make it require close to the same percentage amount of capital as the new, much higher, minimum.

I will not speculate on why FHFA chose to require that Fannie and Freddie hold far more capital than necessary to cover the risks of the one business—guaranteeing the credit of residential mortgages—they now are permitted to do. My comment instead elaborates on three points. First, that basing the companies’ capital on historical credit loss data will lead to percentage requirements that are far lower than those being proposed by FHFA. Second, that FHFA’s arbitrarily high capital requirements will force Fannie and Freddie to charge guaranty fees that are notably out of line with explicit or implicit credit pricing elsewhere in the market. And third, that competition from the Federal Housing Administration and commercial banks will make it extremely difficult for Fannie and Freddie to raise guaranty fees to levels that will provide an attractive return to potential new investors in the companies on the amount of capital FHFA seems intent on requiring them to hold. I close with some observations on how FHFA could, if it wishes, revise the May 2020 proposal to make it more reasonable and workable for the company, its investors, and homebuyers.

Fannie and Freddie’s capital must be based on data, not Basel risk weights

Prior to the 2008 financial crisis it was possible to argue that the Basel capital framework designed for international commercial banks also should be applied to Fannie and Freddie, since they competed directly with banks in the portfolio investment business. At December 31, 2007, commercial banks held $2.98 trillion of single- and multifamily mortgages and mortgage-backed securities (MBS) in portfolio, while Fannie and Freddie held a combined $1.45 trillion in single- and multifamily mortgages and MBS as portfolio investments, and earned the majority of their profits from this business. When Treasury put the companies into conservatorship, however, it required each to reduce its portfolio by 10 percent per year (later increased to 15 percent per year), to no more than $250 billion. They did that. At March 31, 2020, Fannie and Freddie’s combined portfolios totaled just $362 billion ($151 billion at Fannie and $211 billion at Freddie), or less than 3 percent of total single- and multifamily loans outstanding, and were being run as complements to their credit guaranty businesses. With Fannie and Freddie no longer investing in mortgages for profit, more than all of their former single- and multifamily loan and MBS holdings went to bank portfolios, which at March 31, 2020 totaled $4.62 trillion, for a 36 percent market share.

Today Fannie and Freddie have no business or activity in common with commercial banks. Banks are not in the credit guaranty business at all. Banks originate and service mortgages, which Fannie and Freddie do not do, and have never done. Banks also are deposit-based financial intermediaries, and in that capacity incur substantial liquidity risk (the threat of a “run on the bank”), interest rate risk (some long-duration assets are funded with short-term deposits and purchased funds), and credit risk on multiple asset types (with loss rates much higher than on single-family mortgages). Fannie and Freddie are not intermediaries, and do not have those risks. This absence of any business overlap removes all justification for applying banks’ Basel capital standards to Fannie and Freddie, particularly given the widely acknowledged weaknesses of the Basel framework.

Basel I was promulgated in the 1980s with the goal of creating a “level playing field” among large international commercial banks by bringing the capital standards of their regulators into closer conformity. Yet because banks have so many lines of business and risk types, the best any common bank regulatory standard can do is use broad and rough risk categories and percentages to arrive at a total capital level that seems adequate to cover all of a bank’s risks combined. Basel I attempted to do this with credit risk weights for five categories of assets (four for U.S. banks), applied to a base capital requirement of 8.00 percent.

At the time it came out, Basel I was criticized for having too few risk categories, and being based solely on credit risk. All bank loan types, except single-family first mortgages, are assigned a 100 percent risk weight. Loans to credit card holders have the same required capital as loans to corporations, even though U.S. banks’ historical credit loss rates for the former are seven times higher than the latter. And banks’ single-family first mortgages are given a 50 percent risk weight irrespective of their credit scores or loan-to-value ratios, and in spite of the fact that the large majority of these mortgages have 30-year maturities and are financed with deposits and debt with much shorter terms, thus exposing the banks to tremendous liquidity and interest rate risk. The United States’ thrift industry was based on this same “borrow short-lend long” model, and it failed catastrophically.

A 50 percent risk weight for all single-family first mortgages that ignores interest rate risk and differences in credit quality may be the best international banking regulators can do given the complexities and intricacies of the tens of thousands of banks in the world, but FHFA has no reason to impose this “one-size-doesn’t-fit-all” straitjacket on two companies that take only one type of risk on two types of product (single- and multifamily mortgages) in one currency in one market, and for which ample historical data exist.

FHFA also attempts to justify its 4.0 percent minimum capital requirement for Fannie and Freddie by citing what it terms “peak cumulative capital losses” at the companies of $167 and $98 billion, respectively, in the years following the crisis. These losses were ballooned by the more than $300 billion in non-cash expenses that FHFA, as conservator, required the companies to book based on its estimates or expectations, and over half of those expenses subsequently reversed and came back as income. Fannie and Freddie’s capital requirement must be based on actual losses, not artificial or inflated ones.

Data on commercial bank loan losses are readily available from the FDIC going back to 1992—sixteen years before the financial crisis. From 1992 through 2007, the average annual loss rate on all U.S. commercial bank loans was 72 basis points, and for their single-family first mortgages it was 13 basis points (less than 20 percent of the loss rate for total bank loans). Both of these loss rates have been higher since the financial crisis, with the average 2008-2019 loan loss rates rising to 107 basis points for all loans and to 68 basis points for single-family firsts. These higher more recent loss rates raise the averages for the full 28-year period (1992 to 2019) to 86 basis points per year for all bank loans, and to 37 basis points per year for banks’ single-family first mortgages.

With access to physical copies of annual reports from my time as CFO, I have Fannie single-family credit loss data since 1992 as well. During the sixteen years before the financial crisis—1992-2007—Fannie’s single-family mortgage credit loss rate averaged only 2.5 basis points. (Freddie’s pre-crisis loss rates should not be significantly different.) This rate also has averaged much higher from 2008 to 2019, at 31.5 basis points, pushing Fannie’s average single-family credit loss rate for the full 28-year period up to 15 basis points.

Two comparisons from these historical data stand out. The first is that during the past 28 years the average loss rate on all commercial bank loans of 86 basis points is 5.7 times as high as Fannie’s average 15 basis point loss rate on its single-family mortgages. The second is that the 37 basis-point average single-family first mortgage loss rate at banks over this period is 2.5 times Fannie’s 15 basis point average loss rate.

