A Political Problem

Shortly after my book The Mortgage Wars came out in November of 2013, an executive of the Fairholme Funds connected me with the legal team at Cooper & Kirk in Washington D.C. (about 15 miles from my home), whom Fairholme had retained to pursue its suits against the government for imposing the Fannie and Freddie net worth sweep in August of 2012, and subsequently I flew to Miami for two days of meetings at the Fairholme offices. Thus began my involvement with all of the net worth sweep cases, the first filed on July 7, 2013.

I had written about the sweep in my book. I had noted that “In the first year and a half after its conservatorship, Fannie Mae reported a staggering $127 billion in losses, exhausting its capital and causing it to draw $75 billion under its senior preferred stock agreement with Treasury in order to maintain a positive net worth.” I pointed out, however, that of this $127 billion only $16 billion were actual credit losses, and that, “Virtually all of the rest of its losses were accounting entries made by the company’s conservator, FHFA, that pulled into Fannie Mae’s 2008 and 2009 financial statements over $100 billion in expenses that otherwise would have been incurred in the future, if they were incurred at all.” Fannie’s draws of senior preferred rose to $116 billion at the end of 2011, but then, after home prices bottomed out, it began to make money again. Fannie announced on August 2, 2012 that it had earned $5.1 billion in the second quarter, enough to add $2.5 billion to its net worth after the required senior preferred stock dividend to Treasury. Less than ten days later, Treasury and FHFA agreed to the net worth sweep, changing the dividend on Fannie’s senior preferred stock from 10 percent per annum to “everything you ever earn.”

I understood exactly what had happened. Treasury knew that a large number of temporary or estimated non-cash expenses put on Fannie’s books by FHFA were about to reverse and come back into income, not only greatly increasing the company’s capital but also making clear that its 2008-2011 losses had not been real, and that Fannie had been forced to take senior preferred stock it didn’t need but couldn’t repay, whose purpose was to “transform massive, temporary and artificial book expenses created for Fannie into massive, perpetual and real cash revenues for Treasury.” I laid out my thesis in a January 2015 paper titled Treasury, the Conservatorships and Mortgage Reform (accessible on this site, under the column labeled “Reference Documents”), and six months later, at the request of Cooper & Kirk, expanded on this paper in an amicus curiae brief written for the Perry Capital case, being heard by Judge Royce Lamberth. I did a second amicus brief in February of 2016 for the Jacobs-Hindes case in Delaware, and discussed it in this blog’s inaugural post, titled “Thoughts on Delaware Amicus Curiae Brief.” Back then I believed it was inevitable that the net worth sweep would be invalidated in the courts, as I said in that post’s final paragraph: “Sorry, Treasury. Because of the lawsuits, you’re now in a different game. Your actions, and your defense of those actions, no longer are being adjudicated only on the editorial pages of the Wall Street Journal; they also are being adjudicated in courts of law. There facts matter, and there you almost certainly will lose.”

Seven years later, those words ring hollow. Through some two dozen lawsuits contesting the net worth sweep, counsel for Treasury and FHFA have continued to advance a blatantly and provably false version of the reasons for and the actions behind it, with no significant adverse legal consequences. On the one case that reached the Supreme Court, Collins v.  Yellen, the author of its unanimous opinion, Justice Alito, repeated the government’s false version of the rationale for the sweep—ignoring the contrary factual allegations put forth by the complainant (which in a motion to dismiss must be accepted as true), as well as the amicus brief I filed with the Court—then insisted that a clause appearing in a section of the Housing and Economic Recovery Act (HERA) titled “Incidental Powers,” allowing FHFA to act “in the best interests of…the Agency,” could be read to apply to the statute as a whole, thus overriding the specific “Powers of Conservator” listed in an earlier section. And even here, Alito had to construe that giving all of Fannie and Freddie’s future earnings to Treasury somehow was “in the best interests of the Agency [FHFA]” in order to rule that the net worth sweep was a legal act by the conservator.

For me, the Alito ruling was a defining event. I of course knew that he and the other five conservative justices on the Roberts Court were members of the Federalist Society, which was founded in 1982 and has been a fierce opponent of Fannie and Freddie since that time. But still, I did not believe the Court would make such a nakedly political ruling in the net worth sweep case until it actually did. Yet now that it has, it is foolish to ignore the ruling’s implications. One is that none of the remaining constitutional challenges to the net worth sweep percolating in the lower or appellate courts—whether on the succession clause, the appointments clause or the separation of powers—has any realistic chance of resulting in a voiding of the net worth sweep that is upheld by the Roberts Court. While it is possible that plaintiffs in suits alleging regulatory takings or breach of contract may win some minor amount in monetary damages—and even that will not be easy—the net worth sweep, as flagrantly illegal as it was, will not be overturned judicially.

With the net worth sweep legitimized, and a capital standard that imposes bank-like requirements on Fannie and Freddie’s low-risk credit guaranty business by adding huge amounts of conservatism, minimums and buffers to the risk-based framework mandated by HERA—and pretending that the companies’ $35 billion per year in guaranty fees absorb no credit losses—the companies are in an impossible position. The $192 billion in senior preferred stock that they were forced to take, could not repay, and doesn’t count as core capital must remain on their balance sheets, and they must replace the $265 billion in earnings swept by Treasury between the end of 2011 and the middle of 2019 with earnings they’ve been allowed to retain since then, at the cost of an equal increase in Treasury’s liquidation preference, now $289 billion and rising every quarter. And before they can be considered adequately capitalized under the standard made final by former FHFA Director Calabria in December of 2020, they must attain a level of “adjusted total capital” that as of September 30, 2022 was $301 billion, or 4.0 percent of total assets, a percentage that likely will increase in the future because it is procyclical.

This untenable construct for the net worth sweep and the “Calabria capital standard” was hard-wired into the January 14, 2021 letter agreement between former Treasury Secretary Mnuchin and Calabria. That letter stipulates that neither Fannie nor Freddie will be eligible to be released from conservatorship until “all material litigation [is] resolved or settled,” and each company “for two or more consecutive calendar quarters has and maintains ‘common equity tier 1 [CET1] capital’…in an amount not less than 3 percent of Seller’s [Fannie’s or Freddie’s] ‘adjusted total assets’.” Subsequently, the companies may continue to retain capital until “the last day of the second consecutive fiscal quarter during which Seller has had and maintained capital equal to or in excess of all of the capital requirements and buffers under the Enterprise Regulatory Capital Framework [ERCF]”. At that point, the net worth sweep will be resumed, at an amount “equal to the lesser of 10.0 percent per annum on the then-current Liquidation Preference and a quarterly amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter.”

The letter agreement does permit each company to issue up to $70 billion in common stock (the same amount for both, notwithstanding that Fannie’s required capital is half again the size of Freddie’s) provided all material litigation has been resolved or settled, and Treasury has exercised its full warrant to acquire 79.9 percent of that company’s common stock. But few if any investors will put new capital into the companies, much less $70 billion, while the net worth sweep remains in place and Treasury’s liquidation preference rises in line with their earnings. Consequently, as long as the January 14, 2021 letter is in effect, Fannie and Freddie seem destined to remain in conservatorship until they can accumulate CET1 capital equal to 3.0 percent of their adjusted total assets, and they will have constraints on their executive compensation and dividend-paying abilities until they fully meet “all of the capital requirements and buffers” of Calabria’s ERCF.

