Comment on ERCF Rule Amendments

Yesterday I submitted my comment on FHFA’s September 16 proposed amendments to its “Enterprise Regulatory Capital Framework” (ERCF) rule. That comment is reproduced below.

On September 16, 2021, the Federal Housing Finance Agency (FHFA) requested comment on a notice of proposed rulemaking “that would amend the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (PLBA) and credit risk transfer (CRT) securitization framework for [Fannie Mae and Freddie Mac]…and also make technical corrections to various provisions of the ERCF that was published on December 17, 2020.”

The proposed amendments not only ignore but would build on, and enshrine, the glaring inconsistences between the hugely excessive amount of capital required of Fannie and Freddie by the ERCF, the actual risks of the companies’ business as reflected in the results of FHFA’s Dodd-Frank stress tests for 2020 and 2021, and the structure and economics of their current CRT programs as discussed in FHFA’s May 17, 2021 report, “Performance of Fannie Mae’s and Freddie Mac’s Credit Risk Transfer.” If adopted, these amendments would actually reduce the companies’ ability to withstand future credit stresses. FHFA therefore must withdraw them, and instead devote its efforts to bringing Fannie and Freddie’s risk, capital requirements, and credit risk transfer programs into proper economic alignment.    

Two publications by FHFA this year—its May CRT performance report and the August 13 release of its 2020 and 2021 Dodd-Frank stress tests on Fannie and Freddie—should have set off alarm bells at the agency that the ERCF’s capital requirements were unreasonably and unjustifiably high, and that former Director Mark Calabria had allowed his ideology to override economics when he replaced FHFA’s June 2018 capital standard with the ERCF.

The June 2018 capital proposal had two main flaws: its risk-based component was tied to current value loan-to-value ratios, which made it procyclical (with capital requirements falling in strong housing markets and rising in weak ones), and it unreasonably assumed that Fannie and Freddie’s guaranty fee income would not offset any credit losses during a period of stress—that is, all stress-period losses had to be covered by initial capital. (It may not have been a coincidence that this latter assumption boosted the companies’ required capital to 3.24 percent of total assets and off-balance sheet guarantees as of September 30, 2017, virtually identical to the 3.25 percent capital percentage proposed by the firm Moelis & Company in its 2016 “Blueprint for Restoring Safety and Soundness to the GSEs,” which was being widely discussed on a bipartisan basis at the time.) Many commenters noted, and criticized, the procyclicality feature and the exclusion of guaranty fees in calculating required stress capital, and urged correction of these flaws after a new Director of FHFA was appointed by President Trump.

That new director was Mark Calabria. When he took office in April of 2019, his views on Fannie and Freddie were well known. In an essay titled “Coming Full Circle on Mortgage Finance,” done for the Urban Institute’s 2016 “Housing Finance Reform Incubator” project (for which I also submitted an essay, “Fixing What Works”), Calabria wrote, “Securitization is a false god that failed us,” conflating the private-label securitization process in which no participant bears any risk of loss—and which was the cause of the 2008 mortgage crisis—with entity-based securitization as done by Fannie and Freddie, who do take risk. Calabria’s prescription for mortgage reform was that, “A more stable and affordable housing market would be best served by returning to an originate-and-hold model of mortgage finance,” and consistent with that objective said, “To retain whatever value there is [in Fannie and Freddie], the current GSE charters should be converted to national bank charters and the GSEs reorganized as bank holding companies (BHCs).” Then, shortly after joining FHFA he said in an interview with Fox Business News, “I think our objective over time is that you have capital levels at Fannie and Freddie that are comparable to other large financial institutions,” adding that 4.5 percent capital was “kind of in the neighborhood of where we’re looking at.”

By the time Calabria put out his initial capital re-proposal for Fannie and Freddie in June of 2020, the actual amount of credit risk at both companies had fallen significantly from where it had been when FHFA’s June 2018 standard was promulgated. One measure of this was the annual Dodd-Frank stress tests run on the companies each year, that replicate the impact of a severe credit shock comparable to the Great Financial Crisis, including an approximate 25 percent decline in home prices. To pass the 2017 stress test, run on year-end 2016 data, Fannie and Freddie had needed capital of 66 basis points of their combined total assets. To pass the 2019 Dodd-Frank stress test run on year-end 2018 data, however, they needed only half that amount of capital—33 basis points of total assets.

Fannie and Freddie’s capital required by FHFA’s June 2018 standard declined significantly over this period as well. When FHFA made its June 2020 capital re-proposal, it revealed that the capital required of the companies by the June 2018 standard of 324 basis points of total assets and off-balance sheet guarantees at September 30, 2017 had fallen to only 225 basis points of “adjusted total assets” (a somewhat larger denominator) at September 30, 2019. This nearly 100 basis-point capital reduction was driven by the same improvements in credit quality as the Dodd-Frank stress tests were reflecting, as well as the procyclical effect of a reduction in the current loan-to-value ratios of the companies’ guaranteed loans during a period of strong home price appreciation.

Calabria, however, wanted Fannie and Freddie’s required capital to be higher, not lower, irrespective of risk. To this end, he added a “prescribed leverage buffer amount” (PLBA) of 1.5 percent to the 2.5 percent minimum capital requirement of “Alternative 1” in the 2018 standard, bringing Fannie and Freddie’s total minimum capital requirement up to the Basel 4.0 percent bank leverage standard (as he had indicated he would). And for the risk-based standard, he made only a technical adjustment to the procyclicality of the 2018 rule, still did not count any guaranty fees as offsets to credit losses, then added enough other buffers, capital minimums and non-risk-based capital charges to raise required capital for his risk-based standard up to 3.85 percent of adjusted total assets (or 4.20 percent of actual total assets). When many commenters said that having minimum capital higher than risk-based capital would encourage excessive risk-taking, Calabria responded not by lowering the minimum percentage but by adding still more conservatism to the risk-based standard, to raise it in the final capital rule, the ERCF, to 4.27 percent of adjusted total assets (and 4.65 percent of actual total assets) as of June 30, 2020.

From 2016 through 2019, FHFA had released the results of its Dodd-Frank stress tests for Fannie and Freddie in August. The results of the 2020 stress test (based on year-end 2019 data) were expected to be released that August as well, during the comment period for the June 2020 capital rule. Calabria did not release them then, or at any other time last year. Instead, FHFA put out a statement saying, “achievement of the purposes of the Safety and Soundness Act will be adversely affected if each Enterprise’s publication of the summary of its Dodd-Frank Act stress test results is not delayed so that each Enterprise may include the alternative [Covid-19] scenarios considered by the Board.” Commenters on the capital rule made their comments without the benefit of the latest Dodd-Frank stress test results.

When FHFA finally did release the 2020 stress test results on August 13, 2021—the same day as the results of the 2021 test (run on the year-end 2020 books) were put out—there was no Covid-related loss scenario, and in the 2020 “severely adverse scenario,” with a 28 percent home price decline, Fannie was able to survive with no initial capital, while Freddie needed just 32 basis points of total assets as capital (combined, they needed 12 basis points of capital). The results of the 2021 stress test were even better: neither company needed any initial capital to survive the 23.5 percent home price decline in this year’s “severely adverse scenario,” and during the stress period they were able together to accumulate and retain earnings equal to 16 basis points of their combined total assets.

