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Didn't the gses' just pass their Dodd Frank Stress Test with flying colors?
The FHFA and UST merely need to follow HERA and let these private corporations decide what is in their best interests and not the governments. All this elaborate, "let's extract everything from these 'evil hedge fund guys' is problematic and contrary to the Primary Power/Duty in HERA to conserve and preserve their wards assets...
Because....?
Mechanically, Calhoun's plan: "Operationally, the value of the government GSE stock interests could be placed in an independent joint
affordable housing entity of the GSEs, similar to the organization of the GSEs’ Common Securitization
Solutions, which houses the GSEs’ common securitization platform that issues and services GSE mortgage
securities. FHFA should oversee this entity and approve its board members. The stock interests could be waived by Treasury and the GSEs could place equivalent stock, money, or an obligation from the GSEs into the housing entity. If stock were transferred by the GSEs it could be held or eventually sold by the
new joint GSE affordable housing entity, with the income and proceeds used for affordable housing.24
Housing assistance could be implemented in a manner similar to the process used by the Federal Home
Loan Banks (FHLBs) under their affordable housing program. The FHLBs, which are also government
sponsored enterprises supervised by FHFA, direct funds to other entities for affordable housing programs,
rather than operating housing programs themselves.25"
Does transferring the "financial interests" of corporate stock (an asset) held by the Federal Government to a new entity with a SPECIFIC PURPOSE/MISSION AND DONE SOLELY AT THE BEHEST OF THE EXECUTIVE BRANCH OF THE FEDERAL GOVERNMENT VIOLATE THE SEPERATION OF POWERS DOCTRINE (Only Congress has the power of the purse !)
Would existing shareholders have standing to file a preliminary injunction?
Don't know, maybe...
Constitutionally speaking, wouldn't the Executive Branch of the Federal Government be deciding on how the United States Government spends money, A POWER SPECIFICALLY DELEGATED TO THE LEGISLATIVE BRANCH OF THE FEDERAL GOVERNMENT UNDER THE US CONSTITUTION?
I'm asking for a friend !
The irony is that the gses are only possible because of the natural boom and bust cycles of the residential real estate market AND THE FEDERAL GOVERNMENT IMPLIED OR EXPLICIT GOVERNMENT GUARANTEE!
Allowing the "free market" to have 100% control of the mortgage market just leads to exaggerated booms and busts.
So ironically, our investments in the twins is based on a type of "socialism" for the primary mortgage market...
Good points, AND THAT IS EXACTLY THE REASON WE ARE HAVING A HARD TIME IN COURT! I'm sure many, many federal judges, regulators, politicians, et.al. DON'T WANT TO SEE US 'EVIL HEDGE FUND GUYS' PROFIT FROM OUR OPPORTUNISTIC INVESTMENTS IN TWO CORPORATIONS THAT WERE INVOLVED SO HEAVILY WITH THE GFC, WHICH WIPED OUT FINANCIALLY SO MANY PEOPLE....
No one but us really have a great grasp of the facts here...
I mean my close family members risked their lives in Nam and Korea, wasn't there a cold war with the Karl Marx enthusiasts for decades post WWII?
The whole nation (and apparently so many federal judges) just seems to accept that it is okay to Nationalize private corporations and maybe this Karl Marx guy isn't that bad!
Seems weird to mean...
https://www.reuters.com/world/us/ny-feds-williams-says-rising-home-prices-dont-pose-financial-stability-risks-2021-10-22/
"U.S. home prices are rising rapidly because of low interest rates and as people seek out living space during the COVID-19 pandemic, but the trend doesn't yet pose big risks for financial stability, New York Federal Reserve Bank President John Williams said on Thursday.
Housing prices could come down later if preferences change, Williams said, but there is less credit risk in the housing markets and banks are better prepared to handle that kind of shift than they were before the Great Recession."
What the Chair of the Senate Banking Committee fails to recognize is that BUT FOR THE EVIL HEDGE FUND GUYS' AND OTHER PRIVATE CAPITAL SCOOPING UP FORECLOSED HOMES DURING THE DEPTHS OF THE GFC, AMERICAN FAMILY HOMEOWNERS WOULD HAVE SEEN THEIR HOME PRICES PLUMMET EVEN MORE!