How long might that take? We can make an estimate, using data as of September 30, 2022 from the companies’ most recent 10Qs. To be eligible to be released from conservatorship, Fannie would need $136 billion in CET1 capital, $230 billion more than the negative $94 billion it has now (because of the net worth sweep); Freddie would need $111 billion, or $168 billion more than the negative $57 billion it has. At what I estimate as their sustainable rate of after-tax retained earnings—about $13 billion per year for Fannie and about $9 billion per year for Freddie—Fannie would not be eligible for release until 2040, and Freddie not until 2041. Fully meeting their risk-based capital requirements would take even longer.

After over 14 years in conservatorship, what possibly could justify keeping the companies in conservatorship for another 18 years, or more? There is no economic reason. Fannie and Freddie are, and always have been, the highest-quality and lowest-risk sources of mortgage credit in America. Prior to the 2008 financial crisis, the serious delinquency rate on single-family loans owned or guaranteed by the companies was one-third that of the prime single-family mortgages held by banks, and less than one-tenth that of the mortgages originated by subprime lenders. Along with the rest of the industry, Fannie did experience a spike in credit losses on loans guaranteed between 2004—the year the issuance of private-label securities first exceeded the combined issuance of mortgage-backed securities (MBS) by Fannie and Freddie, and underwriting standards collapsed—and 2008, suffering average lifetime default rates on these books of about 10 percent (comparable data for Freddie are not publicly available). But from 2009 on, each of Fannie’s books of business has a lifetime default rate of less than 1 percent. And Fannie and Freddie’s total single-family credit guaranty books as of September 30, 2022 are pristine, with average current loan-to-value ratios of 50 and 53 percent, and credit scores at origination of 752 and 750, respectively. Any doubts about the companies’ credit quality should have been dispelled by the results of their last two Dodd-Frank stress tests, in which neither needed a dollar of initial capital to withstand a stylized repeat of the 30 percent nationwide decline in home prices during the time of the Great Financial Crisis.

Nor is there any structural reason to keep Fannie and Freddie under government control. The most severe and persistent criticism leveled against the companies prior to the crisis was that they should not be allowed to finance mortgages on their balance sheets; today they no longer are. And their entity-based credit guaranty business does not need “reform,” because it already is far superior to the senior-subordinated model used in private-label securitization. In the entity-based model, revenues on good loans from all years, regions and loan types are available to cover losses on any loans that go bad, and all loans benefit from a corporate guaranty. In contrast, each senior-subordinated pool must stand on its own, and the inability to reach beyond it for revenues—or add capital post-securitization—requires substantial initial subordination, which translates into considerably higher credit guaranty costs, while still leaving investors in the senior tranches exposed to losses that exceed the fixed loss-absorbing capacity of the subordinated tranches. Fannie and Freddie’s entity-based model makes them the credit guarantor “gold standard,” as they exist today.

Fannie and Freddie have neither an economic problem nor a structural problem. They have a political problem. And it will require a political solution.

It was a political judgment that put Fannie and Freddie into conservatorship in the first place. After the private-label securities market imploded in 2007, and banks began pulling back sharply on their mortgage lending, Treasury Secretary Hank Paulson knew this left Fannie and Freddie as “the only game in town” (his words) for mortgage lending. Because he did not want to rely on them as shareholder-owned entities to get the country through the financial crisis, however, he made the policy decision to nationalize them, while each exceeded their statutory capital requirements. Except he couldn’t admit that; it had to be a “rescue.” Thus was born the litany of fictions about Fannie and Freddie that persist to this day: that the $187 billion in senior preferred they had been forced to take (to cover non-cash losses) was a real economic cost, and a “bailout;” that they—and not the private-label securities market—had caused the financial crisis, and that their “flawed business model” required them to be “wound down and replaced” by Congress in legislation.

Congress, as we know, has been unable to come up with a workable alternative to Fannie and Freddie, because there isn’t one. What I call the Financial Establishment—large banks and Wall Street firms, and their advocates and alumni at Treasury and elsewhere—finally has accepted this, but continues to insist that Fannie and Freddie only can be released from conservatorship if they are capitalized like banks, and “reformed” (with the two preferred proposals being an explicit government guaranty on their securities, and allowing FHFA to charter multiple credit guarantors). Former FHFA Director Calabria obligingly saddled Fannie and Freddie with a meticulously engineered “risk-based” capital standard that produces 4-percent-plus capital requirements for the companies no matter how little risk they take, while current FHFA Director Thompson says she will defer to Congress on whether, how and when to move Fannie and Freddie off their 18-year-plus path of exiting conservatorship through retained earnings alone, with the net worth sweep and the Calabria capital standard staying as they are in the meantime.

It is hard to imagine, though, that Fannie and Freddie will remain in counter-factual limbo until 2040. Well before then, it seems inevitable that some administration will recognize and admit the absurdity of the status quo, and acknowledge the damage it is doing to the nation’s housing finance system. Whichever administration does so will get to restructure, recapitalize and release the companies in the manner and with the objectives it chooses.

The Biden administration is first in line. And Fannie has not been shy about expressing the extent of its problems with the policy and regulatory actions of FHFA and Treasury. In its 2021 10K, for example, Fannie said, ”We believe that, if we were fully capitalized under the [ERCF] framework, our returns on our current business would not be sufficient to attract private investors,” and that, “Increasing our returns may require substantial increases in our pricing or changes in other aspects of our business that could significantly affect…the level of support we provide to low- and moderate-income borrowers and renters.”

The average guaranty fee rate on Fannie’s single-family book of business nearly doubled between 2007 and 2021, rising from 23.7 basis points to 45.2 basis points (not including the 10 basis points it has had to charge and remit to Treasury since April of 2012). During this same period, Fannie’s percentage of credit guarantees on loans to borrowers with credit scores under 700 fell from 33 percent at December 31, 2007 to less than half that, 15 percent, at December 31, 2021. Fannie’s guaranty fees in 2021 already seemed to be at the threshold of affordability for most lower-credit-score borrowers, but the company’s need to get closer to a market rate of return on its required ERCF capital forced it to raise its average fee on new business in the third quarter of 2022 to 53.3 basis points (63.3 with the 10 basis points for Treasury), with that fee likely headed even higher, and the percentage of Fannie’s business done with lower-credit-score borrowers headed lower.

It would be a simple matter for a Democratic administration with a stated policy priority of supporting affordable housing to remedy this situation. It merely has to declare that the 2008 nationalization of Fannie and Freddie (by a previous administration) was unjustified and a mistake, and that it has had the severe and ongoing consequence of impeding access to homeownership for low- and moderate-income families. To reverse that action, it would declare the companies’ senior preferred stock to have been repaid (which it has been) and cancel it, along with Treasury’s liquidation preference. Next, it would require that Director Thompson (or her successor) replace the Calabria standard with one that is not designed to produce a pre-determined capital number, but instead reflects the actual risk of the loans the companies are guaranteeing, with a minimum required capital percentage consistent with those risks. In Capital Fact and Fiction, I explain why that minimum should be 2.5 percent, and note that with the credit quality of Fannie and Freddie’s current business, the 2.5 percent minimum would be their binding capital percentage for the foreseeable future. Eliminating Treasury’s senior preferred stock and liquidation preference, and a putting in place a true risk-based capital standard with a 2.5 percent minimum, will create a path for Fannie and Freddie to emerge from conservatorship relatively quickly, and to resume their traditional roles as the mainstays of large-scale, low-cost, finance for affordable housing.