No one paying attention, including at FHFA, should have missed the fact that while FHFA’s Dodd-Frank stress tests based on a repeat of the Great Financial Crisis were showing that Fannie and Freddie had gone from needing 66 basis points of capital to survive their stress test to generating 16 basis points of retained earnings as it unfolded, Director Calabria had been using a host of cushions, buffers and add-ons to set a “risk-based” capital requirement for the companies of more than 460 basis points—double the capital required by the 2018 FHFA rule—to survive essentially the same scenario.

This disconnect between the reality of Fannie and Freddie’s actual creditworthiness and their assumed, but fictious, need to cover more than 400 basis points of credit losses in a severe stress scenario was inescapable when FHFA published its May 2021 performance report evaluating the companies’ credit-risk transfer programs. In it, FHFA said it had asked a consulting firm, Milliman, to simulate the performance of the companies’ CRTs on $126 billion of risk in force as of April 30, 2021 under two sets of conditions, a “Baseline scenario” and a “2007 Replay” intended to mimic the credit stress experienced during the Great Financial Crisis (and the Dodd-Frank stress tests). Milliman found that in the baseline scenario Fannie and Freddie’s lifetime CRT costs were $33.60 billion and their “ultimate benefits,” or credit loss reimbursements, were $1.06 billion, for a net CRT cost of $32.55 billion. And in the 2007 Replay, Milliman projected lifetime CRT costs of $30.72 billion, ultimate benefits of $10.10 billion, and a net CRT cost of $20.63 billion.

FHFA gave the results of the Milliman CRT performance simulations without comment or conclusions; instead, it simply said, “FHFA continues to assess the CRT programs, including their costs and benefits as well as the benefits and risks to the safety and soundness of the Enterprises, the Enterprises’ ability to perform their statutory mission, and the liquidity, efficiency, competitiveness and resiliency of the national housing finance markets.” Yet the problem FHFA dodged in its CRT report is obvious. The reason that Fannie and Freddie will make (according to Milliman) 30 dollars in CRT interest payments for every 1 dollar of credit loss transferred in a normal environment, and pay 3 dollars in interest for every 1 dollar in credit losses transferred even in an environment of extreme credit stress, is that the companies’ CRT programs are calibrated to wildly overstated levels of potential credit loss, and have been since their inception. The large majority of the CRTs they issue are pure giveaways to the investment community.

And FHFA knows this, at least at the staff level. In its June 2018 capital proposal, FHFA said that the credit loss rate of Fannie’s 2007 book of business through September 30, 2017 “using current acquisition criteria”—that is, without the Alt A loans, interest-only ARMs and risk layering that resulted in over half of that book’s losses—would have been only 1.5 percent. Fannie and Freddie can cover a 9-year cumulative loss rate of 1.5 percent with the income from their current average annual guaranty fee (net of administrative expenses) of 36 basis points, as evidenced by the most recent results of their Dodd-Frank stress tests. And with a 9-year cumulative stress loss rate for the companies of 1.5 percent, the Milliman CRT performance results make perfect sense. Typically, Fannie and Freddie’s CRTs do not transfer any losses before they exceed 50 basis points of a covered pool of loans, and they continue to provide coverage up to 400 basis points or more. With the expected loss rates of Fannie and Freddie’s post-2007 loans in the range of 2 to 5 basis points per year, only a very small portion of covered pools in a “baseline scenario” will have credit losses in excess of 50 basis points while the CRTs issued against them remain outstanding (as they can, and do, prepay). And even in a repeat of the Great Financial Crisis, only the bottom third of the CRT coverage range of 0.5 percent to 4.0 percent (or more) of a pool balance has any risk of experiencing credit losses.

Once these actual data, from FHFA, are introduced into the analysis, it becomes obvious why the agency’s September 16 ERCF capital amendments (and “technical corrections”) are such a bad idea. They use the lure of a reduction in capital requirements—more risk-based CRT credit, and a reduction in the PLBA—from levels that are indefensibly high, and based on wholly fictitious notions of Fannie and Freddie’s credit risk, to effectively penalize the companies for not issuing CRTs that are virtually certain to lose them tremendous amounts of money under any set of circumstances, thus greatly reducing their ability to handle the credit stress they may one day face in reality. This is the opposite of FHFA’s professed goal. 

Because FHFA’s September 16 amendments would weaken the companies, they must be withdrawn. But that will not be sufficient; the disconnect between the ERCF, the results of the annual Dodd-Frank stress tests run on Fannie and Freddie, and the economics of their credit risk transfer problems will persist until FHFA acts to fix it. And it is clear what needs to be done. The 1.5 percent stress loss rate for Fannie and Freddie’s 2007 book of business “using current acquisition criteria” through September 2017, the Dodd-Frank “severely adverse scenario” stress test results for 2020 and 2021, and the Milliman performance simulations of the companies’ April 2021 CRT books all are based on real data. Calabria’s ERCF is not.

In fact, since the beginning of the conservatorships, proposals for Fannie and Freddie’s capital have never been linked to their risk; they have been driven by the intent of the companies’ critics and competitors to use overcapitalization in the name of safety and soundness to push their guaranty fees to noneconomic levels, and drive business to “free market” alternatives. In 2013, for example, FHFA Acting Director Ed DeMarco required Fannie and Freddie to raise their guaranty fees by 10 basis points not because of risk but to “encourage more private sector participation” and to “reduce [their] market share.” And as recently as April of 2014, the Johnson-Crapo bill from the Senate Banking Committee would have required the credit guarantors who were to replace Fannie and Freddie to hold 10 percent capital to back their credit guarantees—with no reference at all to risk, other than to say that the 10 percent capital amount could be reduced if the guarantors transferred it. The ERCF is only the latest example of a non-risk-based approach to Fannie and Freddie’s capital, but it is the one that currently is binding on them, so it is the one that FHFA needs to repeal and redo.

The persistent and deliberate overcapitalization of Fannie and Freddie has had several negative, but predictable, consequences. Most obviously, you have two companies who today have extremely high-quality books of business and earn some $20 billion per year after-tax, but have no hope of exiting conservatorship in the foreseeable future because they have a core capital shortfall to the grossly inflated levels required by the ERCF of nearly half a trillion dollars, and no access to the capital markets because Treasury and FHFA have elected not to cancel the net worth sweep, which was imposed before the two agencies realized that the correct resolution of the companies’ indeterminate limbo was not to replace them, but to recapitalize them.

Second, Fannie and Freddie’s guaranty fees since the conservatorships have risen by over 20 basis points, and could rise dramatically further if the ERCF remains in place. In order to earn a modest after-tax return of 9.0 percent on 465 basis points of capital, the companies would need to charge an average of 65 basis points on their new credit guarantees, another 21 basis points more than their average gross fee (net of TCCA) in 2020 of 44 basis points. This is a ticking time bomb that everyone would prefer to think does not exist. And even the current level of Fannie and Freddie’s guaranty fees has had a profound effect on their ability to do affordable housing business. In 2007, 36 percent of the loans they purchased or guaranteed had credit scores less than 700; in 2020, just 12 percent of their combined business had credit scores that low.

