Tomorrow is the sixth anniversary of the first live post on Howard on Mortgage Finance, “Thoughts on Delaware Amicus Curiae Brief,” and this is the fiftieth post I’ve written since then.

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

My posts during the blog’s first three years (2016-2018) were written at a time when what I refer to as the Financial Establishment—which I defined as “large banks and Wall Street firms, and their advocates and alumni at Treasury and elsewhere”—was using these false narratives to justify a series of legislative proposals to replace the companies with “private sources of capital.” The proposals had begun with Corker-Warner in 2013 and continued with Johnson-Crapo in 2014, neither of which were brought up for a vote. Then in 2016, after I’d started the blog, the Urban Institute’s “A More Promising Road to GSE Reform” and the Milken Institute’s “Toward a New Secondary Mortgage Market” each proposed to replace Fannie and Freddie with entities that used credit-risk transfer mechanisms as a substitute for upfront equity capital. The former proposed to “merge Fannie Mae and Freddie Mac into a government corporation that is required to transfer all non-catastrophic credit risk into the private market,” while the intent of the latter was to “[r]econstitute Fannie Mae and Freddie Mac as lender-owned mutuals, and build on the credit risk transfer (CRT) initiative to create a private market for mortgage credit risk.”

I did several posts critiquing these proposals—and Fannie and Freddie’s CAS and STACR credit risk-transfer programs in general—and also wrote pieces putting forth my own ideas on the objectives for and recommended approach to successful mortgage reform (the post to read is “Fixing What Works,” written in March of 2016 for the Urban Institute’s “Housing Finance Reform Incubator”). The Promising Road and Milken Institute pieces died deserved deaths, after which, in April of 2017, the Mortgage Bankers Association (MBA) released a 60-page white paper titled “GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market.” This paper explicitly acknowledged the merits of an equity-based model of credit guarantors, and reversed the MBA’s prior position that credit guarantors should be required to issue risk-transfer securities. The MBA paper included two controversial recommendations: that “FHFA or a successor regulator” be empowered to charter new credit guarantors, and that the securities those guarantors issued—but not the guarantors themselves—be backed by an explicit U.S. government guaranty. These and other aspects of the MBA paper ultimately became the core elements of yet another piece of legislation being developed in the Senate, dubbed “Corker-Warner 2.0.” A working draft leaked in late January 2018, and as I recounted in “Waiting for Mr. Corker” it was roundly and justifiably criticized, with even Senator Corker seeming to realize that it wasn’t going anywhere. The November midterm elections, moving the House under Democratic control, then sounded the death-knell for any hopes that Congress would be the path Fannie and Freddie would follow out of conservatorship, and the legislative reform chapter of the blog came to a close. 

I viewed the first three years of Howard on Mortgage Finance not only as worthwhile but also successful. Nothing bad had happened in Congress, and I felt the shift in focus toward administrative reform would make the facts about Fannie and Freddie more relevant. As I noted in “A Three-Year Retrospective,” [T]he strategy of the banks and their supporters to replace a secondary market mechanism built around Fannie and Freddie that works for consumers with one that works for themselves was dependent on banks convincing Congress of their false definition of the problem and the merits of their proposed solution to it. This deception is much less likely to work in an administrative reform process.” I also was optimistic about the Collins case working its way towards the Supreme Court, where, I said, “the plain text of HERA and the undeniable fact pattern in the case will carry much more weight than they did in the lower courts.”

As we know, I was wrong on both counts. The facts about Fannie and Freddie’s business, role in the financial crisis, and current risk profile have had no discernable impact on the policies or actions towards Fannie and Freddie of Treasury, FHFA, or any executive branch agency in either the last two years of Trump administration or the first year of the Biden administration. And the Supreme Court’s ruling in Collins that the net worth sweep was a legal action by FHFA simply repeated the fictions in the government’s pleadings, ignoring not only the plaintiff’s persuasive and well documented argument to the contrary (and the amicus brief I filed), but also the directive that in a motion to dismiss, which the Court was adjudicating, the factual allegations in the complaint must be accepted as true.