Standing in the way of this remedy, however, are the Financial Establishment and its ally in the judiciary, the Federalist Society, who continue to falsely claim that the conservatorships of the companies are justified, the net worth sweep is proper compensation for Treasury’s “heroic rescue” of them, and that they only can be released if they are capitalized like banks and “reformed.” Some of the reason for this posture on Fannie and Freddie is ideological, but most is competitive. Banks have benefited greatly from having Fannie and Freddie run in conservatorship and grossly overcapitalized by FHFA. At December 31, 2007, banks held $2.29 trillion in single-family whole loans and MBS, or 23 percent of outstanding single-family mortgage debt, on their balance sheets. At June 30, 2022 (the latest date for which full data are available), banks held more than double that amount—$4.65 trillion, for a 36 percent market share. Moreover, because the rates on all new mortgages are set with reference to MBS yields, the same unnecessarily high guaranty fees that are blocking access to mortgage credit for affordable housing borrowers add, basis point for basis point, to the spreads on the long-term fixed-rate whole mortgages banks finance in their portfolios with government-guaranteed consumer deposits and purchased funds. It is, as they say, “about the money.”

Yet this cliché also highlights a compelling argument for the Biden administration to not keep giving the banks what they want, and instead “do the right thing” by Fannie and Freddie, and low- and moderate-income homebuyers. After Treasury told FHFA to put Fannie and Freddie into conservatorship, it gave itself warrants for 79.9 percent of each company’s common stock. Today, those warrants have very little value, just $3.2 billion, because—with the government’s current policy of laying claim to more than all of Fannie and Freddie’s net worth, and keeping them unreasonably mired in conservatorship for the next two decades—the companies have very little value, with their share prices averaging 44 cents yesterday. As noted earlier, I estimate their combined sustainable earnings to be about $22 billion per year. At a multiple of 10 times earnings—less than half the price-earnings ratio of the S&P 500—their market capitalization would be about $220 billion. Through exercising the warrants, bringing Fannie and Freddie out of conservatorship with a capital standard that allows them to price their business on an economic basis, and then selling the shares from its warrant conversion, the Biden administration could capture a very large portion of that $220 billion potential value for itself for whatever purposes it wishes, including an affordable housing fund.

From both a policy and a financial standpoint, therefore, Fannie and Freddie are worth far more to the Biden administration as vibrant companies run by private management to the benefit of homebuyers than as zombie companies run by FHFA to the benefit of banks. But to unlock that value, someone in the administration is going to have to step up and call the leaders of the Financial Establishment and the Federalist Society on their fictions about the two companies, and be willing to voluntarily cancel the net worth sweep without a judicial ruling saying it must do so, which will not be forthcoming. And the clock is ticking. In two years the opportunity to make defining policy and financial choices with respect to Fannie and Freddie may pass to the next administration, or the next, on towards 2040 or beyond.

73 thoughts on “A Political Problem

  1. BTIG analysts are cited in this piece (https://www.nationalmortgagenews.com/list/why-the-gses-new-fees-may-be-tricky-to-implement) as saying:

    “The FHFA estimates that it will release a proposal in February 2023. Our sense is that the core of the capital rule will remain unchanged, but there are a number of areas that are ripe for modest tweaks,” the BTIG researchers said. “For example, we will be focused on the potential for a change to certain risk weights which ultimately led to the imposition of the fee on commingled UMBS.”

    Wondering if you had any thoughts on this (or the UMBS fee change generally), and if you expect GSE capital rule changing/tweaking to be a recurring exercise by the FHFA?


      1. Here is the non-paywall link: https://web.archive.org/web/20230124102217/https://www.nationalmortgagenews.com/list/why-the-gses-new-fees-may-be-tricky-to-implement

        Interesting quote: “Even more changes may be on the way given that the FHFA is considering amending the capital rule that governs the financial buffers Fannie and Freddie must have… The FHFA estimates that it will release a proposal in February 2023.”

        Liked by 1 person

        1. This article mainly is about the recent implementation by FHFA of a new set of Loan Level Pricing Adjustments (or LLPAs) for Fannie and Freddie’s credit guarantees. I’ve addressed this already in a comment below (dated January 19), but I’ll add a few more comments here.

          I don’t have high expectations for articles that attempt to explain the details or nuances of Fannie and Freddie’s business, but this one didn’t meet them. It’s hard to blame the author, though. When FHFA, as conservator, is saying and doing things that don’t make economic sense, it’s very difficult for a generalist reporter to write an intelligible article about them.

          The President of the Mortgage Bankers Association, Bob Broeksmit, had the right take on FHFA’s new LLPA grid: “The granularity is excessive and it’s also confusing…If you ask me to explain to a borrower why his price differs from his neighbor’s price, it’s just really hard to do.” But I’d bet that even Broeksmit doesn’t understand why FHFA is doing what it’s doing. It’s both simple, and maddening.

          Fannie and Freddie’s regulatory statute, HERA, requires FHFA to create a risk-based capital standard for the companies. A proper risk-based standard would have logical and understandable pricing differentials for all of the different product and risk features discussed in the article (and more). But former FHFA Director Calabria didn’t want a real risk-based standard; he wanted a standard that would require Fannie and Freddie to hold 4.0 percent (“bank-like”) capital irrespective of the amount of risk of the loans they were guaranteeing. To get that, he put cushions, add-ons, minimums and buffers into his ERCF, thus breaking the link between ERCF pricing and risk. The fix for this should (and I believe eventually must, and will) be to scrap the ERCF, and re-do the Calabria standard so that it DOES reflect real loan risk. But Director Thompson doesn’t seem to understand this, and/or be willing to do anything about it. Instead, she is putting arbitrary–or to use Broeksmit’s terms, excessive and confusing–LLPA adjustments on top of the hairball Calabria created with the ERCF, and pretending that THIS will make it risk-based. It would be comical if it wasn’t causing $6.6 trillion in single-family mortgages–most of them to lower- and moderate-income family–to be severely mis-priced.

          As to FHFA’s decision to cut the 50 basis-point fee it imposed for commingling Fannie MBS and Freddie PCs in a UMBS to 9.3275 basis points, that’s risible. The risk to Fannie of guaranteeing a UMBS that includes Freddie PCs (as well as its own MBS)–and vice versa–is zero. The original 50 basis point fee was roundly and correctly criticized, but for FHFA to lower it to a spuriously precise 9.375 basis points, instead of simply eliminating it, is more evidence of a bureaucracy run amok, as if any were needed.

          Liked by 3 people

          1. “It would be comical if it wasn’t causing $6.6 trillion in single-family mortgages–most of them to lower- and moderate-income family–to be severely mis-priced.”