Over the past three decades, single-family first mortgages have accounted for about 20 percent of total bank loans. Since these have a 50 percent risk weight, and all other bank loans have a 100 percent risk weight, the average Basel risk weight for total bank loans is 90 percent. By simple extrapolation, if bank loans with a 90 percent risk weight have had an 86 basis-point annual loss rate over the last 28 years, the 15 basis-point annual loss rate on Fannie’s single-family mortgages for the same period should equate to a risk weight of 16 percent, not 50 percent. Even starting with the “rough justice” risk weight of 50 percent for single-family mortgages from the Basel standards, Fannie’s 15 basis-point loss rate compared with banks’ 37 basis points still would result in a risk weight of only 20 percent.

These data-based risk weights translate to capital in the range of 1.3 to 1.6 percent, which is little different from the 1.5 percent requirement for credit guarantees (or “trust assets”) in the “Bifurcated Minimum Leverage Capital Requirement” alternative from FHFA’s June 2018 capital proposal. FHFA must return to this alternative for minimum capital. It sets a reasonable floor for the risk-based standard—which as discussed below FHFA also must revise—and unlike the 50 percent Basel risk weight conforms with Fannie’s historical loss experience (and almost certainly Freddie’s as well).

Excessive Fannie and Freddie capital leads to severe pricing and market anomalies

Six years ago, FHFA was focused on, and concerned about, the market consequences of setting Fannie and Freddie’s guaranty fees too high. Acting Director Ed DeMarco had required the companies to increase their guaranty fees by 10 basis points in 2012, to “reduce [their] market share” and “encourage more private sector participation” (which also appear to be objectives of the May 2020 capital proposal). He had scheduled a further 10 basis-point increase for 2014, but incoming Director Mel Watt suspended it pending further review. That spring FHFA published “Fannie Mae and Freddie Mac Guaranty Fees: Request for Input,” in which it acknowledged the competitive impact of fee increases, saying, “Finally, it is noteworthy that increases in g-fees [guaranty fees] on higher-risk loans may result in originators insuring/securitizing some of these loans with Federal Housing Administration (FHA)/Ginnie Mae rather than one of the Enterprises. While this substitution would reduce the Enterprises’ footprint in the mortgage markets, it would not reduce the federal government’s overall footprint. On the other hand, increases in g-fees for lower-risk loans may make it more profitable for banks or other private market participants to retain these loans rather than selling them to the Enterprises.”

FHFA did not raise Fannie and Freddie’s fees any further following its 2014 guaranty fee review. In fact, after peaking that year at 60.5 basis points (including an extra 10 basis- point fee paid to Treasury, mandated by the Temporary Payroll Tax Cut Continuation Act, or TCCA, of 2011), the companies’ guarantee fees on new business averaged almost five basis points lower, at 55.7 basis points, between 2015 and 2019. But even at this lower level there were pronounced effects on the relative business shares of Fannie and Freddie versus commercial banks and the FHA, as FHFA had surmised. Between December 31, 2007 and March 31, 2020, the dollar amount of single-family mortgages guaranteed or owned by Fannie and Freddie rose by less than 20 percent, from $4.25 trillion to $5.06 trillion, while the share of its business with credit scores under 700 fell from 37 percent to 14 percent. In contrast, over the same period bank portfolio holdings of single-family first mortgages and MBS grew by almost 70 percent, from $2.29 trillion to $3.87 trillion. And the volume of Ginnie Mae securities backed by FHA or VA mortgages virtually exploded—increasing by 360 percent from $465 billion at December 31, 2007 to $2.14 trillion at March 31, 2020.

Fannie and Freddie’s guaranty fees today are based on FHFA’s “conservatorship capital” requirements, which are consistent with its June 2018 capital proposal. FHFA’s May 2020 proposal would raise the required capital on Fannie and Freddie’s September 30, 2019 books of business from $137 to $243 billion, or by 77 percent, relative to the June 2018 proposal. Such a massive hike in required capital, if passed on as higher guaranty fees, would greatly exacerbate the pricing disparities with the FHA and banks that already exist, resulting in an even greater skew in relative financing shares than has occurred to date.

The FHA’s new business in 2019 had an average loan-to-value (LTV) ratio of 91.6 percent and an average credit score of 670. The table of “Performing Loan Base Risk Weights” from FHFA’s May 2020 capital proposal assigns a risk weight of 119 percent—or 9.5 percent capital—to this combination of LTV and credit score if the loans are guaranteed by Fannie or Freddie. But Fannie and Freddie’s high LTV loans have private mortgage insurance (PMI), whereas the same loans guaranteed by the FHA do not. Removing the credit for PMI pushes the required capital for the FHA’s average 2019 business, if done by Fannie or Freddie, to 16 percent, plus a 1.5 percent buffer. The FHA’s statutory minimum capital requirement is 2 percent, and at the end of its 2019 fiscal year its total capital resources were 4.5 percent of insurance in force. FHFA’s May 2020 capital rule thus would require Fannie and Freddie to try to price its high LTV-low credit score business off nearly four times the capital the FHA now holds, and more than eight times its statutory minimum.

The May 2020 capital proposal would result in a similar market challenge with respect to commercial banks. Fannie and Freddie would be able to use their proposed 4.0 percent minimum capital only to make credit guarantees, for which their average net fee on new business in 2019 (after TCCA payments to Treasury) was 46 basis points. Banks can use their 4.0 percent minimum capital to buy mortgages with the same credit risk as Fannie and Freddie take, but then fund them with short-term, maturity-mismatched consumer deposits and purchased funds and earn a spread of over 300 basis points. Banks’ ability to earn income from both credit and interest rate risk-taking is an enormous advantage when overcapitalization pushes guaranty fees to levels that become disconnected from the risk of the underlying loans. Fannie and Freddie have no alternative but to attempt to charge those fees to earn a market return on their capital, whereas banks can, and do, accept modestly lower spread income and still retain or buy mortgages that are highly profitable for them.

There are market limits to increases in guaranty fees

There are limits to how much Fannie and Freddie can raise guaranty fees before they lose significant business to the FHA or commercial banks, and data from FHFA’s 2014 document “Fannie Mae and Freddie Mac Guaranty Fees: Request for Input” help define them.

In this document there is a table showing Fannie and Freddie’s target and charged guaranty fees on the business they did in the first quarter of that year, for each of nine combinations of LTV and credit score ranges. From the table it is possible to deduce that at this time the companies’ average required conservatorship capital was a little over 3.00 percent, and that they were targeting an after-tax return on equity (ROE) of 11.0 percent. Achieving this required them to charge an average guaranty fee of 72 basis points (including the 10 basis points for TCCA), but there was a marked difference between the 35 basis-point target fee for the least risky 20 percent of that quarter’s business and the 130 basis-point target fee for the riskiest 20 percent. (The target fee for the middle 60 percent was 65 basis points.)