Finally, and not surprisingly, banks’ holdings, and share, of 1-4 family first mortgages and mortgage-backed securities (MBS) have soared since the conservatorships. At December 31, 2007, banks held $2.23 trillion in 1-4 family first mortgages and MBS, for a 22.2 percent share of that $10.04 trillion market. Outstanding 1-4 family first mortgages and MBS were 15.7 percent higher at June 30, 2021, at $11.62 trillion, but banks’ holdings of them then were nearly double, at $4.42 trillion, for a 38.0 percent market share. This may have been good for the banks—and what they wanted to have happen—but shifting these volumes of mortgage holdings from capital markets investors such as pension funds and life insurance companies to leveraged commercial banks, who are funding them with consumer deposits and short-term purchased funds at a time of record low interest rates, increases systemic risk markedly.

None of these effects are ones senior economic officials in the Biden administration, when they focus on them, will support, or wish to have continue. The change of administration thus puts FHFA in an excellent position to take the lead in breaking free of the misguided, fiction-based policies of previous administrations towards Fannie and Freddie, and shifting to policies based on fact. FHFA must be bold in making this change, and not ignore the need for it or pretend it isn’t necessary, as the September 16 proposed capital amendments do.

And the required changes are straightforward. First, FHFA and Treasury must agree to declare that Fannie and Freddie have paid back all of the $187 billion they were forced to draw during the financial crisis, including 10 percent interest (which they have done), and deem Treasury’s senior preferred stock to have been repaid and cancel it, along with Treasury’s liquidation preference. Then, FHFA must replace Calabria’s ERCF with a rule based on the companies’ actual business and credit risks. As I discuss in “Capital Fact and Fiction” on Howard on Mortgage Finance, a rigorous and highly effective capital regime for Fannie and Freddie can be built with just three elements: (a) a true risk-based capital requirement based on a stress test run on each company’s book of business every quarter, with no cushions or add-ons; (b) a single “all purpose” capital cushion, calculated as a percentage of this true risk-based requirement, and (c) a minimum capital percentage aligned with the risk-based capital requirement.

Only when the ERCF has been replaced should FHFA turn to the task of determining how much capital credit to give to Fannie and Freddie’s (redesigned and recalibrated) credit risk transfers. Changing the CRT credit before then would be a waste of FHFA’s time, and worse, result in a great waste of the companies’ money.

67 thoughts on “Comment on ERCF Rule Amendments

  1. Tim

    Collins 5th C en banc oral argument tentatively scheduled for week of 1/17/22. it is my speculation that this oral argument would not have been scheduled if Ps request to shift the burden of proof was not a real option under consideration by the en banc court. it is my further speculation that the Trump Letter had some significant effect in constituting as a live option the question of shifting of the burden of proof.

    in simple terms, the merits are a real problem for the DOJ. SCOTUS has made clear that Director Watt should not have been FHFA director for two years at the beginning of the Trump term IF POTUS Trump would have fired Watt on day1, had it been clear that he had that power. The Trump Letter confirms that POTUS Trump would have done so, and there is no one else whose testimony is relevant to what POTUS Trump would have done than POTUS Trump.

    So what if anything is the Ps remedy? Well, the remedy hinges on whether the recap of the GSEs could have been executed within the 4 year term if begun of day1. This is hard to prove, but it is also hard to disprove, so who has the burden of proof is crucial to the determination as to whether there should be a remedy. If there is a remedy, it is hard to understand how the remedy would be other than putting Ps in the position they would have been had there been a recap…and substantial evidence would be presented that there could be no recap without the write down of Treasury’s senior preferred stock.

    so as you intimated, Collins is becoming much more interesting than one may have thought.


    Liked by 1 person

    1. Do you think how far any clandestine capital raise “road shows” had progressed is relevant? In other words, if they were less than two years away from R&R, then is that relevant?


    2. First, it is obvious to the court that Trump would have fired Watt on day 1. Second, since Trump wanted to recap and release GSEs, lots of good things could have happened in 4 years. Examples, eliminating liquidation preference, returning over payment, and even lowering capital rule to attract investors.


    1. There was a flurry of responses to FHFA’s proposed amendments on the ERCF in the last few days before the comment deadline, and because of the Thanksgiving weekend holiday and other priorities I’ve only been able to take a brief look at most of them. I’ve skimmed the responses from the major institutional or political (trade group) commenters, and so far haven’t seen anything surprising. The entities that historically have supported limits on Fannie and Freddie’s competitiveness, pricing or market share say they support their CRT programs because they move risk away from them (only remote or zero-probability risk, at a very high cost) and protect the taxpayer (which they emphatically do not: CRT programs that cost Fannie or Freddie $30 dollars in normal times and $3 dollars even in a worst-case scenario to transfer $1 dollar of credit losses significantly weaken the companies’ abilities to absorb the credit risks they do face), and are either mute on or supportive of the proposed FHFA changes to prescribed buffer leverage amount (PLBA) and CRT capital credits, and deem them to be the only changes necessary to the Calabria capital rule. And of course the investors in or issuers of CRTs are very happy with the proposed amendments, since they give Fannie and Freddie a strong incentive to issue tremendous amounts of CRTs–and in Fannie’s case, a reason to re-start its CRT program after a year of suspension–that provide highly attractive yields and very low probabilities of actually transferring credit losses.

      I did read the summary of the comment submitted by the Center for Responsible Lending (above), and agreed with almost all of it; I will read the entire document as soon as I can. And I was glad to see the Urban Institute point out the problems with the “countercyclical adjustment” FHFA put into the ERCF in an attempt to mitigate the procyclicality of basing the risk-capital stress test on current value loan-to-value ratios; this adjustment further complicates the capital rule without solving the real problem.

      Yet because the large majority of the comments FHFA received on its proposed rule were positive–as I expected them to be–I believe Director Thompson will simply adopt it as proposed. I don’t expect her to tackle the obvious overcapitalization of the ERCF, or the glaring inconsistencies between the ERCF, the Dodd-Frank stress tests and the structure and economics of Fannie and Freddie’s CRT programs with any urgency, if at all. That level of reform will have to await the Biden administration appointing a new permanent director of FHFA.

      Liked by 2 people

    1. Well, this letter will at least give the Fifth Circuit justices something to think about. The key statement here is, “From the start, I would have fired former Democrat Congressman and political hack Mel Watt from his position as Director and would have ordered FHFA to release these companies from conservatorship.” There is little doubt about the first action. As to the second, President Trump had 20 months to “order” Mark Calabria to release Fannie and Freddie from conservatorship and never did. That, to me, does weaken the hypothetical that he would have done that had he be able to fire Watt. But it will be up to the justices to make this determination.

      Liked by 2 people

      1. Tim, I think the last sentence in Trump’s letter address your point about ordering “FHFA to release these companies from conservatorship.” Trump Claims his administration was “denied the time it needed to fix this problem because of the unconstitutional restriction on firing Mel Watt.” So while 20 months wasn’t enough time to begin and complete the work to release the companies from conservatorship, Trump is stating a full 4 years from day one would have been sufficient.

        Craig Phillips discussed this in an interview where he said had they not had to wait to fire Watt, there would have been ample time to complete the privatization as well. This certainly should tilt the favor in plaintiffs favor.

        Will be interesting to see how the 5th circuit judges try to untangle this mess of a ruling handed down from SCOTUS with Trumps curveball thrown in.