            Tim, would you elaborate on that? How much is the mis-pricing costing some folks? Would you give an example.


          2. Robert–I made an attempt at quantifying the impact of the mis-pricing caused by the Calabria standard in the post I did before the current one, titled “Mind the Gap.” I described this post as a “‘real world’ way to explain why the Calabria capital standard is so terribly damaging to the ability of Fannie and Freddie to finance any significant amount of affordable housing loans on reasonable terms.”

            You (and others), should read the entire post, but in it I estimate that forcing Fannie and Freddie to (unnecessarily) price to 4.0 percent capital leads them to have to put a target fee of 95 basis points on the riskiest quarter of their business in order to earn an after-tax return of capital of 9.0 percent (the minimum ROC I view as competitive for investors). I also estimate that were the companies’ average capital requirement to be a little over 3.0 percent (307 basis points to be exact, and you’ll need to read the post to understand why I picked that percentage), they could use cross-subsidization to lower the fee on that riskiest quarter of their loans to 52 basis points. That’s 43 basis points less than what’s required with the “Calabria standard.” And were FHFA to do a true risk-based standard with a 2.5 percent minimum, as I recommend, the current quality of their book would enable Fannie and Freddie to set an even lower fee on those loans, probably no higher than 45 basis points, or 50 basis points less than what I estimate they have to charge now. That’s a lot, and as we can see by the low percentage of credit guarantees the companies are doing on loans with credit scores under 700, the high fees do seem to be pricing many affordable housing borrowers out of the market, and denying them access to homeownership. It’s a scandal that should be receiving much more attention than it’s getting.

            Liked by 3 people

          3. Tim

            I always thought that a lawsuit against FHFA claiming that the ERCF is an invalid administrative rule implementing the statutory requirement of a risk-based capital standard had some merit. There has been substantial success lately challenging administrative agency rule making that goes beyond statutory authority. I wonder if one can convincingly argue, based upon the F/F stress test results that best indicate risk levels, that the capital rule bears no rational relationship to the risk to be insulated against. The stress test results indicate that a much lesser capital standard would suffice…leading to the statutory requirement being imposed of 2.5%

            now the most logical plaintiffs with standing would be F/F themselves, but they are not going to bring this suit. but there should be sufficient injury on the part of homeowners with mortgages guaranteed by F/F arising from this administrative rule that would support their standing to bring suit. A class action suit for damages might even be worth examining.


            Liked by 2 people

          4. @ROLG,

            I had the same thought. In my world (Environmental Consulting), Sierra Club and River Keepers entities are always filing lawsuits against EPA, Fish and Wildlife Service, Army Corps of Engineers and other agencies claiming their rules are arbitrary and capricious. Many go to SCOTUS and seem to get shot down at that point, but some do prevail. I had to find a new job when the EPA rule covering 316b of the Clean Water Act was struck down by the 2nd circuit in NY, resulting in suspension of my projects at the time. That playbook seems relevant in this scenario as well.

            Liked by 1 person

          5. Tim, I’ve read and continue to read all your content so I’m aware of your datapoints like, “or 50 basis points less than what I estimate they have to charge now”. What I don’t know, because I’m not an accountant or mortgage professional, is what that actually means to the borrower. How much these poor practices by FHFA are costing folks.

            50 basis points is .5%, so on a $250K outstanding loan (insured by FnF) it’s costing them $1250/year? That’s what I’d like to understand – how painful are these policies in real life.


          6. One doesn’t need to be an accountant or a mortgage professional to understand that. The “extra cost” depends on the loan amount and the interest rate. Just pick a loan amount, Google the prevailing rate on a 30-year fixed-rate mortgage, add 50 basis points to it, and then use any one of a number of applications available on the internet to obtain the monthly payment on that loan balance at those two mortgage rates. Multiply the difference by twelve and that’s the annual cost to the borrower of FHFA’s excessive capital requirements on affordable housing loans.

            Liked by 2 people

          7. $250k loan amount 30YR @ 7.051% = $1, 019.40 more per year. If correct, I wonder if that’s one of the reasons for the slow-footing. Initial rate, insurance, and CR more impacting.

            Anyways, thank you.


    1. If Klain does leave, I would view that as a setback for the chances of a change in the Biden administration’s policy towards Fannie and Freddie in the near term, and perhaps for the full second half of the President’s first (and possibly only) four-year term.

      A Chief of Staff does not make policy, but he (or she) does help the President and his senior leadership achieve a consensus on what the most important policies to pursue are, and then how to implement them effectively. What’s wrong with Fannie and Freddie now is that they are on Treasury and FHFA “institutional auto-pilot,” heading in a non-sensical direction that is doing great harm to a key constituency of the Democratic party, low- and moderate-income homebuyers. As I’ve been saying for some time, to fix that will require some senior member of the Biden economic team to step up and make thoughtful secondary mortgage market reform a high personal priority. I wasn’t thinking that Ron Klain would be that person, but he certainly could have been a big help in making a change in policy toward Fannie and Freddie successful. As a former senior advisor to Fannie’s Office of the Chairman (of which I was a member for the last five years I was there), Klain knew the company and its business in a way that very few in government do. And of course he had great credibility and clout among Biden’s senior economic policy team, and with the President himself. We’ll have to see who Biden picks as his next COS (of the names I’ve heard bruited about, the only one I know to have some familiarity with Fannie and Freddie is Steve Ricchetti), but in my view not having Klain in that role will make getting the companies out of conservatorship in the next two years a tougher lift than it already was shaping up to be.


      1. Tim

        I have the opposite view. I think Klain’s leaving is a positive, or at least not a negative, for possible F/F reform. Klein appears to me to be a Beltway professional, and I never expected him to do anything that would negatively impact his next career stop, post-Chief of Staff. Being an administration alum will play well for his next consultancy position, at least for the next two years. There would be very few highly remunerative landing spots that would view F/F advocacy as a feather in the cap. I dont know what or who might kickstart F/F reform, but I never expected anyone in the revolving door of a Beltway career to be that person.



        1. just saw that Jeff Zients will be next chief of staff. I have only a few degrees of separation from him, and he is very smart, organized and competent (sometimes these things dont go together). for one thing, he has no need for another paycheck, so he is not playing the Beltway game. while I dont know if he has any particular housing finance experience, he has very deep experience with the regulated health care industry, having helped to found the Advisory Group. and he has experience with government finance, as head of OMB. so I find his presence as chief of staff to be a decided upgrade over Mr. Klain. just imo



          1. I certainly hope you’re right. As I said, I didn’t expect Klain to take the lead on getting Fannie and Freddie out of conservatorship, but I did think he would have been valuable in getting any agreed-upon policy change defined properly and accomplished skillfully and effectively. I don’t know Zients, but I’ve read and heard good things about him, so hopefully he can be as or more useful a steward of this process as I thought Klain would have been.


    1. FHFA is just carrying through on what it announced it would do earlier: it’s increasing upfront fees (Loan Level Price Adjustments, or LLPAs) on products or loan features it thinks Fannie and Freddie should be doing less of–such as second homes, investor properties, cash-out refis and even rate-and-term refis–while also lowering LLPAs for features it associates with affordable housing loans. In making these changes, FHFA claims it’s “developing a pricing framework to maintain support for single-family purchase borrowers limited by weal​th or income…fostering capital accumulation, and achieving commercially viable returns on capital.”