How the companies actually priced those segments of their business is instructive. They charged 50 basis points for their least risky loans (15 more than the target fee), 58 basis points for the medium-risk 60 percent of their loans (7 less than the target fee), and only 76 basis points for their highest-risk loans (54 less than the target fee). The huge shortfall in the fee on the riskiest 20 percent of Fannie and Freddie’s business—and the modest underpricing of their business with medium risk—caused their average charged fee overall to be only 60 basis points, not 72. Consequently, their return on conservatorship capital for that quarter’s business was only 8.5 percent, far below their 11.0 percent target.

Looking back, it seems clear what happened. Fannie and Freddie’s average charged fee in 2013, including the 10 basis points for TCCA, had been 55.0 basis points. When it rose to 60.5 basis points in 2014, the companies’ outstanding credit guarantees fell, by 0.5 percent. Then as they cut their fees over the following three years, their business growth resumed. These volume effects, viewed in the context of the pricing grids, strongly suggest there may be something of a “pricing resistance wall” when Fannie and Freddie’s average guaranty fee rises above 60 basis points. Specifically, when the fee on lower-risk loans exceeds 50 basis points larger volumes of business shift to the banks, and when the fee on higher-risk loans exceeds 75 basis points similar volumes of business shift to FHA, or don’t get done at all.

Given Fannie and Freddie’s average net fee on new business in 2019 of 46 basis points, the capital required by FHFA’s May 2020 proposal would produce a sustainable ROE of about 8.0 percent, far below the 12.0 percent average ROE of commercial banks. The companies’ ROEs would rise to around 10.0 percent if the TCCA is allowed to expire in October of 2021 and they retain the 10 basis points they have charged for this tax over the past nine years. But this is not a sure thing. And in any event, guaranty fee increases much beyond their current total of 56 basis points (including the TCCA fee) seem likely to trigger competitive and borrower responses similar to what Fannie and Freddie experienced in the middle of the last decade.

For this reason, significant increases in guaranty fees do not appear to be either a sure or a sufficient means of remedying the damage to Fannie and Freddie’s business caused by the imposition of a 4.0 percent minimum capital requirement. To permit Fannie and Freddie to be competitive in the market, FHFA must lower that minimum to one better aligned with the companies’ historical credit losses, as discussed above, and also re-do the May 2020 risk-based standard to eliminate its excessive conservatism, whose purpose was to push required risk-based capital up to a level approximating the arbitrary Basel bank minimum.

FHFA must re-do, and greatly simplify and clarify, its risk-based capital standard

A properly designed, and transparent, risk-based capital standard for Fannie and Freddie would have three distinct and clearly identified components: (a) the amount of initial capital required to survive the FHFA-defined stress environment; (b) other required capital to cover operations and other risks, as well as model risk or imprecisions in the stress test, and (c) a level of “buffer capital” sized to ensure continued access to the debt and equity markets throughout the stress period. Once the risk-based standard has been specified, FHFA would set a data-driven minimum capital percentage to serve as a floor for the risk-based standard, which would be binding only under extreme or unusual circumstances.

FHFA’s calculation of the amount of initial capital in its June 2018 capital proposal suffered from having cushions and elements of conservatism suffused throughout the stress test in ways that made them difficult to discern or quantify. The most obvious was not counting guaranty fee income as an offset to credit losses, which is particularly punitive to affordable housing borrowers. The May 2020 stress test still does not count guaranty fee income, and adds even more elements of conservatism that raise gross required credit risk capital on Fannie and Freddie’s September 31, 2019 books of business from $127 billion in the earlier version to $152 billion. Included in the additional conservatism of the May 2020 proposal is a 15 percent risk weight (or 1.2 percent minimum capital requirement) on all loans guaranteed by Fannie and Freddie irrespective of risk, which if not rescinded would further penalize affordable housing borrowers by drastically reducing the amount of “excess” fees on low-risk loans available to be used as cross-subsidies for higher-risk loans.

In a re-specified risk-based capital rule, FHFA must begin with a “clean” stress test—drawing on Fannie and Freddie’s historical data to project the amount of initial capital required to cover all credit losses projected through the stress period, without cushions or add-ons. If guaranty fees generated during the stress test are not counted as offsets to credit losses, they must be counted in determining the size of the companies’ going-concern capital buffer, as discussed below. And while the calculation of required initial stress capital should be straightforward, FHFA should disclose the results of the stress tests run independently by Fannie and Freddie (in what FHFA calls the “advanced approach”) as well as its own results, to ensure consistency and transparency.

Other required capital must be clearly identified, described and defended. Aggregate required capital to cover cushions and add-ons for market, operations and other risks also must be in reasonable proportion to the amount of initial capital required to pass the stress test, so that Fannie and Freddie’s guaranty fees are driven principally by the credit risk of the underlying loans, not the cushions and add-ons.

In addition, FHFA must seriously reconsider its decision to base the companies’ risk-based standard on mark-to-market rather than original LTVs. The “collars” on market value LTVs in its May 2020 proposal do reduce some of the procyclicality of the earlier version, but they still subject the companies to very large increases in required capital during a severe downturn. The FHFA stress test assumes a 25 percent decline in home prices, and should anything approaching that occur there would be a period when home prices fall from above the “collar zone” to below it, subjecting the companies to the effects of a 10 percent rise in mark-to-market LTVs. That would increase their required risk-based capital by more than 1.0 percent, throwing them out of capital compliance. Unless FHFA switches to original LTVs, Fannie and Freddie would need to hold enough excess capital to cover this risk, making their effective capital requirement that much higher (in effect, a “hidden cushion”).

There are three separate capital buffers in the May 2020 proposed risk-based standard: a stress capital buffer (0.75 percent of adjusted assets), a stability capital buffer (keyed to FHFA’s definition of each company’s “market share”), and a countercyclical capital buffer (initially zero, but it could be imposed in times of stress). The stability capital buffer must be eliminated entirely, because it is based on an inaccurate definition of market share and a misunderstanding of the systemic risks that produced the mortgage and financial crises.