      2. Tim,

        How do you think this plays with current administration? Will they be forced to take the other side against this Trump letter and double down and try to preserve NWS? Will they want to be the ones that accomplish what Trump claims he would have accomplished if he had authority to fire Watt up front and make a “huge profit” for the American people?

        Clearly this letter helps legally in the 5th circuit for Collins, but I’m wondering if that fails, does it help or hinder the chances of an administrative resolution?


        1. The Fifth Circuit can’t invalidate the net worth sweep; all it can do is determine that Mel Watt’s implementation of the sweep caused some identifiable harm to plaintiffs, then award damages. It’s possible, though, that if the senior Biden administration officials who have Fannie and Freddie within their purview think there is a chance the Fifth Circuit might require them to pay significant monetary damages, that might be a swing factor in favor of their doing what they should be doing in any event: declaring the senior preferred fully repaid, voluntarily canceling the sweep and Treasury’s liquidation preference, and putting the companies on a path out of conservatorship.

          Liked by 2 people

          1. From what I calculate using FHFA’s Table 2 (dividends paid to UST), Fannie paid $18.232B in NWS dividends between Q1 2017 (beginning of Trump’s term) and Q3 2019 (when FnF stopped paying dividends to UST due to the September 2019 letter agreement). Freddie paid $26.988B, for a total of $45.220B.

            Click to access Table_2.pdf

            That could be what UST is ordered to pay back to FnF, under the assumption that if HERA had allowed it, Trump would have removed Watt in January 2017 and ordered an agreement similar to the September 2019 letter agreement stopping the NWS.

            Perhaps the court would increase the liquidation preference of the SPS by the same amount, but it’s clear from Presidential budgets that each dollar of the SPS liquidation preference is worth much less than one dollar in cash, and it’s cash UST would be ordered to pay.

            Liked by 1 person

          2. Other than the fact that you’ve reversed Fannie and Freddie (between 12.31.16 and 9.30.19 Fannie paid $27.0 billion to Treasury, and Freddie paid $18.2 billion), your numbers are correct. But then you’re into hypotheticals, and you’ve also omitted one significant point: between those two dates, both companies paid somewhat less under the sweep than they would have owed under the original 10 percent dividend requirement (Fannie about $5 billion less, and Freddie about $1.5 billion less). It was the net worth sweep that caused the real harm to the companies, and there the Supreme Court’s curious assertion that an acting director of FHFA is removable by the president and thus constitutionally appointed puts more than all of the damages to the companies caused by the net worth sweep (which occurred in 2013 and 2014) beyond the scope of the SCOTUS remand to the Fifth Circuit for remedy.

            As you know, what Calabria and Mnuchin did in September of 2019 was allow Fannie and Freddie to forego their required sweep payments and thus build up their core capital, in exchange for a dollar-for-dollar increase in Treasury’s liquidation preference in them. That voluntary decision by FHFA and Treasury came at no cost to the Treasury (albeit it did carry the opportunity cost of not receiving the foregone payments). I have a hard time seeing how a court would determine that an equitable remedy for not having made the voluntary decision to (at no cost) suspend the sweep in the first quarter of 2017 would be for Treasury to have to pay $45.2 billion in cash back to the companies (and increase its liquidation preference at the same time) today. And I’d be very surprised were that to happen.


          3. Tim/midas

            now that we are into hypos, there is a scenario where, if the court were to find that it is more likely than not that the GSEs would have been recapped within Trump’s POTUS term if Director Watt was fired on day1 (yes, a big if), then the expectancy damages sought would be to put the shareholders in the position they would be if there was a recap…and to do a recap, Ps would argue that the SPS preferred balance would have to go away in its entirety (which seems to me to be correct as a practical matter).

            so Collins would argue for essentially the same damage remedy as would be available if the NWS was invalidated. remember, this is exactly what Trump says he would have done in the letter. so game on…but it will be really on if the 5th C shifts the burden of proof.


            Liked by 1 person

          4. Tim,

            Thanks for the correction. For some reason whenever I see Fannie and Freddie numbers side-by-side I assume that Fannie’s numbers are on the left.

            My impression was that the remedy is to set things to where they would have been had Trump been able to remove Watt at will. Had the September 2019 letter agreement happened in January 2017 instead then I don’t see why FnF wouldn’t have the extra $45B in cash; the agreement suspended all dividend payments and not just NWS payments.

            Trump’s assertion that he wanted FnF released from conservatorship means he wouldn’t have been in favor of 10% cash dividends instead of the NWS either; as you point out those would have drained FnF’s capital even more effectively than the NWS itself. Those payments would also have rendered/kept the common stock economically worthless, while Trump asserts he would have had UST sell those shares “at a huge profit”.

            All of this is not what I think *must* happen, just what I think would comport with SCOTUS’s ruling. The Fifth Circuit, or perhaps the Southern District of Texas on remand, will have to decide whether retrospective relief is available and what form it would take.

            This is just how I understand the situation, further corrections are welcome.


  2. Tim

    I found this tidbit interesting (from IMF News): “Banks held $2.859 trillion of residential MBS in available-for-sale and held-to-maturity portfolios at the end of September. That was up 2.8% from June and marked the 14th consecutive quarterly gain.”

    one might infer that banks have ceded much of the mortgage origination market to nonbanks (eg rocket mortgage), which seem to be more efficient, but have maintained their exposure to the housing credit as an investor of GSE MBS. my simple mind would have thought that these banks would want to strengthen the creditworthiness of the MBS guaranty in favor of their MBS holdings by seeing the GSEs recapped.

    as I recall, one of your takes was that having higher guarantee fees for the GSEs increased the profit for banks which originate and hold mortgages…but is the market transitioning such that banks are less concerned with origination profits and more concerned with net interest income afforded by the MBS/deposit rate spread?



    1. From the standpoint of the creditworthiness of Fannie and Freddie’s MBS, banks are perfectly happy with them remaining in conservatorship, since they have the SPSA line from Treasury backing them. Banks aren’t the ones pushing for “recap and release” of Fannie and Freddie; they’re either opposed to it or keeping mum about it.

      On your “originate and hold” question, there are a couple of things going on. First of all, banks do not seem too concerned about their recent loss of mortgage origination share to nonbanks. Since the conservatorships, two-thirds of the near-doubling in bank holdings of 1-4 family first mortgages and MBS–from $2.23 trillion at December 31, 2007 to $4.42 trillion at June 30, 2021 (I haven’t updated my data for September yet)–have come in the form of Fannie or Freddie-guaranteed MBS and REMICs. Banks don’t care who originates the mortgages that end up in those securities; they just buy them on issuance, or in the secondary market.

      And, yes, banks are buying the MBS for the spread income, since their cost of consumer deposits is essentially zero (at the moment; if we see an upswing in inflation that will change). But many banks still do obtain their residential mortgages via the “originate and hold” process. And for those banks, higher guaranty fees for Fannie and Freddie are a benefit to them. All originators, including smaller banks, base their primary mortgage market quotes on the cost of selling into the secondary market. So when that cost rises because of higher guaranty fees, banks who don’t sell into the secondary market still charge the higher primary market rates, and keep the additional spread for themselves.