In reviewing the developments of the past three years, I am struck by how successful Treasury and FHFA have been in implementing the post-conservatorship plan for Fannie and Freddie that first was outlined over ten years ago in a December 12, 2011 “Draft Information Memorandum to Secretary Geithner” from Assistant Secretary Mary Miller. This was one of 33 documents produced in discovery for a case in the Court of Federal Claims, released in July of 2017 by Judge Margaret Sweeney, and I discussed its contents in a post the same month titled “A Pattern of Deception.”  Two of the policy options from this memo are particularly notable: (a) “Guarantee fee price increases – pricing for direct GSE guarantees could be increased by a minimum of five to ten basis points per annum (or at a pace determined annually by FHFA and Treasury) until pricing reaches levels that are consistent with those charged by private financial institutions with Basel III capital standards and a specified return on capital;” and (b) “Risk syndication – consistent with the phase-in period of guaranty fee increases, the GSEs could be required to sell a first-loss position (or the majority of the credit risk) to the private market on all of their new guarantee book business within a five- or seven-year time period. It is important to note that risk syndication would likely reduce the earnings capacity of the GSEs (similar to how the winding down of the retained portfolios also limits income generation).”

FHFA Acting Director Ed DeMarco did raise Fannie and Freddie’s guaranty fees by 10 basis points in 2013, and proposed a second 10-basis point increase for 2014, which incoming permanent Director Mel Watt suspended. Then, Director Mark Calabria simply reversed the process, imposing Basel III bank capital standards on Fannie and Freddie—in spite of the fact that they are not banks, and have no business in common with banks—and made them be the ones to raise their guaranty fees, to earn a market return on that capital. The result, of course, will be what Treasury said it wanted ten years ago: guaranty fees far higher than warranted by the risk of the loans guaranteed, to the banks’ advantage (and homebuyers’ disadvantage). Also note that in the December 2011 memo Treasury acknowledged that credit risk transfers will “reduce the earnings capacity of the GSEs,” by causing them to make much more in interest payments than they receive in credit loss reimbursements. This, too, was deliberate—intended to move revenues from Fannie and Freddie to “private sources of capital,” who are vastly overcompensated for the small amount of risk they take.  

Allowing the banking interests to dictate how Fannie and Freddie are capitalized and regulated has produced predictably bizarre results. Since the Great Financial Crisis, Fannie and Freddie’s credit risk has been cut in half (as documented by FHFA), their average guaranty fees have more than doubled, and FHFA’s own Dodd-Frank stress test showed that their December 2020 books of business needed no initial capital to survive a stylized version of the home price collapse experienced during the crisis. Yet in 2020 Director Calabria nonetheless insisted on raising the companies’ capital requirements by nearly 80 percent, to a pre-determined “bank-like” level of more than 4.5 percent of total assets. They now earn over $20 billion per year after tax and have extremely high-quality books of business, yet because the net worth sweep has left their core capital at a negative $126 billion as of September 30, 2021, and they had an indefensibly high capital requirement estimated at $332 billion on the same date, they find themselves nearly half a trillion dollars short of being considered “adequately capitalized” by FHFA, and after 13 years are still mired in conservatorship, with no evident way to exit on their own.

Faced with this situation, FHFA Acting Director Thompson so far has taken three tentative steps, each consistent with the objectives of the ten-year-old Treasury memo. First, she did propose a modest reduction in the companies’ capital requirements, but only if they issue credit-risk transfer securities that cost them $30 in interest payments for every $1 in credit losses reimbursed in a normal environment, and $3 in interest for every $1 in reimbursed losses during a period of severe stress. Next, she directed Fannie and Freddie to raise their guaranty fees on their lowest-risk mortgages even higher than they are now, which likely will drive more of that business to banks—and to the private-label securities market, which was the cause of the 2008 crisis. And on January 13 she told the Senate Banking Committee that if confirmed as Director she would view her role as “facilitating,” rather than initiating, Fannie and Freddie’s exit from conservatorship, and would look to Congress to pass reform legislation first; that is the long-standing position of the banking interests, and if actually adhered to would take us back to where we were during the first three years of the blog.