Today Fannie and Freddie “finance” very few mortgages, as they have been required to exit the portfolio investment business. Instead, they guarantee mortgage credit, allowing others such as capital markets investors and banks to finance them without having to worry about the risk of repayment by each individual borrower. For this service they receive a relatively small fee compared with the spread earned by the funder of the mortgage. It is not correct for FHFA to assert that Fannie and Freddie have a “44 percent share of the single-family mortgage market.” They do not. They operate only in the credit risk management segment of that market, along with private mortgage insurers who also earn revenues on many of the loans Fannie and Freddie guarantee. Weighting all mortgage market activities—origination, servicing, credit risk management and funding—by the revenues available to be earned in them, Fannie and Freddie’s combined total mortgage market share is only about 2 percent, well below the 5 percent threshold for FHFA’s punitive capital surcharge.

Moreover, it is a misreading of history to equate a large volume of credit guarantees by Fannie and Freddie with greater systemic risk. The huge jump in mortgage credit loss rates for banks, Fannie and Freddie during and after the 2008 crisis was caused by less credit guaranty business being done by Fannie and Freddie, not more. From the early 1990s through the mid-2000s, Fannie and Freddie’s dominance as secondary market credit guarantors enabled them to exert strong influence over national underwriting standards. But in the early 2000s, concerns by Treasury and the Federal Reserve over rapid growth in the companies’ portfolios led them to support the creation of an alternative, unregulated financing mechanism using senior-subordinated private-label securities (PLS) to compete with Fannie and Freddie. By 2005, issuance of PLS exceeded the issuance of MBS by Fannie, Freddie, and Ginnie Mae combined. At that point, Fannie and Freddie no longer could enforce their underwriting disciplines; originators could sell loans through PLS, whose issuers were not exposed to the losses on them and thus had no incentive to limit their risk. Undisciplined underwriting became the norm, leading to the boom and bust that followed. A proper reading of the financial crisis is that having companies that specialize in credit risk management, with their own capital at stake, playing the lead role in setting national mortgage underwriting standards is a clear benefit, and leads to lower, not higher, credit losses for the system as a whole. FHFA has this exactly backwards with its “stability buffer”.

The stress capital buffer is a valid concept, but it is a mistake to view this buffer for Fannie and Freddie as the equivalent of the “capital conservation buffer” proposed in Basel III for banks. The Basel III buffer was a response to the realization that during the financial crisis banks experiencing credit losses were subject to runs by depositors and holders of short-term certificates of deposit, which could cause a bank to become insolvent long before its credit losses did. That is a much lesser concern for Fannie and Freddie. They have relatively little debt compared with the volume of their credit guarantees, and even in a stress period their credit losses unfold relatively slowly, as evidenced during the 2008-2012 period.

Sizing the stress capital buffer at 0.75 percent of assets seems reasonable, provided that FHFA remedies an inconsistency in the construction of this buffer that exists not just in the current proposal but in the equivalent going concern capital buffer from the June 2018 version: Fannie and Freddie are required to have sufficient capital to remain as going concerns, yet the structure of their risk-based capital requirement assumes that they are not going concerns. Were the risk-based capital stress test to be done on a going-concern basis, (a) guaranty fees from loans that remain on the books during the stress test would count towards covering credit losses, (b) liquidated loans would be assumed to return as new business, with guaranty fee rates at the previous year’s new business average, and (c) the companies’ initial capital would be calculated based not on lifetime credit losses but on cumulative losses up to the point at which income from new business is sufficient to return each company to its fully capitalized level.

Along these lines, the stress capital buffer could be integrated into the risk-based capital stress test. Required gross credit risk capital would be the amount necessary to keep each company’s capital above 0.75 percent of adjusted assets (the stress buffer) throughout the stress period, while allowing capital to rebuild through assumed new business until each company once again is fully capitalized. But should FHFA elect not to follow this approach, it must at a minimum count guaranty fee income on existing business in its base stress test, just as the Federal Reserve counts bank income in the Dodd-Frank stress tests it conducts for large commercial banks. FHFA then would add the 0.75 percent stress buffer to the result of that test.

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It is clear that FHFA engineered its May 2020 capital proposal to inhibit Fannie Mae and Freddie Mac from fulfilling their charter purposes of providing “ongoing assistance to the secondary market for residential mortgages,” by requiring the companies to capitalize their credit guarantees in amounts grossly disproportionate to their risks, which in turn forces them to price that business at levels starkly at odds with the explicit or implicit pricing of mortgage credit risk by other sources of finance, notably the FHA and commercial banks.

Less clear is what FHFA seeks to achieve through this policy. Yet without changes to the May 2020 re-proposal along the lines of this comment, homebuyers will face unnecessarily higher costs and reduced availability of mortgages, and the mortgages that are made will pose much more risk to the financial system. Loans that could be safely guaranteed by Fannie and Freddie were they to be given reasonable capital requirements will instead go to the FHA—which has far less capital and is backed directly by taxpayers—and to banks, which are taking the same mismatch risk that caused the thrift industry to fail by funding long-term fixed-rate mortgages with short-term consumer deposits and purchased funds, at a time of historic lows in interest rates. Furthermore, overcapitalizing Fannie and Freddie to the point of inefficiency and non-competitiveness will make FHFA’s goal of attracting the new equity required to quickly remove them from conservatorship much more difficult, if indeed attainable at all.

47 thoughts on “Comment on FHFA Capital Re-proposal

  1. Dem senators on Banking committee sent a letter to FHFA:

    “We further request that FHFA and, as appropriate, the Enterprises, provide their analysis of the rule’s projected effects on various populations of homeowners and renters, including the options available to households and at what price, as well as the many participants in the broader housing market. This includes the effects on small lenders and the affordable rental housing community.”

    How likely will GSEs make a public comment?


    1. This letter from Senate Democrats–which also requests that FHFA extend the comment period on the FHFA capital proposal because of its importance to the housing finance system, its complexity (it’s 424 pages long, and extremely detailed) and the pandemic—echoes the concern of a growing number of commenters that raising Fannie and Freddie’s required capital by 77 percent from what many believed already was an overly conservative requirement from FHFA’s June 2018 proposal could have severe negative effects on the cost and availability of mortgages for homeowners and renters. The Senate Democrats would like FHFA, and also Fannie and Freddie to the extent they feel free to do so, to give their analysis of how this capital rule will affect the guaranty fees for various loan types, and through these pricing effects the impact on credit guaranty affordability for a range of borrower segments. This is an entirely reasonable request, particularly of FHFA, which is the entity making the capital proposal (and claiming, without numerical evidence, that the new rule would be beneficial to affordable housing).

      Fannie already has said it will comment on the FHFA proposal. During its July 30 earnings conference call, CFO Celeste Brown said, “We believe the new proposed capital rule could have significant consequences for our business model, capital planning and ability to attract private investment if implemented as currently proposed. We plan to submit a public comment letter with our recommendations for the final rule.” I expect Freddie will comment as well, and very much look forward to reading what each company has to say.