      Banks who buy Fannie and Freddie MBS don’t get that additional funding spread (it’s absorbed by the higher guaranty fees), but they benefit through a lower capital cost. And that benefit is substantial. It’s hard to know what banks’ net funding spread on mortgages is, because we don’t know how they allocate their administrative expenses. But let’s just say it’s 80 basis points. Unsecuritized mortgages held in bank portfolios have a 50 percent Basel risk weight. On 4 percent capital, 80 basis points of net spread income results in an after-tax return on equity of 15.8 percent. Fannie and Freddie MBS, in contrast, have only a 20 percent Basel risk weight. And on top of that, the administrative costs of buying an MBS in the market are trivial compared to the “brick and mortar” cost of originating them. Banks save far more than the average 45 basis-point cost of a Fannie or Freddie guaranty fee in admin expense, but even if that were all they saved, their ROE on 80 basis points of MBS net spread income at 1.6 percent capital would be almost 40 percent.

      Banks, therefore, are VERY happy with what Treasury and FHFA have done with Fannie and Freddie since the conservatorships. They’re getting higher spread income on the mortgages they originate and hold because the companies’ guaranty fees have been pushed up by 20-plus basis points (and if the Calabria capital rule is not changed will be heading materially higher), and their own capital rules allow them to save on both administrative expenses and capital costs by letting nonbanks do the origination, leaving them with very attractive amounts of (FDIC insurance-subsidized) spread income.


  3. Hi Tim,

    Thank you for your continued thoughtful work on these important topics. I’m wondering how you think about the impact of a new disclosure in FHFA’s Performance and Accountability Report, released yesterday.

    Click to access FHFA-2021-PAR.pdf

    On page 39, the paragraph under Performance Measure 1.3.3 ends with “FHFA plans to issue a proposed rule on capital planning by the end of 2021.” The figure on page 38 shows that this rule issuance is the only unfinished performance measure relating to the strategic objective called “Responsibly end the conservatorships of the Enterprises.”

    Do you think this rule issuance would be significant? Are there reasons FHFA would issue a rule on Enterprise Capital Planning other than creating a pathway for the Enterprises to retain and attract equity capital?


    1. No, my sense is that this is just the FHFA bureaucracy going through its “to dos,” one of which is to require Fannie and Freddie to issue capital plans. I will, though, be interested to see when FHFA does issue its “proposed rule on Enterprise capital planning” whether it makes any reference to the capital circumstances in which the companies find themselves, which for Fannie at September 30, 2021 was negative core capital of $79 billion, estimated required risk-based capital of $196 billion, and a shortfall to full capitalization of $275 billion, with no access to the capital markets because of the net worth sweep. I can’t imagine what FHFA might be expecting the companies to come up with to overcome the capital hole that FHFA and Treasury have put them in. Perhaps it will just say, “please file your capital plans.” But if FHFA meets its self-imposed deadline, we should know before the end of the year.

      Liked by 2 people

    1. Simply because Fannie is paying a premium to repurchase these CRT issues, you can’t conclude that they’ve not transferred any credit losses (although I think it’s very likely they have not). Most if not all of Fannie’s CRTs trade at a premium, based on the fact that their loss assumptions at time of pricing have turned out to be much too conservative. I suspect the reason that Fannie is buying these specific issues back is that it’s concluded they are worth more “dead than alive”: that is, the price Fannie is paying to repurchase them is less than the present value of the interest payments it would have to make were it to leave the securities outstanding.

      Liked by 1 person

      1. Tim,

        I don’t quite understand this. Issuing the CRTs in the first place is uneconomical and yet FHFA is giving Fannie and Freddie every incentive to do them. Why would they direct or allow Fannie to repurchase a CRT issue for economic reasons?

        Also, I saw this in FHFA’s fact sheet regarding the changes to the PLBA: “An economically sensible CRT is not one that is low-cost on an absolute basis, but rather one where the cost to the Enterprise for transferring the credit risk does not exceed the cost to the Enterprise of self-insuring the credit risk being transferred using equity capital.” (top of page 4)

        It appears FHFA has a different definition of an “economically sensible CRT” than most of us would consider, well, sensible. How does “self-insuring the credit risk being transferred using equity capital” cost anything, especially when Fannie and Freddie cannot actually raise any capital?


        1. On your first question, I do not know what role FHFA plays in any decision by Fannie (or Freddie) to repurchase an outstanding CRT.

          On the excerpt from the fact sheet on the PLBA change, FHFA is saying exactly what I’ve described it as doing: setting an indefensibly high capital requirement (although it’s not admitting to that) for Fannie if it takes credit risk itself, but then reducing that required capital (which was never necessary to begin with) if Fannie pays far more in interest payments on CRTs than it can ever hope to receive in credit loss transfers, so the buyers of the CRTs (and FHFA) can pretend that risk is being moved away from Fannie when it really isn’t. It is an absolute scandal that FHFA is doing this. It weakens Fannie’s ability to withstand real credit risk, and actually takes “private capital” OUT of the mortgage market, rather than bringing it in.

          I hope some official in the Biden administration recognizes what’s happening here, and puts a stop to this lunacy.

          Liked by 3 people

    1. The press release on this transaction says, “Fannie Mae will retain risk for the first 60 basis points of loss on a $31.7 billion pool of single-family loans with loan-to-value ratios greater than 80 percent and less than or equal to 97 percent. If the $190 million retention layer is exhausted, 20 insurers and reinsurers will cover the next 315 basis points of loss on the pool, up to a maximum coverage of approximately $998 million.”

      What’s missing, though, is the economic context. These are mortgages that carry private mortgage insurance, which significantly reduces their loss severity on default. Fannie publishes data on recent annual default rates and loss severities for these loans in its Connecticut Avenue Securities Investor Presentations. In the January 2021 version of this publication, it says that for its five most recent origination years that have enough loss data to be meaningful—2012 through 2016—the average annual default rate for loans with LTVs over 80 percent and up to 97 percent has been 0.2 percent, and their average annual loss severity has been 0.11 percent. That’s an annual credit loss rate of 2 basis points per year. It would take 30 years of credit losses of 2 basis points per year for the 60-basis point threshold of credit losses to be reached—at which point the mortgage insurers that are counterparties to this deal would have to begin picking up losses—and the term of the insurance is only 12.5 years. On top of that, Fannie is paying for insurance for up to 375 basis points of losses, which is close to 200 years of losses at the current credit loss rate. As I noted in my current post, even in a repeat of the Great Financial Crisis the total losses on an insured pool of loans are unlikely to exceed 150 basis points of the pool balance. This deal is a giveaway to the mortgage insurers, just as similarly-structured Connecticut Avenue Securities deals are giveaways to investors.

      The only reason Fannie is doing these grossly uneconomic deals is to get the capital relief FHFA is proposing to offer them. And that’s the scandal. FHFA knows the Calabria capital standard is far too onerous, but rather than reduce it, it only allows the companies to “buy it down” somewhat by issuing CIRTs or CRTs that will lose them billions of dollars in the real world, through greatly overpaying for insurance that will never pay off. And Fannie’s customers are bearing the cost of that. Shame on FHFA.