"Sen. Brown’s remarks, as prepared for delivery, follow:
One thing seems to be pretty much certain in this economy: no matter what happens to most Americans – a financial crisis, a global pandemic – Wall Street will find a way to profit off of everybody else’s pain.
We all remember 2008.
Nearly nine million workers lost their jobs. Workers’ savings were wiped out.
And nearly 10 million families lost their homes and everything that went with them –months and years of mortgage payments, their neighborhood school, the family pet, the stability of knowing where you live, where your kids would go to school, and where you’d attend church for the next 20 or 30 years.
But as families watched their dreams crumble, Wall Street found new opportunities to profit from the devastation it created.
As families – disproportionately families of color, who had been targeted with predatory loans – lost their homes, private equity funds with access to cheap cash were waiting to scoop them up.
Following the 2008 financial crisis, private equity funds bought families’ homes in cash, often at foreclosure auctions. And they bought the loans of the hardest-hit borrowers in bulk from FHA and the GSEs.
These professional investors weren’t shy about what made it possible – and profitable – for them to buy up tens of thousands of homes.
They told investors: “recent turbulence in U.S. housing and mortgage markets,” created a “unique opportunity.” And the availability of large quantities of single-family homes at “distressed prices,” and “strong demand from tenants” meant the opportunity for “attractive yields.”
“Unique opportunity” for “attractive yields.”
Think about that – in plain English, that meant take advantage of the foreclosure crisis – the crisis that turned homeowners’ lives upside down and gutted their hard-earned savings – to give Wall Street billionaires the chance to buy up homes for less than they’re worth, and rent them out at a steep profit."
https://www.brown.senate.gov/newsroom/press/release/brown-private-equitys-renters
WSJ: "Cash buyers are playing a large role. About 23% of September existing-home sales were purchased in cash, up from 18% a year earlier, NAR said.
Though prices remain near record highs, the pace of price growth is slowing. The median existing-home price rose 13.3% in September from a year earlier, NAR said, to $352,800. That compares to a 15.2% increase the prior month.
Price cuts are becoming more common, too. Nearly 15% of listings lowered their prices in September, up from 7.9% in April, according to Zillow Group Inc."
Latest from WSJ: "The housing-supply problem has been years in the making. The housing bust and 2008 financial crisis left lasting scars that prevented many people from taking the step into homeownership and drove many small builders out of business.
It could take years, too, before supply is adequate to meet demand—a dynamic that could continue to put upward pressure on prices long after builders' supply-chain and labor woes are resolved.
Get used to some gaudy housing numbers—they will be with us for a while."
Well said, Guido, well said! Very prescient and to the point! My favorite, "Remember that FHFA’s operations are funded by Fannie Mae and Freddie Mac. Not by those who benefit by the issuance of CRTs."
The only possible revision may be the actual length of the 'conservatorship' has it been 12 years or 13 years (I only have 10 digits, ) and maybe you meant to say, "would" prevent here: "They would also wonder what prevent the FHFA..."
So I guess all the shareholders are NOT evil hedge fund guys and some are hard working Americans who invested their retirement dollars under the premise that high ranking federal officials like Paulson and Lockhart stated the truth about the federal governments intentions with what is now the longest running 'conservatorship' in US history.
So is the 14th year of 'conservatorship'!
https://www.cnbc.com/2021/10/19/single-family-rents-are-surging-and-investors-are-flooding-the-market.html
“The ongoing preference toward more living space — and slim for-sale inventory — is forcing would-be buyers back into renting, putting significant strain on the single-family rental market.”
Nguyen cites several reasons for the investor demand:
Worldwide bond yields are at historic lows, and investors need yield.
Inflation is on the rise, and most investors view rental homes as an inflation hedge.
Record high rent growth is supported by high occupancy rates.
Renters have demonstrated that they are willing to pay a premium to rent in a new home neighborhood managed by a professional landlord.
Meanwhile first-time homebuyers, who historically make up about 40% of sales, were at just 29%, the lowest level in more than a decade. Home prices continue to rise sharply, weakening affordability but bolstering demand for rentals.