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    2. (Bloomberg) — Fannie Mae and Freddie Mac are planning to charge an additional fee on most mortgage refinance loans that could raise costs for borrowers trying to take advantage of historically low rates in an uncertain economy.

      The mortgage giants, which have been under government control since 2008, announced the plan late Wednesday, saying the new 0.5% fee is meant to mitigate their risk in light of the Covid-19 pandemic. It would apply to most refinances involving the companies.


      1. I saw this, and also the reaction of Dave Stevens (former head of the Mortgage Bankers Association) that “FHFA and the GSEs are essentially providing [families affected by the pandemic] the middle finger in order to protect billionaire bond investors by adding a 50bp fee on refis.”

        While I didn’t know this fee was coming, I’m not surprised by it—something along these lines was hinted at by Fannie in its second quarter 2020 10Q and its earnings conference call. And my response to Stevens’ reaction is, “Dave, this fee is a direct consequence of something you’ve been advocating for two decades: the deliberate and unnecessary overcapitalization of Fannie and Freddie intended to drive business to banks and other sources of mortgages. Be careful what you wish for.”

        There is little question that this 50 basis-point fee is related to the FHFA capital rule, and in my view it’s a signal that at least for now Director Calabria does not intend to back off much, if at all, on his insistence that Fannie and Freddie hold 4.0 percent capital against their credit guarantees. As I noted in the current post, “Given Fannie and Freddie’s average net fee on new business in 2019 of 46 basis points, the capital required by FHFA’s May 2020 proposal would produce a sustainable ROE of about 8.0 percent, far below the 12.0 percent average ROE of commercial banks.” To make this ROE attractive to potential participants in their recapitalization, Fannie and Freddie have no alternative but to try to raise fees. And what’s happening now? As Fannie said in its 10K, its book is turning over rapidly at LOWER, not higher, guaranty fees because of refinances triggered by pandemic-induced declines in interest rates. Here is what Fannie said in its second quarter 10K:

        “Because we expect mortgage rates to remain low through 2021, we anticipate a large and growing portion of our book of business, originated in a historically-low-interest-rate environment, will have less incentive to refinance, slowing the pace at which loans in our book of business turn over in future years. A slower turnover rate in our book of business would reduce our ability to increase our revenues by increasing guaranty fees, as any such change would take longer to meaningfully increase the average charged guaranty fee on our total book of business.”

        There is little doubt that the 50 basis-point upfront fee is an attempt by Fannie and Freddie (and approved by FHFA) to get at least some additional revenue out of this wave of refinances in anticipation of much higher required capital. But one thing the fee won’t do is allow the companies to recapture the extra 10 basis-point annual TCCA fee they’ve been charging borrowers for the past nine years and passing on to Treasury; if those fees are locked in on refis before the TCCA expires next year, so too is Treasury’s claim to them. To get their own average net guaranty fee up, Fannie and Freddie will have to wait until higher fees on purchase money mortgages, and a greatly reduced volume of post-2020 refis, edge their average fee higher. Potential investors in Fannie and Freddie almost certainly are aware of this dynamic. They are being asked to invest huge amounts of new equity into two companies that, with the current FHFA-proposed capital requirements, will have below-market and uncompetitive ROEs for a very long period of time, with few alternatives for raising them more quickly. And no, Dave, you can’t blame Fannie and Freddie for attempting to get out ahead of this problem; that’s on FHFA, and those, including the MBA, who support what Calabria wants to do with their capital.

        Liked by 2 people

    1. This is an issue that’s been getting a lot of attention, but in my opinion it does not have significant implications for Fannie and Freddie’s securitized CRT programs going forward. It’s arisen because the CRTs issued in the first couple of years of Fannie’s (and presumably Freddie’s) programs are what were called “fixed severity” securities–that is, if a mortgage defaulted, the investor in the CRT was obligated to reimburse the issuer a given percentage of the UPB of the defaulted loan, as defined in the prospectus for that security. (CRTs issued in later years, and currently, pay out based on actual loss severities). The problem with the structure of these early securities has become apparent with the forbearance program from the pandemic: once the forbearance period reaches six months a loan is technically in default, and that triggers payment of the fixed severity amount to Fannie or Freddie, even if the loan subsequently becomes current and the companies suffer no real losses.

      Investors in these early deals, which are mainly hedge funds, say this is a technical error, not intended when the securities were issued, and either the companies or FHFA need to step up and remedy it. The problem with this position, of course, is that most everyone believes that if the hedge funds were on the favorable side of this “technical error,” it is a virtual certainty that they would say, “a contract is a contract, and you (the issuer) must honor it.” That does tend to weaken their position. But in any event, this is a problem that has no direct application to the CRTs the companies have been issuing for the past several years.

      Liked by 2 people

    2. ZANDI:

      “The GSEs’ current guarantee fees imply capitalization of close to 3%, which is more than adequate to ensure that they remain going concerns under severe stressed economic scenarios. This would have been sufficient for them to remain going concerns through the financial crisis, and considerably more than would be needed today given their mix of business.”

      Liked by 1 person

        1. The link is to an article put out by the Urban Institute earlier this week, critiquing the May 20 FHFA capital proposal. Its authors are Jim Parrott, nonresident fellow at the Urban Institute and co-owner of Parrott Ryan Advisors; Parrot’s new partner Bob Ryan, who from July 2015 through September 2018 was Acting Deputy Director for the Division of Conservatorship at FHFA, and Mark Zandi, Chief Economist at Moody’s Analytics. Parrott and Zandi have done papers for the Urban Institute before, but this is the first that includes Ryan as a co-author.

          On the Urban Institute website, the abstract of the paper reads, “In this brief, the authors summarize and critique the FHFA’s recent capital proposal for Fannie Mae and Freddie Mac, concluding that it misapplies the bank capital regime in a way that would ultimately take the GSEs and the housing finance system in the wrong direction, unnecessarily leading to higher mortgage rates, riskier GSEs, and a less stable housing finance system.” And in the paper itself the authors describe the FHFA capital rule as “beginning with the capital the banks are required to hold and setting the GSEs’ capital rules so that they need to hold approximately the same amount of capital, regardless of the risks the GSEs are taking.”