      Liked by 6 people

      1. Tim,
        Agreed and extremely well said.
        “And Fannie’s customers are bearing the cost of that.”
        Are these billions primarily coming out of Fannie’s ‘pocket,’ or mortgage holders, or a combination of both? What would be the % Fannie, the % mortgage holders?
        What realistically can be done? TIA

        Liked by 1 person

        1. At the moment, the costs of Fannie’s risk-sharing transactions are “coming out of Fannie’s pocket,” and thus lowering its retained earnings and slowing the pace of its capital retention. Fannie said in its third quarter 10Q that in the first nine months of the year it had paid a total of $1.025 billion in cash for CAS, CIRT and lender risk-sharing transactions, which is $1.367 billion on a full-year basis. (Fannie actually paid more than that during the first nine months of 2020; shutting its CAS and CIRT programs down for much of 2021 lowered its risk-transfer costs for the year to date.) It’s possible that without FHFA’s involvement and direction Fannie would be doing some type of risk-sharing, but if it did none the increment to its 2021 retained earnings (i.e, the after-tax value of its annualized risk-sharing costs this year) would be $1.08 billion.

          It’s hard to tell if Fannie is passing any of these risk-sharing costs on to homebuyers, or if it is just absorbing them. We know from the July 2014 paper from FHFA, “Fannie Mae and Freddie Mac Guaranty Fees: Request for Input” that in the first quarter of 2014 the companies’ target average fee to produce their desired return on capital was 61.8 basis points, but they only were able to charge 50 basis points. And that was at an average capital percentage of only a little over 3 percent (but also at a marginal corporate tax rate of 35 percent, versus 21 percent today). I noted in my current post that to earn a 9.0 after-tax return on its current “Calabria standard” capital, Fannie would need to charge an average of 65 basis points on its new business. It’s not close to doing that, which means it’s implicitly absorbing this higher cost of capital itself. That may be fine for a company in conservatorship, but if and when it gets out it will be a problem.

          The last point to make on this topic is that FHFA’s current proposal to give Fannie and Freddie a break on their required capital if they issue CRTs won’t help homebuyers. Yes, Fannie and Freddie will be able to reduce the component of their guaranty fees related to capital charges, but they will then have to add nearly an equal amount to their guaranty fee buildup to compensate for the wasted interest payments made on their non-economic CRTs. So in that manner, once the companies ARE pricing to their full cost of capital, it will be homeowners who bear the cost–whether if be for the cost of the unnecessary capital itself, or the cost of the CRTs the companies are issuing to (modestly) reduce the amount of that unnecessary capital.

          As to the “what realistically can be done” question, I did my best to publicize the issue in the current blog post. I’m also trying to get certain people in the financial media (and no, I won’t give names) to do a story on this, but so far haven’t had much success; it’s always been hard to convince anyone to take on an issue that puts the Financial Establishment in a bad light. And I know there are people in the Biden administration who have been exposed to my takes on the capital and CRT issues, but I don’t have a good sense for their appetites for engaging on them–although now they’re very focused on getting their infrastructure and Build Back Better legislation passed.

          Liked by 3 people

  4. Hi Tim,
    You may have addressed this in the past, but if not I was wondering if you could give us your view on it.
    -Fannie reports $4.8B of net income.
    -reports an asset base increase of $223.5B
    That means the lowest possible min cap req allowed by HERA, 2.5% of bal sht assets, went up $5.58B.

    Thus Fannie has *lost ground* relative to its cap reqs needed for release once again.

    Freddie- $2.8B income, asset base up $310.5B
    2.5% of that is $7.76B, meaning Freddie *lost* $5B of ground versus its lowest possible min cap req.

    Any thoughts?

    Liked by 1 person

    1. Yes; the net income increases you cite for Fannie and Freddie are from the second quarter to the third quarter of 2021, while the asset size increases for both companies are from December 31, 2020 to September 30, 2021, which is a three-quarter period. So your “lost ground” observation for each company is based on an erroneous calculation, and thus incorrect.

      Neither company reported what their September 30, 2021 capital requirement would have been under Calabria’s “Enterprise Regulatory Capital Framework,” or ERCF. (In its 10 Q, Fannie said, “We are required to report capital amounts as determined under the enterprise regulatory capital framework for periods beginning after 2021.”) The latest ERCF percentage we have for Fannie was for June 30, 2020, when it was 4.65 percent of total assets. Assuming it’s been the same since then (which it very likely hasn’t), then Fannie’s required capital at September 30, 2021 would have been $195.7 billion, a $10.4 billion increase from its required capital of $185.3 billion as of December 31, 2020. Fannie’s core capital at September 30 of this year (which it does not publish; you have to calculate it) was a negative $78.7 billion, down from a negative $95.7 billion at December 31, 2020. Fannie therefore has added $17.0 billion to its core capital (making it less negative) this year, while its required capital has risen by $10.4 billion, meaning that for 2021 to date the company has managed to come $6.6 billion closer to meeting Calabria’s definition of “adequately capitalized.” Only an estimated $274.5 billion still to go.

      Liked by 4 people

  5. Tim

    3Q 2021 results are out for Fannie and Freddie and they are as stellar as we have become accustomed to recently. The Fannie 10Q:

    it is remarkable that Fannie (which I focus on) has grown capital by $40B over the past 3 years, during which period there was an economic shutdown from the covid pandemic, resulting in broad based foreclosure and eviction forebearances. the GSEs didnt even break a sweat. A “re-Ipo” is quite feasible given these results.

    I look forward to your thoughts on their financial performance.


    Liked by 1 person

    1. Fannie’s earnings for the third quarter were as I expected–not as good as the second quarter, but still above a level that’s sustainable over the next several quarters.

      Two factors have been fueling the company’s earnings recently–still low (albeit now rising) mortgage rates, and exceptionally strong home price growth. Both have resulted in rapid business growth and a lower provision for credit losses. I continue to be surprised as to how low Fannie’s reserve for single-family credit losses is going. At September 30, 2021, this reserve was just $5.45 billion, or 16 basis points of Fannie’s conventional book of single-family business. Under CECL, this supposed to be the companies’ best estimate of that $3.40 trillion book’s LIFETIME expected credit losses. The drawdown in the single-family reserve is the main reason Fannie has recorded a $4.1 benefit for single-family credit losses this year. But that’s not sustainable. Nor is the $8.6 billion recorded to date this year in amortization income from Fannie’s credit guaranty business. That’s been driven by a large volume of mortgage prepayments, which result in the faster recognition of up-front guaranty fees (loan level price adjustments, or LLPAs) on the prepaid loans. As that slows down, that will lower the amount of upfront fees amortized into current-period income.

      Two positives that should carry through are Fannie’s now much larger book of single-family business ($3.40 trillion this September versus $3.09 trillion last September) and the higher average level of single-family guaranty fees–45.4 basis points this past quarter versus 44.4 basis points in the same quarter of 2020. These two factors alone will increase Fannie’s sustainable annual earnings by a little over $1.5 billion, to close to $16 billion after-tax.

      I’ve been waiting to see how the new Calabria capital rule ( the ERCF) that officially went into effect this February would impact Fannie’s charged guaranty fees, and it looks like I may have to wait a while longer. In its third quarter 2021 10Q Fannie said, “In our 2020 Form 10-K we stated that we measured our risk and returns on our current business against the conservatorship capital framework, and that we expected to cease using the conservatorship capital framework to make business and risk decisions sometime in 2021 and to use instead the new enterprise capital regulatory framework and certain risk measures. We now expect our transition to the enterprise regulatory capital framework will continue into 2022.” Fannie gave no reason for this extended transition period.