Sherrod, Maxine, and the NAHB will be on the steps of Capitol Hill tomorrow morning promoting inclusion of the $300B for housing bill. https://m.facebook.com/events/479873566407695
Keeps the lawyers busy with billable hours! In DC 1 out of 4 working professionals is a lawyer. I used to tell people you couldn't swing a dead cat around DC without hitting a lawyer
I think their latest 'kill the twins' strategy is to convince Sandra to overload the gses with high ltv, low Fico mortgages in the name of promoting 'affordable housing', but as a former bank regulator she may not take the bait...
SP still below the Bollinger line?
I bet MC ends up taking a six or seven figure job with one of the gses competitors or industry sponsored think tanks who stood to gain from MC's actions as the answerable to no one in government FHFA Director who was determined to saddle the gses' with a capital requirement so high that they would be ineffective in carrying out their Congressionally chartered mission.
In his exit interview with Larry Kudlow, Larry said, "Don't worry you will find a job."
Thanks Nats, good point, the FHFA keeps an iron fist wrapped tightly around the internal operations of their "wards" now on its 14th year of 'conservatorship'. Who wants an open and transparent federal government anyway, apparently not the Feds ! The FHFA won't even allow the list of shareholders to be disclosed and the federal courts have said it is okay! This 14th year of 'conservatorship' has all the earmarks of a government by the government for the government and not a government by the people for the people...
USA spending.gov I believe was created with the help of funding from Steve Balmer, former CEO of Microsoft and I think all see what I can find and the gsa website may help as well, worth a look, thanks again!
"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."
"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."
He's a smart guy and he seems very interested in making sure the almost unique American Secondary Mortgage Market is working as efficiently and effectively as possible to help hard working Americans have low cost access to the great American 30 year PREPAYABLE AT ANY TIME WITH NO PENALTY, FIXED RATE MORTGAGE!
It's one of the main reasons I have invested in the twins for over 3 decades and continue to do so to this day....
Shockingly Senator Pat Toomey wants more required capital not less:
Dear Acting Director Thompson:
I write to express concern with respect to two specific aspects of the proposed amendments to the
regulatory capital framework for Fannie Mae and Freddie Mac (the “GSEs”).
First, an interagency review of the Federal Housing Finance Agency’s (“FHFA”) proposed
capital rule led by the Financial Stability Oversight Council found that capital requirements “that
are materially less than those contemplated by [the proposed rule] would likely not adequately
mitigate the potential stability risk posed by the [GSEs].”
1 The proposed two-thirds reduction in
the leverage buffer could result in a material reduction in regulatory capital, increasing risks to
taxpayers and financial stability.
Second, FHFA solicited comment on whether to reduce the minimum credit risk capital
requirement on mortgage exposures (i.e., the 20 percent risk weight floor). More than half of the
GSEs’ single family mortgage exposures are subject to this minimum requirement.2 Reducing
this floor could materially reduce aggregate capital requirements and also significantly increase
the gap between the credit risk capital requirements of the GSEs and other market participants. I
urge FHFA not to reduce the 20 percent risk weight floor on mortgage exposures and, if that
change is still contemplated, to separately solicit comment on that proposed change with a
detailed preamble discussion on the safety and soundness risks, risks to financial stability, and
other implications.
TH's Comments on the Proposed Capital Rule: https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15852
COMMENT ON PROPOSED AMENDMENTS TO THE ENTERPRISE
REGULATORY CAPITAL FRAMEWORK RULE
Timothy Howard—Former Vice Chairman and Chief Financial Officer, Fannie Mae
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 yearend 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 riskbased 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.
October 18, 202
Up by .13 in less than 30 minutes to close, unusual?
https://finance.yahoo.com/quotes/fmcc,fnma,fmckj,fmcki,fmccm,fmcck,fmcct,fmcci,fmckk,fmccg,fmcch,fmccl,fmccn,fmcco,fmccp,fmccj,fregp,fmckp,fmccs,fmcko,fmckm,fmckn,fmckl,fnmap,fnmao,fnmfo,fnmam,fnmag,fnman,fnmal,fnmak,fnmah,fnmai,fnmaj,fnmas,fnmat,fnmfm,fnmfn/view/v1
For whatever reason(s), they seemed to prefer commons today...
"And as conservator of Fannie Mae and Freddie Mac, “the Enterprises," we oversee operations and strategic decisions in greater detail, directing them to preserve and conserve their assets while fulfilling their charter purposes and responsibilities."