So this, unfortunately, is where we are now, and why I have to rate the last three years of the blog as unsuccessful. While I’m pleased with the posts I’ve done during this time (“only” 15, compared with 34 in the first three years), I am disappointed in how little practical impact they seem to have had. The banks continue to be able to get whatever they want from both political parties, despite the glaring weakness of their arguments and the economic harm caused by moving billions of dollars from low-and moderate-income homebuyers onto banks’ income statements. And this state of affairs leads me to wonder about the level of activity in the blog in the coming year. I’ve put out the best and most clear versions of the facts about Fannie and Freddie’s past history and current circumstances that I know how to produce, and believe they speak for themselves. Since I do the blog voluntarily, and don’t like to repeat myself, I’m not sure how much more there will be for me to write about in the foreseeable future. (I don’t intend to turn the blog into a running chronicle of the remaining legal cases; that is neither my primary interest—even though I do hold Fannie junior preferred and common stock—nor my area of expertise.) So, while we wait to see what the dogs (Treasury and FHFA) who chased and caught the cars (Fannie and Freddie) end up doing with them, I’ll call attention to the posts I’ve done in the past three years that I would advise my readers to bookmark and refer back to periodically, since the facts about Fannie, Freddie and the mortgage market aren’t going to change:

An Unexpected Ruling (June 2021). This was my reaction to the Supreme Court’s ruling in the Collins case. It’s a “top post” for two reasons. The first is that it includes a link to the amicus curiae brief I submitted to the Court, which is the best and most comprehensive account I’ve done of Fannie and Freddie’s placement into conservatorship and subsequent management by FHFA and Treasury. It’s impossible to read this brief and conclude that the companies’ 2008 takeovers by Treasury in September of 2008 were rescues, or that they required any Treasury senior preferred stock, let alone $187 billion, to survive the financial crisis. Anyone who claims “the taxpayer must be compensated” by converting Treasury’s senior preferred stock to common stock before the companies can exit conservatorship should read this brief. The second reason for highlighting the post is my analysis of the ruling itself, which led me to state, “there can be little question that the Court’s ruling on the APA claim in Collins was imposed upon the case rather than deduced from it. And this has implications for…the major net worth sweep-related cases remaining in the lower courts.”

Capital Fact and Fiction (September 2021). This post gives the facts about Fannie and Freddie’s credit losses following the 2008 mortgage crisis, and the changes in the credit quality of their books and their guaranty fees since that time. It also details how Mark Calabria “used four contrivances [which I list and discuss] to artificially engineer a result for the required amount of Fannie’s ‘risk-based’ capital that was greater than his arbitrary minimum of 4.0 percent.” It notes that “there is a huge difference between the capital required by a risk-based standard for Fannie and Freddie based on fact, and one based on fictions invented by those who oppose the companies on ideological or competitive grounds,” and adds that, “developing and implementing a fact-based capital rule for the companies is astonishingly easy,” as I go on to explain.

Comment on ERCF Rule Amendments (October 2021). This one almost didn’t make the cut, but it’s included because it very clearly illustrates “the glaring inconsistencies between the hugely excessive amount of capital required of Fannie and Freddie by the ERCF [Calabria’s capital rule], 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’.” At least at the staff level, FHFA is well aware of these inconsistencies, and also that, “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.” Yet the ERCF “hairball” remains in place.

Some Simple Facts (October 2019). This post addresses why the large commercial banks are so insistent on giving Fannie and Freddie bank-like capital requirements, without bank-like asset powers. It’s to handicap the companies’ business, and drive more mortgages, at higher funding spreads, into bank portfolios. And as the piece (along with Capital Fact and Fiction) notes, banks have been phenomenally successful at this since FHFA and Treasury have had control of Fannie and Freddie in conservatorship. Some Simple Facts also contains useful background information on the 2008 mortgage crisis and stress testing, as well as a reminder that there is a direct comparable to Fannie and Freddie, and it’s not the banks but the FHA, which does far riskier business than the companies, without private mortgage insurance, and was capitalized and regulated dramatically less onerously even before the ERCF.