      Liked by 1 person

      1. Tim,

        First, thank you for the correction above. Tony’s post is a tweet of mine and I had made a careless mistake in comparing the asset base rise in the 9 months to 9/30/21 to the earnings just in Q3.

        Second, do you know which of the two alternatives in Watt’s CCF (Conservatorship Capital Framework) Fannie and Freddie are pricing to? The higher was 2.5% of balance sheet assets and the lower was 4% of non-trust balance sheet assets plus 1.5% trust assets. Or are they pricing to some other part of Watt’s capital rule?


        1. The Conservatorship Capital Framework is essentially the June 2018 proposed FHFA capital rule. Its risk-based component was 3.24 percent when it first was issued, but as I noted in my post it fell to 2.25 percent at the time the Calabria capital rule came out. So the companies since that time would have been pricing to the minimum capital requirement of the CCF, which I assume they took to be 2.5 percent.


          1. I wrote my answer on Fannie and Freddie’s CCF pricing too quickly. The roughly 100 basis-point drop in capital required by FHFA’s June 2018 capital standard (based on the CCF) between September 2017 and September 2019 was for the companies’ existing books; the capital they use for pricing new business would not have fallen nearly as much, and may in fact have increased.

            One of my criticisms of the June 2018 FHFA capital standard (which also applies to the Calabria standard) was that using current loan-to-values (CLTVs) as the basis for calculating risk-based capital complicates guaranty fee setting. At the time you price a pool of loans, you know what its original LTVs are, but you have to guess at what the CLTVs will be over the life of the pool. The only way you can do that is by making an assumption about long-term home price growth. And that raises an interesting point that I really hadn’t thought about until now: it’s entirely possible that today, pricing to the CCF (and potentially the Calabria standard as well), Fannie and Freddie’s guaranty fees on new business will be HIGHER than they were a few years ago because, given the extremely rapid growth in home prices over the past several years, the expected long-term growth in future home prices should be lower. (Trees don’t grow to the sky.)

            Liked by 3 people

  6. Am I missing something with todays notice of proposed rule making?

    Why would this nugget not just simply be part of the actual capital rule? Why does a requirement for such disclosure even require a rule making? Or 6 months to apply it after the final rule? What would be the purpose of this?

    Liked by 1 person

    1. perhaps the FHFA could also publish a proposed rule, relating to additional public disclosure, that would require FHFA to disclose the results of GSE stress tests promptly. unfortunately, assessing GSE capital risks may not be as important as assessing FHFA’s lack of transparency and regulatory incompetence.


      Liked by 2 people

      1. You don’t have to get too far into this notice of proposed rulemaking (NPR) before reading that, “The proposed rule would implement standardized approach public disclosure requirements for the Enterprises that align with many of the public disclosure requirements for large banking organizations under the regulatory capital framework adopted by United States banking regulators,” and soon after learning that a rationale for the rule is “establishing a level playing field for public disclosures between the Enterprises and large, domestic banking organizations.” FHFA admits that “enhanced public disclosures would necessarily be somewhat costly for the Enterprises,” but then goes on to inform us that it will require Fannie and Fannie to disclose even more than banks do, “to reflect the ERCF [the Calabria capital rule], such as those referring to statutory core capital and statutory total capital, adjusted total capital, the prescribed capital conservation buffer amount (PCCBA), and CRT.” Starting on page 22 of the NPR, and running through page 35, are a list of required disclosures that I didn’t even attempt to try to count. The NPR is signed by Acting Director Sandra Thompson.

        I have kept an open mind as to whether Ms. Thompson might be someone the Biden administration could count on to move FHFA off the path of regulating and capitalizing Fannie and Freddie based on fictional depictions of their risks, and to the wishes of the banking community and the Financial Establishment. With this NPR, I can now definitively say that my opinion is, “No.” As did the September 16 proposed amendment to the ERCF that is the subject of my current blog post, the NPR builds on that completely contrived capital rule as if actually were reflective of the companies’ business risk, then asks them to report in micro-detail on minutia that FHFA pretends will place the financial system in grave peril if the public is not able to monitor them closely on a quarterly basis. This NPR is the official dropping of the “other shoe”: gross overregulation on top of gross overcapitalization of two companies who take one risk on one asset type, for which (unlike commercial banks’ assets) ample data exist already, enabling investors and others to clearly see that their risk is exceptionally well managed and controlled, in spite of FHFA’s pretense that the opposite may be true.

        Liked by 5 people

        1. [Edited for length]

          Tim–You have, again & again, over the many years addressed what would be appropriate capital requirements for the GSEs.

          While I know it is your policy to demur on the execution of implementing changes to address the required capital for the GSEs, I was wondering if you may be inclined to opine on “CoCo Bonds”. They are used by European banks (primarily via dictate by regulators). A contingent convertibles expand on the concept of convertible bonds by modifying the conversion terms. As with other debt securities, investors receive periodic, fixed-interest payments during the life of the bond. Like convertible bonds, these subordinated, bank-issued debts contain specific triggers that detail the conversion of debt holdings into common stock. The trigger can take several forms, including the underlying shares of the institution reaching a specified level, the bank’s requirement to meet regulatory capital requirements, or the demand of managerial or supervisory authority.

          Contingent convertible bonds could be an ideal product for the GSEs if they are undercapitalized as they come with an embedded option that would allow the GSEs to meet capital requirements and limit capital distributions at the same time.

          Liked by 1 person

          1. No, I don’t intend to offer advice on what specific types, or combinations, of securities Fannie or Freddie should use to meet their capital requirements. That is a decision I believe is best left to company management, with the advice and assistance of their investment bankers.


  7. Tim

    I wonder if the irony is lost on the Biden administration.

    we are witnessing the struggle that it is for the federal government to appropriate money for social policy objectives that POTUS wants to achieve with “Build Back Better”. this is either a bug or feature of divided government and the separation of powers, and I wont venture into the political waters to characterize which it is.

    yet, the Biden Administration can implement massive federal investment for affordable housing objectives on its own initiative simply by monetizing Treasury’s financial state in the GSEs by returning them to the public capital markets. All it would take is to nominate Calhoun to FHFA director, who will be confirmed because he is eminently well qualified. then director Calhoun would implement his plan for a massive increase in affordable housing federal investment:

    Does the Biden Administration understand this, or is it too simple and easy for DC?


    Liked by 1 person

    1. I think some people within or important to the Biden administration do understand it–that’s how the Calhoun nomination got to the 1-yard line. But to get it past the objections of the banking lobby–which are what got Calhoun’s nomination stopped–getting Fannie and Freddie properly capitalized and on a path to exit conservatorship will have to become administration policy. And this is where the “Build Back Better” saga comes in. Right now, top policy officials are concentrated on, and consumed by, getting it passed with as much substantive content as possible. But once we have a bill (or know that one’s not possible), that’s when the lure of being able to have a significant impact on housing affordability that doesn’t have to go through Congress, and not only has no cost but will bring money into Treasury (through conversion of the warrants and sale of the associated stock) could prove hard to resist–and worth blowback from the banking lobby, although it really doesn’t have any substantive argument in favor of why Treasury and FHFA should keep Fannie and Freddie overcapitalized and in perpetual conservatorship, for the banks’ benefit.