"We have now seen that the risk-blind leverage buffer was set so high that, together with the leverage requirement, it eclipsed the risk-sensitive aspect of the rule. As a result, it could provide the Enterprises with incentives to pursue and retain more risk."
"The Enterprises are now rebuilding their own capital to ensure that they have the resources to fulfill their mission to keep housing finance markets liquid, in both good times and bad."
"By taking advantage of lower interest rates, borrowers can reduce the share of their income they have to spend on housing costs. And given that these are already borrowers with an Enterprise-backed mortgage, they can access these financial benefits with minimal additional risks or costs to the Enterprises or taxpayers.
This should be an urgent priority, as we are seeing significant numbers of lower income and minority Enterprise borrowers stuck in rates 30 to 60 percent higher than the current average. There are even a surprising number of Enterprise borrowers who have been diligently paying the mortgages they received in the 2000s but are still having to pay rates of more than 6 percent. To assist these borrowers in lowering their monthly payments, the Enterprises will remove the 10-year seasoning cap from the original program."
Prepared Remarks of Sandra L. Thompson, Acting Director, FHFA, at the 2021 Mortgage Bankers Association Annual Convention and Expo
??Sandra L. Thompson, Acting Director
Federal Housing Finance Agency
MBA KEYNOTE REMARKS AS PREPARED FOR DELIVERY
Monday, October 18, 2021
Thank you, for that introduction Kristy. It is always an honor to share a stage with Secretary Fudge, and I am glad to be back at MBA's annual conference, addressing you for the first time as Acting FHFA Director.
The past few months have been a busy and productive period for FHFA. I am here today to update you on our recent work, and to clearly articulate the path forward for our Agency and our regulated entities: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
FHFA is a unique financial regulator in that each of our regulated entities was chartered by Congress to fulfill specific purposes and duties. Our Agency is charged with ensuring that they fulfill their missions by responsibly promoting equitable access to mortgage credit throughout the Nation, including to underserved communities, through safe and sound business practices.
Our work stands on the twin pillars of good lending: sustainability and affordability. Each of these pillars is necessary for safe, sound, and effective financing, and each strengthens the other. After all, a loan that a borrower cannot afford is unsustainable: it will stop performing. And loan products, like some of those sold in the first decade of the 2000s that reset from low teaser rates up to unsustainable payment schedules, or contained no income documentation, cannot reasonably be called affordable.
Much of our work consists of the rigorous, detailed supervision and oversight that our team carries out every day. As regulator and prudential supervisor, we review the business activities, financial performance, and governance of our regulated entities to ensure that they are managing risk effectively while meeting mission obligations and statutory requirements. And as conservator of Fannie Mae and Freddie Mac, “the Enterprises," we oversee operations and strategic decisions in greater detail, directing them to preserve and conserve their assets while fulfilling their charter purposes and responsibilities.
This may not sound exciting to everyone, but to this lifelong regulator and the rest of our expert team, it is compelling and fulfilling work. At FHFA, we are focused on identifying and deploying the right solutions to address challenges in housing finance. We recognize that one size does not always fit all or benefit all households equally.
So, we are looking to continue to strengthen our ability to protect the housing finance system throughout the economic cycle while ensuring equitable access to credit reaches all borrowers, including historically underserved communities. We are accomplishing this through a series of discrete steps that we are optimistic will add up to significant progress in advancing both sustainability and affordability.
The Enterprise Regulatory Capital Framework that FHFA finalized last year was designed to ensure the safety and soundness of Fannie Mae and Freddie Mac throughout the economic cycle by establishing robust regulatory capital requirements to be met with high quality capital.
Our analysis never stops, however. And this year we identified two areas that warranted revision.
We have now seen that the risk-blind leverage buffer was set so high that, together with the leverage requirement, it eclipsed the risk-sensitive aspect of the rule. As a result, it could provide the Enterprises with incentives to pursue and retain more risk.
Last month, we proposed modifications to the buffer that will allow the rule to work as intended, with the leverage requirements and buffer serving as a credible backstop to the risk-based capital requirements that will keep the Enterprises strong throughout even another event like the Great Recession.
We recognize that, together, the Enterprises hold trillions of dollars of mortgage credit risk, so their ability to transfer some of this risk away from taxpayers and to private markets makes for a healthier housing finance system. In our continued review of the regulatory capital treatment of Credit Risk Transfers, we concluded that the rule was not providing sufficient capital relief for these transactions.