      FHFA’s not doing any of those things. The biggest change FHFA could (and should) make to help Fannie and Freddie support affordable housing is to get rid of all of the conservatism, minimums, cushions and buffers in their “risk-based” capital standard, which cause them to have to put unnecessarily high guaranty fees on ALL their loans (as I discussed in my August 2022 post, “Mind the Gap”). But Director Thompson won’t do that. Instead, she hopes to achieve a very rough form of cross-subsidization by raising LLPAs on some (mainly lower-risk) loans while lowering them on affordable housing loans.

      Aside from the fact that this doesn’t solve the overall pricing problem caused by gross overcapitalization, it’s also likely to LOWER Fannie and Freddie’s returns, because the LLPA cuts on affordable housing loans still leave the total guaranty fees (base guaranty fee plus amortized LLPA) on these loans much higher than warranted by their risk–thus not attracting that much more volume–while the huge jumps in LLPAs for low-risk refi business will drive much of that business to the banks, and may even prompt a restart of the hugely inefficient private-label securitization process. So with Fannie and Freddie doing less lower-risk business at higher fees, and more higher-risk business at lower fees, their overall mix of credit guarantees will shift more to loans that are underpriced relative to the Calabria standard, at the same time as that same standard will require a greater percentage of capital because a significant volume of lower-risk loans will have gone elsewhere. The result will be a lower, not a higher, return on the companies’ “Calabria capital.”

      This, unfortunately, is what you get when you have politicized bureaucrats running complex, sophisticated, market-based institutions like Fannie and Freddie: simple solutions that look good–and can be turned into a great press release–but won’t work. And we will likely have to wait until it is “glaringly apparent” that these LLPA changes are NOT doing what Thompson thought they would before FHFA feels compelled to try something different–unless, that is, the Biden administration wakes up to what’s going on and replaces Thompson with someone who understands Fannie and Freddie’s business, and values the role they could play if removed from the straitjackets former Director Calabria put them in.

      Liked by 3 people

    1. No, I haven’t read it. But my experience with economists at conservative think tanks like Cato, the Heritage Foundation and AEI is that while they agree with the principle on issues like private property rights (and compensation for taking it), they also find reasons why the principle doesn’t apply to Fannie or Freddie, or why the remedy the companies seek for violation of that principle shouldn’t be granted in their case.


    2. In direct reference to the article you linked, Bryndon, I just emailed and posted the following on Twitter to Roger Pilon: “What do you think of the Fannie Mae and Freddie Mac debacle in regards to property rights? Should HERA allow the US Treasury to sweep all the profits of the company in perpetuity? Are the GSEs an exception to the rule?”

      Liked by 1 person

      1. I just received an email response from Roger Pilon: “I have no particular expertise on Fannie or Freddie Mac, to say nothing of the massive HERA, so I’ll say nothing.”

        Liked by 1 person

        1. Interesting. That’s a little like saying “I care deeply about the constitutional right to free speech, but I have no particular expertise on Twitter or Tik Tok, to say nothing of the massive social media enterprise, so I’ll say nothing.”

          Liked by 1 person

  2. [Edited for length] Tim, first, thank you for your enlightening insights. I realize it is time consuming to address all the questions you receive. In my opinion all the what-if scenario questions on recap-release timing, funding, warrants, SPS, etc. are too bewildering, unwieldy, and premature to be fruitful at this point; besides, you’ve already provided an excellent framework in this current blog post. If you have the time or the inclination it would be interesting to read your thoughts on the combination of thoughts below.

    I cannot reconcile the “federalist society” types’ decisions on the court to weaken or damage the GSEs position with the fact that these decisions are now giving wide latitude to a Democrat Administration with, at least historically, decidedly un-federalist society type policies.

    Bloomberg news ran a story today that the Biden Administration urged SCOTUS to deny the Fairholme case, whether or not this urging had any real impact one would think the urging was accompanied by some reasoning that would appeal to the court’s sensibilities of justice, but more importantly, some sign that the administration is working to resolve the conservatorship. (I could be wildly off on these “assumptions.”)

    Often, we mistakenly believe that presidents and their administrations have the power to make the big decisions and drive action when, in fact, it is often the more long-lived agencies (e.g., US Treasury in this case) that have more influence.


    1. Let me start with the Bloomberg story saying that “the Biden Administration urged SCOTUS to deny the Fairholme case.” It wasn’t the administration; it was lawyers from the Justice Department, arguing that the Supreme Court should not grant certiorari on a case that Treasury (and FHFA, through its lawyers at Arnold and Porter) have been fighting since it was first filed nine and a half years ago. And you’re right that it’s not the President who’s making this decision, it’s Treasury as an institution, which as I said in the post, has been pushing a false story about the conservatorships and the net worth sweep since 2008, and getting its way.

      That’s the reason I said in the post that “someone in the administration is going to have to step up and call the leaders of the Financial Establishment and the Federalist Society on their fictions about the two companies, and be willing to voluntarily cancel the net worth sweep without a judicial ruling saying it must do so.” And it will have to be someone very high up, with significant clout and the explicit approval of the President, because the big banks and Wall Street will fight back.

      And this is where, and why, a broader perspective on the issue is so important. What started Treasury on this whole set of fictions about Fannie and Freddie (FHFA just went along, and then saw it gave them more power) is that it sought to use non-cash expenses to bury the companies under an avalanche of non-repayable senior preferred stock dividend obligations for long enough to give Congress time to replace Fannie and Freddie with a more bank-centric secondary market alternative. But when that didn’t happen quickly enough (because the companies’ opponents kept coming up with ideas that didn’t work), their non-cash expenses began reversing, and Treasury had to impose the net worth sweep to keep them from recapitalizing. Then Calabria–who had been a fervent critic of Fannie and Freddie long before he became Director of FHFA–imposed his bank-like capital standard, SCOTUS ruled the net worth sweep to be legal, and here we are. Treasury and FHFA continue on the track they’ve been on for the last fourteen years because it’s worked for them, and neither has any incentive to change, nor any plan for what to do next.

      That’s why we’ll need an “adult,” in some administration, to step up and fix this; it’s not going to fix itself. As Democrats, the leaders of Biden economic team should be ideologically disposed to view government-chartered special-purpose entities like Fannie and Freddie as good things–in contrast to the members of the Federalist Society, who see them as an abomination–and they also should appreciate the companies’ potential to make a difference in housing affordability, if the consequences of the net worth sweep are reversed and they are capitalized properly. And if that’s not enough, there are the warrant proceeds, which would be dramatically more valuable if and when the government gets its foot off the companies’ air hoses (which in my view a Republican administration is less likely to be willing to do).

      This still will be an uphill battle, with the Financial Establishment fighting back. But as I said in the post, the current “counter-factual limbo” will not continue for another 20 years. Why shouldn’t the Biden administration end it now, and reap the benefits for itself?