      Liked by 4 people

      1. I think the ongoing Governor’s race in VA may have some impact on whether or not the Biden administration gets going with some urgency in implementing their housing agenda. I went to vote today (in NVA) at my local library. I was stunned, that for early voting, and a middle of the week, and an off year election, the turn out was very heavy. And this polling place is open every day until the election. Right now it could go either way.


        1. @jimm

          without venturing too far into the partisan political weeds, I have been thinking about this some and I sense a potential pivot point for the Biden administration, insofar as it may view the future of the GSE conservatorships.

          the whole BIF/BBB legislative controversy (understanding that the outcome is not yet written) may lead POTUS to conclude that governing from the middle should receive more emphasis…especially if there is a new R Va governor. time to announce a new policy “win” especially when you can do it without congressional involvement. if a state that went blue in the POTUS election goes red in the governor election one year later, that can capture the attention of the Biden administration.

          BBB sets forth some $150B for housing spending, and this has not been a subject of negotiation and controversy, such as have the tax/climate change etc provisions…but this appropriation is for the next 5 or so years, and POTUS can ensure continuing investment in housing initiatives for a longer term by implementing the Calhoun/Ranieri plan…and not expect any substantial political blowback. this all makes too much sense, which gives me pause…


          Liked by 1 person

          1. Rolg – Definitely not intending to digress this blog into a political discussion and I will make no more comments along these lines after saying that the fact that the state has turned increasingly and steadily blue over at least the last 12 years and to suddenly reverse (the GOP candidate would only have to make it very close and not necessarily win) is what will make the Biden admin take notice. Its good that the election is only one year into the admin and hopefully gives the administration time to implement a well reasoned (and funded) housing policy which should include releasing the GSEs.

            Thanks Tim for this forum!


  8. Tim,
    You are being shunned and treated as a ‘biased source’ by many who do not want the perception of F&F to ‘go back.’ This is highly unfortunate because a lot of what you state makes sense. The Financial Establishment is running the show for their interests regardless of what is ‘right’ or what should be done. This is most unfortunate, but you called how powerful they are.

    Where do we stand on Calhoun? Is his nomination completely DOA?

    Thompson seems to be a simple-minded, maleable Financial Establishment/Banking shill that ‘more capital is good, more capital means an additional buffer should something go wrong.’ Regardless again of the consequences you highlight.

    You are dead right that the Commerical Banks have eaten F&F’s lunch over the last decade and the numbers prove it! Money that could have resulted in profits to F&F, recapitalizing the GSEs to make the housing market more, not less, efficient.

    May I suggest that if you push for Sandra Thompson to formally be made FHFA Director so that the ‘powers that be’ may as a knee-jerk reaction push for Calhoun? I say this tongue-in-cheek since the world seems to be getting madder, not saner.

    Do you have any comment on why the Commons and JPS have experienced (relative) strength very recently?



    1. VM– What you call the “shunning” is nothing new and certainly not unique to me: attempting to discredit the messenger when you don’t have a valid critique of the message. I expect it, and frankly am surprised I don’t see (or hear about) it more. I’m in direct contact with a lot of people–including committed “bankistas”– and I don’t get a whiff of it. But it wouldn’t surprise me if among some people privately that’s a common way not to have to answer questions about the points I’m making. My response would be, “Take the name off the top of the piece, read it, and tell me what you think is wrong with it.”

      Calhoun’s nomination certainly has stalled, but it won’t be dead unless and until Sandra Thompson is nominated as permanent director. I don’t expect that anytime soon.

      I don’t speculate about or comment on movements in Fannie and Freddie’s common or preferred share prices.

      Liked by 1 person

  9. Tim,

    Not asking for names, but are there *influential* people in the administration including Treasury and FHFA that resonate with the problem and solution you set forth? Can the bank lobby be defeated without the courts ruling on the side of truth?


  10. This is by design. The banking lobby has successfully crushed litigation, administrative reform and shareholder rights.

    By hobbling Fannie Mae and Freddie Mac through a 13 year conservatorship, they are free to profit in myriad ways.

    Sandra Thompson is a tiny pawn in the big game. Mel Watt, Mark Calabria and Thompson, albeit from different ideological origins are malleable mainly due to their inexperience.


    1. Watt and Thompson were and are (respectively) inexperienced in the highly specialized business of mortgage credit guarantors, but Calabria was a “fellow traveler” with the banks and their supporters. His view seemed to be, “If I can’t turn Fannie and Freddie into banks (which is what his Urban Institute essay said he wanted to do), I’ll capitalize them like banks and let them figure out how to deal with that.” Calabria did real harm to the companies, but he may have pushed too far. His “risk-based” capital standard is so blatantly at odds with the results of their annual stress tests, and he has left them so far away from adequate capitalization, and even the 3% capitalization level required for consideration for release from conservatorship under a consent decree, per the January 14, 2021 letter agreements with Treasury, that I can’t see these circumstances being allowed to persist indefinitely. It’s just too obviously an “unsolved problem.”

      Liked by 2 people

  11. Tim,

    I have been one of the millions of people quietly following your posts on the subject. Each of your posts are well thought through master pieces. I applaud your efforts and encourage the leaders at FHFA listen to your opinions.

    Best regards,

    Liked by 2 people

  12. Tim

    great job. as you no doubt recall, Director Calabria never really substantively responded to the many comments, including yours, to the capital rule when proposed. I wonder whether Acting Director Thompson and staff will respond to your comments on this half-baked attempt at improvement. the problem with an acting director is that she will never face senate confirmation inquiry as acting director…so Acting Director Thompson can just duck and sail merrily along…again, typical conservatorship buck passing.


    Liked by 3 people

    1. As I discuss in my comment, the post-Calabria FHFA so far has ignored the obvious inconsistencies between the ERCF, the Dodd-Frank stress test results, and the implications of the Milliman CRT performance simulations. That does suggest a considerable degree of bureaucratic inertia, at the very least. Although I submitted my comment to FHFA, the intended audience for my observations extends to other potential commenters on the rule or stakeholders in the companies, as well as senior economic policy officials in the Biden administration. The more people there are making clear that what’s happening at FHFA is obviously wrong and not acceptable, the more likely FHFA leadership will feel pressured to change course, or, failing that, that senior Biden administration officials will appoint a new director who will shake things up at the agency and put it on the right course.

      Liked by 3 people

      1. Tim

        agreed, your public comment can and should be read by a diverse audience outside FHFA…but it is dismaying to the idealistic lawyer in me (or, that idealism which remains that hasn’t been abused by reality) that the whole raison d’être for public commentary on agency rule making was for agencies to receive, engage with, and benefit from a wide diversity of policy views, and this is not being done. while statutory direction (when clear) must be honored, statutes leave so many interstices left to be filled by agency rule making and discretionary action, as is so clear in the example of HERA and the GSE conservatorships. agency discretion was intended by the APA to receive and respond to public comment. I didnt see the Director Calabria FHFA doing this, and I am not holding my breath re the Acting Director Thompson FHFA.



    2. She’s way over her head and clearly doesn’t understand the real political dynamic when she comments to the MBA, as she has this week.


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