          I obviously agree with those points, and am glad the Urban Institute is making them. It’s noteworthy, though, that these and other criticisms of the capital rule came in an article, and not a formal comment letter to FHFA. The Urban Institute did not submit a formal comment for FHFA’s June 2018 capital rule. Instead, three individuals from its Housing Finance Policy Center—Ed Golding, Laurie Goodman and Jun Zhu—submitted a comment under their own names, without mentioning their affiliation. I found that odd, but now wonder if the Urban Institute might do something similar this time as well, or if it will just let this article stand as its point of view on the rule.

          Liked by 2 people

          1. Tim

            I found the Parrott, Ryan and Zandi piece to be informative and well done. It is, I suppose, criticism that Calabria should take to heart given its source (meaning, from opponents, generally, of privatization who seem to have the same reaction to the proposed capital rule as proponents of privatization).

            I invite you to react to the following assumption, loss of market share of 10-14% due to excessive capital level requirement:

            “Under the FHFA’s proposed capital rule, we estimate that the privatized GSEs would lose 10 to 14 percentage points of origination market share on average through the business cycle. Approximately two-thirds of that would go to portfolio lenders, whole loan buyers, and perhaps some private-label securitization, as pricing for the lowest-risk loans converge with that offered in those markets. And about one-third of the loss would be from their higher-risk loans going to the Federal Housing Administration, particularly borrowers whose incomes are below 80% of average median income and first-time homebuyers with incomes of less than 100% of AMI.” pps 3-4.

            I ask in particular because as we read this, Morgan Stanley and JP Morgan are fine tuning their financial modeling of the GSEs in connection with the preparation of the capital restoration plans. If MS/JPM incorporate this assumption as to market size going froward as well, it will significantly (and adversely imo) impact the feasibility of their capital raising mandate.

            This will all be presented to Calabria in due course, hopefully before the capital rule is finalized. bankers have a way of assigning blame, especially when it is to sources (market conditions is oft used) other than themselves. one wonders how much of a surprise all of this will come to Calabria for him to learn that he is being held up as the principal impediment to a successful privatization.


            Liked by 2 people

          2. When I read the prediction in the Urban Institute paper that the May 2020 FHFA capital rule would cause Fannie and Freddie to lose “10 to 14 percentage points of origination market share,” I had two reactions: (a) the percentage reduction almost certainly came from the economist of the group, Mark Zandi, and I don’t know how he came up with it, and (b) it’s the first time I recall seeing the term “origination market share.”

            To make sense out of this, you have to start with the second point. As I noted in my FHFA comment, the measurement of market share for the mortgage market is complicated by the fact that it has four main segments: origination, servicing, credit risk-taking and funding. Fannie and Freddie now effectively operate in only one of those segments, credit risk-taking, and there they share the credit enhancement function (and revenues) on all loans with LTVs over 80 percent—about one-third of their business—with private mortgage insurers. So, there’s really no clean way to allocate “market share” on a high-LTV loan guaranteed by Fannie or Freddie, with PMI, that is purchased for portfolio by a bank. FHFA claims that loan is “financed” by Fannie or Freddie, but that’s simply wrong. The “market shares” are split, in ways that are not easy to track, but that provide the most revenues to the final investors.

            “Origination share” seems to be the Urban Institute’s way to try to get around this problem. It’s essentially asking, “Who gets the ‘first touch’ on a new loan?” Does it go to Fannie, Freddie or the FHA for a credit guaranty, to a bank either as an aggregator or an investor, or somewhere else (such as a private conduit)? It’s important to bear in mind, however, that every loan that gets a credit guaranty from Fannie, Freddie or the FHA still has to be funded by a final investor. A focus on “origination share,” while useful in some respects, obscures this vital point.

            Between the end of 2007 and March 2020—when Fannie and Freddie’s guaranty fees went from the low 20s to the high 50s (in basis points)—Fannie and Freddie’s combined “origination share” of single-family first mortgages still rose by 5 percent (from 42 to 47). Banks’ origination share also rose by 5 percent (from 13 to 18), while their funding share—whole loans acquired at origination plus MBS acquired in the secondary market—rose by a much larger 13 percent (from 23 go 36). And Ginnie Mae’s origination share rose by a mammoth 15 percent (from 5 to 20). All these increases in origination share, however, came at the expense of the private-label market, which now has an origination share of effectively zero. This means that if Fannie and Freddie try to raise their guaranty fees from where they are now by another 10 to 20 basis points, as a result of much higher (unjustified) capital required by FHFA, they WILL lose origination share; the only question is how much.

            In my comment to FHFA, I was content to simply make the case for why there would be a drop in Fannie and Freddie’s origination shares if they attempted to raise their guaranty fees much higher than they are now, but I didn’t attempt to quantify it. Is Zandi’s 10 to 14 percent share drop a reasonable estimate? Yes, I think probably so, and it could even be understated. I believe we’re close to a “tipping point” for Fannie and Freddie on guaranty fees. As I discussed in my comment, bank portfolios can do “blended pricing” for both interest rate and credit risk when buying mortgages for portfolio, whereas Fannie and Freddie can only price the credit risk, while FHFA is proposing to require the companies to price their high LTV loans off nearly four times the capital the FHA now has. And I would add that a focus on origination share changes leaves out the third outcome of excessive Fannie-Freddie guaranty fees: less business will get done. That won’t show up in the share data (although it will in single-family mortgage totals), and it’s an important effect.

            Finally, to your last point, I agree that having the 10 to 14 percent market share loss out there as a prediction from the Urban Institute should be helpful, although I think more for Calabria than JP Morgan or Morgan Stanley, who will have been focused on this issue already. They well understand that the interactions between Fannie and Freddie’s capital, guaranty fee pricing and guaranty volumes are keys to their future profitability, and hence their market value as investments.

            Liked by 1 person

          3. Tim

            as to your question why UI wont submit this paper as a formal comment to the proposed rule, I can only guess that UI is wary of being accused to be lobbying, which is a questionable activity for a 501c3 (permitted up to a point). assuming Calabria, who comes from the nonprofit world, understands this, one would hope that he is willing to give this paper as much credence as any formal comment.


            Liked by 1 person

          4. The Parrot, Ryan and Zandi paper won’t be the last to make the point that Calabria’s decision to impose a bank capital standard on Fannie and Freddie is without justification and contrary to the readily observable risks of the one business they’re permitted to do, and if insisted upon will have easily predictable negative consequences for mortgage rates, mortgage availability and systemic financial risk. I suspect he’ll get the message. And I also wouldn’t rule out Laurie Goodman and her UI colleagues doing a substantive analytical comment similar to what they did on the previous FHFA capital rule.