      Liked by 5 people

      1. I know you don’t have time to respond to everything, but can you explain why in any case 2028 is not the end of the road? As you so adequately put It, the court cases are a dead end, the administrative action would take an “adult,” and the status quo seems like the most likely and easiest option for any administration because it requires them to do nothing. But doesn’t the expiration of the warrants in 2028 end this as a worst case scenario? If they go beyond that–a consent decree or not–the gov’t loses its ability to lay claim to the equity in the shares, and by that point they would have retained earnings of another $40 billion. What am I missing here?


        1. You’re missing the fact that 2028 is not a real deadline. If we get to September 2028 and Treasury has not exercised the warrants, it will ask FHFA to extend their expiration date, and FHFA–which always has done whatever Treasury has asked of it–will agree. Then we’ll have a later deadline, also extendible.


          1. Thank you for clearing that up..what a travesty to think that they were given two decades to exercise Penny warrants worth over 100 billion and they waste all the time just to extend it out…sounds like of kind of crazy but certainly consistent with the timeline so far….if that worst case scenario did happen would you think you would get a fresh round of lawsuits for takings, or do you think that court case stuff would all be played out by then..


          2. It’s possible that someone may sue if the warrants are extended, but it would be a waste of legal fees. The Supreme Court has said it is legal for FHFA as conservator of Fannie and Freddie to give all of their net income to Treasury in perpetuity, so it also must be legal for FHFA, as conservator, to extend the exercise period of Treasury’s warrants for 79.9 percent of the companies’ common stock.


  3. SCOTUS just denied cert on the takings cases. So it seems the government can take, and do whatever it wants. From my point of view this is insanity.

    Liked by 2 people

      1. Tim,
        Thank you so much for your continued input on this issue! It really is a disgrace! Many have said that a catalyst is needed to get this resolved. It was believed that the courts would be such a catalyst, but clearly this hasn’t happened. Others have posted articles in financial publications, but clearly these haven’t had a significant impact. Now, it seems we are left with nothing but hope that the Biden administration (or a future administration) will take action. Personally I would think that the greatest catalyst is mass public awareness of the conservatorship and those that have perpetuated it – and I can think of no better means of achieving this than a (Netflix) documentary. One that is presented with true (untainted) facts from yourself and other professionals. One that exposes the truth and those that are responsible for this disgrace. One that helps end this conservatorship and prevent similar events in the future.

        Have you ever considered such an idea or been approached by any filmmakers regarding this?


        1. You’re asking two separate questions. As to whether I’ve ever been approached by anyone about a documentary or other form of broad publicity about the issues with Fannie and Freddie, the answer is no. On the question of whether I’ve ever considered this idea, the answer is a “soft” yes. On several occasions I have reached out to financial journalists I know who I consider to be objective and whose work I admire about doing a general interest piece about the plight of Fannie and Freddie, but have never had success. Everyone I’ve contacted has been polite and seemed receptive, but there always has been a reason not to take this on, whether it’s “not the right story for my audience, “not ‘top of mind’ for anyone, so not something my editors will accept,” “too complicated a story,” or, “I’m working on something else at the moment.”

          I also should confess to the readers of this blog that I don’t view getting Fannie and Freddie out of their captive conservatorships as a personal crusade. While I do own Fannie common and preferred stock, at their current prices it’s a very small investment (it didn’t used to be!) so in that sense I’m not a major stakeholder. From the beginning of this blog, I’ve viewed my role as providing facts, context, solid analysis and a “connecting of the dots” to those who ARE major stakeholders–large investors (including those funding the lawsuits), affordable housing groups, and “good government” types–but I’ve left it up to them to be the advocates and activists pushing for a resolution of the issues. And I think that’s the right posture. If those with the most at stake either won’t or aren’t able to do what’s necessary to get the result they want–even with whatever help I’m able to provide–I’m not going to try to do THEIR job.

          Liked by 4 people

          1. There are a finite number of reasons to believe that when this travesty finally unfolds it will reveal a good and justifiable ending ….
            And of those reasons, you sit near the very top
            Thank you
            Alvin Wilson

            Liked by 2 people

  4. Thank you very much for this write up, Tim. I saw a Brookings presentation in which Aaron Klein intimated (hinted?) that this issue should move to the top of the Administration’s agenda if the Ds no longer hold both branches of Congress. Now that we’re here, we’ll see if he’s right.


  5. Why take such a reasoned and pragmatic approach on the capital requirements being too high (as evidenced by the stress tests) and then tack a different course on the senior preferred?

    As you point out, like it or not (I hate it), the courts have validated the senior preferred. The government is now the steward of securities worth hundreds of billions. Yet you recommend they get sent to the shredder!

    Yes, 80% of the value would be preserved via the warrants but that also means they give the remaining 20% away. Why propose cancellation instead of something that retains more value for the government, is more palatable to someone in a stewardship role, and therefore avoids all the problems/issues that come from “leakage”?


    1. I think I’m taking a “reasoned and pragmatic” (and fact-based) approach on both the capital requirements and the senior preferred stock (SPS).

      I am not recommending that the senior preferred “get sent to the shredder.” I am proposing that the net worth sweep–which was entered into deceptively, with Treasury and FHFA claiming it was to prevent a “death spiral” of borrowing to pay SPS dividends when Treasury knew (based on documents produced in discovery for the cases in the Court of Federal Claims) that the opposite was about to occur–be cancelled retroactively, as if it had never been imposed. Doing so would lead to the sweep payments Fannie and Freddie made each quarter that were in excess of the 10 percent annual dividend on the outstanding SPS balance being re-characterized as paydowns of SPS principal, which would result in both companies’ senior preferred being fully repaid (not “shredded”), with interest, and leaving Treasury owing each company about $12.5 billion, which it could make good on by giving them credits for future Federal income tax payments in that amount.

      Recognizing the reality that Fannie and Freddie’s SPS has been repaid still leaves Treasury with the warrants for 79.9 percent of the companies’ common stock that Treasury gave itself. That’s far more compensation than Treasury deserves, but since the warrants have never been challenged in court, and unlike the net worth sweep did not arise from a deception (Secretary Paulson was upfront with Fannie’s board in telling them he would not reveal the terms of the conservatorship he was forcing them to accept), there is no “reasoned and pragmatic” way to request their cancellation. And if I take your reference to “giving the remaining 20 percent away” as a meaning that Treasury should convert its SPS to common stock, that would be indefensible, as it would be requiring Fannie and Freddie to repay their senior preferred stock twice.

      Liked by 1 person

  6. Tim, I understand your reasoning why the current shareholders have to take whatever they can and move on. It made perfect sense to me. The fact that the companies need to raise additional capital from other private investors is what I can not incorporate in the above line of thought. I hope you wouldn’t mind giving us your thoughts on the below.

    How would the government entice new private shareholders to invest 140 billion when they are looking at the following:
    1. FHFA is controlled by the Administration.
    2. The companies’ board of directors are insulated from any shareholders lawsuits by law and do not owe any fiduciary duty to the shareholders.
    3. The Net Worth Sweep is legal and authorized by law.
    4. When the companies are in conservatorship, the shareholders do not have direct or derivative claims.

    How would the government sell the above to future investors? I would think that they have to give up ground just to be able to get out of their position in the companies. I am interested to hear what you think.

    Thank you

    Liked by 1 person

    1. SimSla–I think you’ve misinterpreted what I’m recommending.

      My recommendation to the Biden administration is that, to restore Fannie and Freddie’s abilities to provide large scale, low-cost, financing to their targeted borrower groups, the administration would (a) cancel the net worth sweep and Treasury’s liquidation preference, and (b) require FHFA to replace the Calabria capital standard–which is ludicrously contrived to produce 4.0 percent-plus risk-based capital on books of business that can survive a Dodd-Frank stress test with NO initial capital–with one that actually does reflect the risks of the loans the companies are guaranteeing, accompanied with a 2.5 percent minimum (which, as I said in my post, would be binding for the foreseeable future, given the very high quality of their books). With that, the companies’ (now negative) core capital would jump up to where their net worth now is–$94 billion–while their required total capital, at 2.5 percent of total assets, would be only $187 billion. The resulting shortfall of $93 billion could then be made up through a combination of retained earnings over time and new issues of equity.

      I agree that even with these changes, it would be difficult for Fannie and Freddie to raise any new capital while they still are in conservatorship. That’s why I recommend that the administration agree to release the companies under a consent decree after they hit a capital milestone short of 2.5 percent. If that milestone is 1.5 percent, that’s only $112 billion, which they should be able to reach through one year’s retained earnings. If the “consent decree release point” is 2.0 percent capital, that’s $150 billion, and the companies would have to do large equity issues to get there, even with a year’s worth of retained earnings. The consent decree would specify that the companies would be released from conservatorship–under whatever restrictions are included in the decree, which would remain in effect until full capital compliance–as soon as the equity issues settle; that way, investors in this equity would know exactly what they are “buying into” when they purchase it.

      I think something like this is eminently doable, and in fact should be done.

      Liked by 2 people

      1. Thank you Tim. I understand the financial engineering neeed to be done to solve this equation. It is the legal standing of the shareholders that bothers me. Money invested in the GSEs is not protected by any law. The government can take over the companies on a,whim and there is nothing you can do about it.
        Thank you again.


        1. I agree that the legal standing is an issue, given the net worth sweep and Justice Alito’s ruling on it in Collins. But because the “Incidental Powers” section in HERA was taken almost word-for-word from the FDIC Act, Alito’s interpretation of it also means that any BANK could be taken over on a whim, too. But that doesn’t seem to be a problem for investors in banks, because they think (correctly, I believe) that it won’t ever happen to them. I suspect that if the Biden Treasury cancels the sweep and the liquidation preference, investors in Fannie and Freddie would view that as a strong indication that Treasury now thinks the sweep was a mistake, and that it is highly unlikely to be repeated. In that event, while the memory of the 2008 sweep may depress the companies’ P/E ratios (the modern version of what was termed Fannie and Freddie’s “political risk” back in the 1990s and early 2000s), it shouldn’t deter investors from purchasing new equity issues.

          Liked by 1 person

          1. As I’ve said a few times over the years, I have a policy of not commenting on my private interactions with or knowledge received from principals in the Fannie/Freddie saga. (I get better receptivity and knowledge from these sources by adhering to this policy….)

            Liked by 1 person

      2. Tim,

        Great article. Thanks for fighting the good fight.

        Can you envision a scenario of release in conjunction with consent decree and full recapitalization through retained earnings toward a revised 2.5% capital standard. It’s positive for warrants due to no additional dilution from ipo, though I’d think not good for dividends and consequently preferreds more acutely.


        1. Yes, I can envision the possibility of the companies meeting a 2.5 percent capital requirement through retained earnings alone, although I don’t think it’s very likely. It would take them close to five years (without growth), and I doubt that either would want to stay in conservatorship that long just to avoid issuing new equity. But the decision on equity issues versus retained earnings also would depend on at what “capital milestone” (in my example above, 1.5 or 2.0 percent) release under a consent decree would take place, and what conditions are imposed on the companies in that decree. So there are a lot of unknowns or moving parts to this. And in any eventuality, it will (or should) be Fannie and Freddie’s decision as to what tools to use to hit their full capital requirements, over the time periods they elect.

          Liked by 3 people

  7. Well said Tim. You definitely advocate for the ‘grab the warrant compensation’ and make a compelling case to do just that.

    However, what one gets the sense is that the USG/Biden Administration ‘wants it all.’ Even to a foolish endeavour of driving everything into dust, or as you point out, potentially leaving it to the next Admin. Then again with a Republican House, money will get tight and this could be another ‘off-balance sheet’ method of obtaining $$$ for low income housing.

    Glaringly, you do not address the ‘moral hazard’ issue of Hedgies and other sundry folk making out through the JPS being made ‘whole.’ This issue has been a yuge overhang, and IMHO cannot be discounted. To wit, the (FHFA/Treasury/Admin) MAY do what you say, but let’s say ‘offer’ a 10-20% (or more) haircut to the JPS holders…..just to ‘grease the wheels’ so to speak. I would if I was Treasury (& to a lesser extent FHFA). Can’t see another way around this issue, if u can, would luv your opinion.
    Interested on your thought(s) regarding this issue:
    1. Do you believe/advocate for the JPS to be left outstanding and the Preferred dividends to be ‘turned back on’?
    2. Do you believe/advocate for the JPS to be converted to new or existing GSE equity?
    3. Existing JPS to be converted to newly-issued Preferred?

    There is no doubt that the ‘Rule of Law’ is a complete and utter joke…….HERE in America. Not China, not Russia, not Ukraine, Venezuela, Cuba, Nicaragua, et al. That is the real shame of the Federalist Society and SCOTUS. You are right to point this out.

    Is the Biden Admin CAPABLE of seeing the big picture and doing what you say? Who would advocate this? Would not just be ST and JY. Ron Klain and Susan Rice would no doubt be in the mix. Have my doubts, but anything is possible.


    Liked by 1 person

    1. VM–Let’s start with what you term the “glaring” issue of the “hedgies” being rewarded if the junior preferred stock is made whole or has its dividend turned back on. That’s the boogeyman raised by the Financial Establishment in an attempt to justify keeping Fannie and Freddie in indefinite conservatorship. The reality is that when Paulson nationalized the companies, the prices of both of their common and preferred shares dropped precipitously, and many holders of those shares sold. Some of the shares were bought by opportunistic investors (including “hedgies”), which is how our financial system works. Perhaps the original owners shouldn’t have sold, but a disinclination to allow the buyers of those shares to profit from their investment shouldn’t drive the policy or economic decision about what to do with Fannie and Freddie going forward.

      I’m a holder of both Fannie common and Fannie preferred, but if I were in charge of getting the companies out of their “debtors prison” and back to being functioning entities again, I would leave the issue of what to do about their junior preferred stock up to them. I understand that the Mnuchin-Calabria letter requires that all major litigation (with more than $5 billion in damages at stake) be settled before the companies can issue any common, but if I were acting for the administration, I would tell Fannie and Freddie, “We will cancel the net worth sweep and Treasury’s liquidation preference, and give you a true risk-based capital standard with a 2.5 percent minimum–and let you out of conservatorship under a consent decree after you have 1.5 (or maybe 2.0) percent capital–but YOU figure out what to do after that.” The junior preferred shares are their obligations, so they can either turn their dividends back on, redeem the shares at par or at some discount, or offer to convert them to common (with or without a haircut) as they think best.