            Liked by 2 people

  2. Tim

    I have had a conversation with midas79, who posts on this blog periodically, who points out that a Mr. Sugarman at FHFA had this to say during the recent FHFA webinar on the proposed capital rule:

    “The way buffers work is that it’s not a capital requirement. Rather the enterprises need to hold the prescribed buffer amount, or we start to limit the capital distributions such as dividends and stock repurchases, and we also limit discretionary bonuses to executives.” p. 11 see

    now, I will be the first to admit that FHFA is confusing regarding the buffers; see Question 26 in the proposed rule and my comment letter to FHFA regarding it:

    are the buffers a capital requirement that need to be met upon pain of regulatory action, or an inducement for GSE management to carry more capital than actually required by the rule in order to avoid dividend and bonus restrictions? the answer to this question is very important for the initial capital raises that will be necessary to at least meet the risk/leverage capital requirements, imo.

    I have to believe that GSE lead underwriters, MS and JPM, are pounding FHFA for clarification on this point behind the scenes, but if you take what Mr. Sugarman said at face value, that buffers are not a capital requirement, then the capital market might take a more sanguine view of this rule.


    Liked by 2 people

    1. I don’t find the ambiguity or confusion around the structure of FHFA’s May 2020 capital proposal that you seem to. Both the minimum and the risk-based capital requirements have two components: a base capital requirement and a prescribed buffer. If either company’s total capital falls below the percentage set by either the minimum capital requirement (2.5 percent) plus buffer or the risk-based capital requirement plus buffer, it becomes subject to restrictions on executive compensation and dividend payments, with the severity of the dividend restrictions depending upon the extent of the shortfall in buffer capital.

      There is nothing in the proposed rule that indicates that FHFA will subject either company to prompt corrective action unless the base capital requirements are breached. FHFA does, however, state its expectation for how the companies will behave under this capital structure, saying, “FHFA expects that each Enterprise generally will seek to avoid any payout restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based and leverage ratio requirements during ordinary times,” adding, “it would not be consistent with the safe and sound operation of an Enterprise for the Enterprise to maintain regulatory capital less than its buffer-adjusted requirements in the ordinary course except for some reasonable period after a financial stress, pending the Enterprise’s efforts to raise and retain regulatory capital.” And lest anyone miss the point, there is this: “FHFA could, depending on the facts and circumstances, determine that it is an unsafe or unsound practice, or that it is inconsistent with the Enterprise’s statutory mission, for an Enterprise to maintain regulatory capital that is less than its buffer-adjusted requirements during ordinary times. If FHFA were to make that determination, FHFA would have all of its enforcement and other authorities, including its authority to issue a cease-and-desist order, to require the Enterprise to remediate that unsafe or unsound practice—for example, by developing and implementing a plan to raise additional regulatory capital.”

      I think the potential new large institutional investors understand how this capital rule will work, and in my current post I’ve tried to give them some facts about the competitive and pricing implications of forcing Fannie and Freddie to operate with a 4 percent-plus capital requirement. If I were a mutual fund manager looking at Fannie and Freddie as an investment, I would be pushing FHFA very hard to give real relief on the capital front by making definite and substantive changes to the rule that bring required credit guaranty capital into much closer alignment with the risks of the underlying loans–otherwise much of the business will go elsewhere. I also would think that there is nothing FHFA, its predecessor OFHEO, or Treasury have done in the last 28 years that would be grounds for my being “sanguine” about the possibility of Fannie and Freddie being allowed to operate with less than the base plus buffer amounts of capital for any length of time during a normal market environment. But we’ll see what the investors themselves say, and do.

      Liked by 4 people

  3. Thanks again for all of your analysis Mr. Howard. Its great to get informed analysis that regular folk can examine.

    I am wondering how the recent decision by SCOTUS to review both claims will impact other litigation in lower courts (Sweeney and all) – if in fact it does impact those claims. Do you or perhaps others have any thoughts on this? For example, does it impact the timelines for other litigation?


    Liked by 1 person

    1. In my opinion the decision by SCOTUS to grant cert in the Collins case will have no impact on the Sweeney case in the Court of Federal Claims, nor on the remand of the breach of contract and implied covenant claims in what used to be called the Perry Capital (which has since liquidated) case to Judge Lamberth in the D.C. Circuit—whether on their substantive matters or their timing. The Collins case obviously is on hold until SCOTUS decides it. The other active case I’ve been tracking is the appeal of Bhatti to the Eighth Circuit Court of Appeals, and there the Seila Law ruling by SCOTUS is supportive of, and will be helpful to, plaintiffs’ argument, but here too is unlikely to have any significant effect on the timing of that case.

      Liked by 1 person

      1. @path/Tim

        the Collins unconstitutional structured claim is the principal claim to follow, even more than the Collins APA which will be argued before scotus at same time. if Ps win APA claim, which comes up on a granted motion to dismiss, then the APA claim will be remanded to district court for a trial as to whether conservator exceeded his authority re NWS, which from start to exhaustion of appeal will be at least two years. Fairholme in court of federal claims and the implied covenant breach case before Lamberth are on similar timelines. If Ps win the Collins unconstitutional structured claim before scotus, the Ps win now (likely announced late spring 2021), and the case is remanded to determine relief. The Collins unconstitutional structured claim is the horse that has jumped into the lead…and imo is the claim with the best chances for success.


        Liked by 2 people

  4. Tim

    FSOC apparently is looking at the secondary housing finance market. while not asking you to speculate, is this the kind of announcement that might lead to an analysis whether to designate the GSEs as SIFIs? a skeptical mind might presume that FSOC is carrying water for FHFA’s proposed capital rule, perhaps justifying the high level of capital as a reason not to designate as SIFIs.


    Liked by 1 person

    1. I have little doubt that Calabria is looking for support for his notion of greatly overcapitalizing Fannie and Freddie. There is a group of critics of the companies who have long advocated applying the SIFI designation to them, and I suspect Calabria is playing off that.

      SIFI, as you know, stands for “systemically important financial institution.” In the segment of the market in which Fannie and Freddie operate–providing credit guarantees on residential mortgages–they are that; their guarantees are attached to close to half of all residential mortgages outstanding today. So, what is the right policy response? This is where the dialogue gets disjointed. Critics of the companies use the SIFI designation as an excuse to pile so much capital onto them that they can’t function. As I attempted to explain in my comment to FHFA, however, that just drives the business into weaker, and riskier, hands, which is worse for the financial system.

      The right answer to the “SIFI” issue is to require Fannie and Freddie to hold enough capital that they can comfortably withstand whatever level of market stress any other providers of mortgages can withstand, but not significantly more than that. But I don’t know how many of the voting members of the FSOC understand this (I’m quite confident that Calabria does not) or think this way, so I don’t know how this review will come out.

      Liked by 1 person

  5. Tim,

    Just like everyone else, “Thank you!” for your work on behalf of Fannie Mae.

    This article was so good, that I felt compelled to send it to a number of individuals including 13 partners of Milbank, a reporter from the American Banker, J.P. Morgan (since they are working for Fannie Mae), and both of the State of Illinois senators.

    Have a great day!


    Liked by 1 person

  6. Tim, another great piece of work. Thanks again for the well directed and thorough analyses.

    Given recap is a key directive and that preferred shares are priced way less than par today, there is up to $20BN (par value less current value) sitting on the table waiting for a formal announcement to acquire back the jr preferred. Why can’t/wouldn’t the GSEs or Treasury not start buying back the preferred today at 35c on the dollar? No law stopping such right? No congressional approval for treasury action like this especially given recent COVID leeway? Wouldn’t a “financial advisor” suggest that sooner rather than later?


    1. @stuart

      imo there is all the reason in the world to retire the existing junior prefs, which are expensive by today’s rate environment. but using precious capital by buying them back is not Plan A given the capital building constraints the GSEs are under. I expect the big junior pref holders would hold out for well more than 35%, but would be willing to continue with an investment in the GSEs (via an exchange into common) when there is some reasonable assurance that the recap has lifted off the runway.



    2. I made a decision some time ago to leave the topic of capital account management advisory to the investment banks Fannie and Freddie hire for that purpose; they have considerably more expertise and current market knowledge than I do.

      Liked by 1 person

  7. Thanks for publishing your opinion on the risk-based capital rule, Tim. Your comments are perfectly rational and fairly easy to understand, which makes me wonder why FHFA and Calabria can’t wrap their minds around the simple dynamics of risk-based capital, or come to grips with what actually happened during the financial crisis, and how the whole system was put at risk, disabling effective controls of the mortgage market by Fannie Mae through the misuse of private label securities.

    Liked by 2 people

  8. Thank you for being a voice of reason!

    You suggested counting future revenue from the G-fees. With all the various moving pieces, is there a short-hand calculation you would do to quantify this?

    The concept makes a lot of sense, but your submission left me wondering how this could be done (and what the magnitude of such an adjustment might be).

    You made a great a case on the historical loss data. I hope your comment receives the FHFA scrutiny it deserves!

    Liked by 3 people

    1. To make an accurate projection of the impact of counting Fannie or Freddie’s guaranty fee income in a stress test, you need two pieces of information: the average net guaranty fee (the guaranty fees received by the companies, less administrative expenses attributable to them) for each of the “risk buckets” being subjected to the stress, and the average prepayment rates for those buckets. We don’t know the first (although Fannie, Freddie and FHFA will) and the second will be dependent on the parameters of the stress test specified by FHFA (principally the path of interest rates).

      But a couple of years ago–before I did my comment on the first FHFA capital proposal, submitted in September of 2018–I did an analysis of the guaranty fee income on Fannie’s December 31, 2007 book of business, which went through the financial crisis (and formed the basis for the stress test being conducted now). I did the analysis by annual book of business (not risk bucket), for which the average net guarantee fees were available, and Fannie published the liquidation rates of each of these books, so I could calculate their annual prepayment rates. The result of that exercise was that guaranty fees lowered the loss rate of Fannie’s December 2007 book of business by about 75 basis points. I noted in my comment, though, that since that time guaranty fees had almost doubled, so it would be reasonable to expect that in a stress test run on today’s books of business counting guaranty fees would lower the credit loss rate by 125 to 150 basis points.

      This is a significant impact, but then high guaranty fees ARE able to absorb a considerable amount of credit losses before a company has to tap its capital. Not counting them greatly overestimates the company’s vulnerability to credit losses–and overstates the amount of capital required to keep it safe.

      Liked by 1 person

      1. Tim

        just to tie things up for a capital-constrained legal mind, would this reduction in credit loss rate of 125-150bps, attributable to including g fee income to reduce loss exposure on this test run of yours, imply a reduction of required capital of 1.25%-1.50%


        Liked by 1 person

        1. Yes, it would, although given that the guaranty fee income is dependent on prepayment assumptions, it would be reasonable to apply some haircut to it, to account for the uncertainty of the projection. But not 50 percent, and certainly not all of it, as is the case now.

          Liked by 2 people

          1. Tim

            one more question along these lines. If FHFA were to adopt some sort of incorporation of G fees into its capital rule, would that have the effect of lowering the requisite percentage capital levels (or could they stay at proposed percentages and simply help the GSEs satisfy them in any capital calculation)? I am curious about the optics. TIA


            Liked by 1 person

          2. Incorporating guaranty fees in the stress test would lower the amount of capital required to pass it. This is different from “counting guaranty fees as capital.” It’s a recognition of the reality that having guaranty fees that absorb credit losses protects the capital base: the higher the guaranty fee revenue, the less capital is needed to successfully withstand a period of stress losses.

            Liked by 2 people

  9. This is a well reasoned transparent expose of behind-the-scenes positioning of the various players in this long saga. Now we simply need our gov’t to do what’s right.

    Liked by 1 person

  10. Thank you for this precise and extremely well reasoned comment, Tim! One can only hope it is seriously considered and doesn’t fall on ‘ideological/political’ deaf ears.

    Liked by 3 people

  11. Tim

    Great comment and a masterful tutorial.

    “Between December 31, 2007 and March 31, 2020…the volume of Ginnie Mae securities backed by FHA or VA mortgages virtually exploded—increasing by 360 percent from $465 billion at December 31, 2007 to $2.14 trillion at March 31, 2020.”

    I distinctly remember Mnuchin saying in Congressional oversight hearing testimony that he wanted to take a holistic view of “housing finance reform”, and make sure that any action taken with the GSEs does not ignore, or exacerbate, issues at FHA. Wise mindset, but I wonder if Mnuchin is aware of the above datum. Leaving FHFA/Calabria to set a capital proposal in isolation for the GSEs seems to fall right into the trap of trying to regulate in piecemeal fashion so as to create larger unintended adverse consequences for Treasury with FHA. One hasn’t accomplished much if one has recapitalized the GSEs with a G-fee schedule that only shifts problems away from the private capital entities that are best positioned to deal with them, all at further risk to the public fisc.


    Liked by 3 people

  12. Thanks Tim for your sound, well reasoned comment. Hopefully they will listen as so much is as stake for the future of homeownership in the US!

    Liked by 1 person

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