      As to who in the Biden administration would be able to pull this off, I believe Ron Klain would need to be involved in some way. He was, as you may know, a senior advisor to Fannie at the time I was the company’s Vice Chairman, and he has both the subject matter knowledge to wade into this and the clout to move it forward if he so chooses.

      Liked by 4 people

    1. Didn’t the liberal justices also vote with the conservative justices in Collins. Perhaps- not a vigorous debate was had to change the minds of Alito and company.


      1. Yes, the SCOTUS ruling in Collins was unanimous. But as I said in my post about it (“An Unexpected Ruling”), “I believe this version [from the Financial Establishment and the Federalist Society] of Fannie and Freddie as problems is the only one the Supreme Court justices have ever heard…[a]nd it’s likely that even the liberal justices have not heard a kind word (or a real fact) about the companies throughout their careers.”


        1. Thank You. My thought has been that Scotus was more concerned about the precedent that would be sent by aligning with the Plaintiffs, and less about the truth. Unwilling to do the heavy lifting.


  8. Thank you, as always for shedding light on a complicated subject.

    I hate to hear “exercise warrants” because it is more stealing on top of theft. They were there to ensure payment, now the big banks get a piece of the IPO and I lose more money.

    Liked by 3 people

    1. I hear you on the warrants–they are unjustified and an outrage, but unfortunately they never were challenged in court, so they are a reality that has to be dealt with in any constructive solution to the conservatorships to the benefit of existing shareholders (common or preferred) or other stakeholders of the companies.

      I believe it will be difficult enough to get the administration to voluntarily give up the net worth sweep (which also was unjustified and an outrage); asking it to give up both the sweep and the warrants is a bridge (much) too far, and is the definition of “making the perfect the enemy of the good.” By offering nothing to the side that (unfairly) holds all the cards, a demand to relinquish the warrants would be doomed to fail.

      Beyond that, I have felt for some time that the best solution for existing investors in Fannie and Freddie (again, both common and preferred) is to make their shares more valuable by making the companies more valuable, even if that entails allowing the government to retain its (ill-gotten) ownership of them. A 12 percent ownership (assuming, very roughly, that reaching full capitalization at 2.5 percent of total assets would dilute existing common shareholders by another 8 percent) of a company trading at ten times earnings would still yield a much higher stock price than anything we’ve seen since the conservatorships began, and also would pave the way for the junior preferred to either have their dividends turned back on or be redeemed and replaced with new preferred structures.

      Liked by 4 people

      1. You are so right. It would be nice to get some of my retirement back. I made my first investment in fannie in June of 2012, and it has been devastating.

        I was unaware just how bad the situation was until your article today and it has me livid. Thank you so much for your continued insight and support for our cause.

        I keep trying to let everyone know (on Twitter, the only place I can be seen) that the NWS and the courts ruling on it have left us all with significantly less private property rights.

        Ps. We need a publicity stunt to bring this matter to elon’s and America’s attention.

        Liked by 3 people

        1. Treasury also gave most of those banks repayable loans at 5 percent pre-tax interest, while ignoring the fact that their balance sheets, marked-to-market, had negative equity (there was a name for that–“extend and pretend”) at the same time as it and FHFA were creating book losses for Fannie and Freddie and requiring them to take non-repayable senior preferred stock against artificial negative net worths, at an annual dividend of 15.3 percent pre-tax (the “concrete life preservers”). Fannie and Freddie have not been treated fairly since the mortgage meltdown. We are hoping to change that somewhat going forward, but as I said earlier, asking for too much means we will get nothing.


  9. Tim

    Thanks for another clear and compelling analysis. the political impetus to monetize the treasury’s warrants for low income housing initiatives, as well as halting and possibly reversing the rise in the guarantee fee, makes perfect sense for the Biden administration to implement the political solution. perhaps in the last half of its tenure without Democrat control of congress, this might become a priority item. unfortunately, inertia is the strongest force in the universe.



  10. Tim,

    Thank you for the great and informative post! I hope the Biden admin gives this serious consideration, especially now that they lost control of Congress.

    [Edited for length and clarity] The only clarification question I have for you is regarding this, “… and before they can be considered adequately capitalized under the standard made final by former FHFA Director Calabria in December of 2020, they must attain a level of “adjusted total capital” that as of September 30, 2022 was $301 billion, or 4.0 percent of total assets …”

    Is it not true that in order to be adequately capitalized (and therefore exit c-ship), the GSEs simply need need to meet the higher of the 1) risk based capital adjusted total (2.3% for Fannie, 1.8% for Freddie) or 2) minimum leverage tier 1 capital requirement (2.5% for both)? Any incremental requirement on top is simply a buffer, which you accurately describe in this post, “… and they will have constraints on their executive compensation and dividend-paying abilities until they fully meet “all of the capital requirements and buffers” of Calabria’s ERCF.” There is no language in the final capital rule that states the buffers must be 100% full in order for the GSEs to be adequately capitalized or exit c-ship, they are simply meant to restrict dividends and executive compensation (on a scale) as you noted.


    1. The language in the January 14, 2021 Mnuchin-Calabria capital agreement is quite clear and explicit that the threshold for exiting conservatorship for the companies is that they hold 3.0 percent common equity tier 1 capital for “two or more consecutive calendar quarters.” That is the binding constraint, and the one that will take (by my estimation) until 2040 for Fannie to meet, and 2041 for Freddie to meet. The other key milestone in the letter is the point at which they have “capital equal to or in excess of all of the capital requirements and buffers under the Enterprise Regulatory Capital Framework [ERCF],” at which point the net worth sweep kicks in again. The intermediate steps or capital ratios you cite do not have much, if any, practical consequence.

      Liked by 1 person

  11. Question….Tim, do you see Sandra Thompson as being a knoledgeable enough FHFA head to guide this to a release? Yellen has been lips sealed, has never mentioned the GSE’S to my knowledge.

    I always thought that if Trump had his second term, that Calabria and Mnuchin would have been our best chance at a resolution. I think Calabria set the capital standard high and hid the stress tests just before the election for ulterior reasons.

    Liked by 1 person

    1. I don’t know Ms. Thompson, but from what I’ve heard and read about her, I would not count on her to be the one in the administration who takes the lead in reversing prior (misguided and bank-centric) government policies towards the companies. I suspect that the Financial Establishment-Federalist Society version of the companies is the only one she knows, and that her sense of whether or not she’s doing a good job regulating Fannie and Freddie is derived from whether she’s getting positive feedback from the “serious people” (and pillars of the Financial Establishment) who keep in close contact with her.

      As for Yellen, she has been the least visible Treasury Secretary in my now nearly 50-year association with the U.S. financial system. I have no idea what she knows, or thinks, about Fannie and Freddie.

      Liked by 2 people

      1. while I have no particular brief against either Ms. Thompson or Ms. Yellen, neither strike me as being governmental/political “actors”. while the positions they hold entitle, and I would argue require, them to develop considered viewpoints on many questions under their purview, I have gotten the sense that they both look for rather than provide direction.

        Liked by 2 people

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s