Our September notice of proposed rulemaking would correct both those problems.
As a veteran of many financial crises, I can assure you that I have a strong appreciation for the importance of loss-absorbing capital at financial institutions. The Enterprises are now rebuilding their own capital to ensure that they have the resources to fulfill their mission to keep housing finance markets liquid, in both good times and bad.
We will continue to review capital adequacy and capital requirements at the Enterprises, and in doing so, we will be sure to promote transparency and good planning in the process.
The same week we released those proposed capital rule changes, FHFA addressed another set of requirements that needed adjustment. In dialogue with stakeholders like you here at MBA, FHFA had identified market disruptions from some of the January 2021 changes made to the Preferred Stock Purchase Agreements, or PSPAs, that govern the Enterprise conservatorships. One was a restriction on Enterprise cash acquisitions that was particularly disruptive to smaller originators who rely on the cash window because they simply don't have a big bank's infrastructure to do MBS swaps.
We were also concerned about the disruptive effects, including pipeline effects from the implementation timing, of the hard restrictions on purchases of second home and investor properties, single-family loans with higher risk characteristics, and multifamily loans. ?Overseeing the Enterprises' exposure to particular product lines is a routine part of FHFA's supervisory and oversight work – it is a basic tenet of financial institution regulation.
Therefore, working with the Treasury Department, we suspended these PSPA provisions while we conduct a review of whether they are redundant with existing FHFA and Enterprise policies to manage credit risk. And the Enterprises, of course, will continue to manage their involvement with these market segments.
This approach will allow us to ensure that our ?day-to-day supervisory and conservatorship work protects the safety and soundness of the Enterprises while ensuring the Enterprises continue to fulfill their necessary role as a source of liquidity for the housing finance market.?
Of course, the Enterprises and their business partners are mutually reliant on each other in the mortgage ecosystem. The Enterprises connect lenders to capital markets, but many of those same lenders also service the loans on behalf of the Enterprises. And just as we need to ensure that Fannie Mae and Freddie Mac are safe and sound, it is important to strengthen the counterparties they rely on. And we recognize that the servicing industry could benefit from increased coordination between Enterprise, Ginnie Mae, and CSBS standards.
I know that many here are anxious about the timing of updated Enterprise nonbank seller-servicer standards. I can tell you that Servicer Eligibility 2.0 will not come before next year. Right now, we need Enterprise servicers to focus their full attention on helping distressed borrowers transition out of COVID forbearance into long-term, sustainable situations that keep them in their homes.
Once that work is mostly accomplished, we will be in a good position to finish updating the proposal we released in January 2020 and to incorporate the lessons learned from the experience of the past two years.
Through our monitoring of the effects of the pandemic on different borrowers, we identified a concerning trend: while many borrowers have taken advantage of the opportunity provided by the past year's low interest rates to refinance their mortgage, segments of the population are at risk of being left behind. We know through our long experience, including the Great Recession, that for those struggling with a mortgage, a meaningful payment reduction is the single greatest predictor of successful performance.
However, during this historic refi boom, we found that there was actually a drop in the share of refinance loans made to borrowers below 100 percent of AMI. These borrowers risk being left on the sidelines during a generational opportunity to lock in more sustainable monthly payments. And these are often the very people who could most benefit from adding breathing room to their budget.
To address this, I am pleased to announce today that Fannie Mae and Freddie Mac will be expanding their new low-AMI refinance programs, RefiNow and RefiPossible, with several enhancements to grow the eligible population and to make these programs easier for lenders to offer.
We first announced these programs in the spring, as a way of helping low- and moderate-income borrowers access the same refi opportunities that higher income borrowers were using. Take up of these programs has been slower among some of the larger depository lenders, and these new changes incorporate feedback we have received about how to make the programs more effective and how to reduce frictions in the process.
The new income threshold will be raised from 80 percent of AMI to 100, significantly increasing the population of potentially eligible borrowers. And we have removed operational frictions in calculating the benefit to borrowers and financing closing costs.
By taking advantage of lower interest rates, borrowers can reduce the share of their income they have to spend on housing costs. And given that these are already borrowers with an Enterprise-backed mortgage, they can access these financial benefits with minimal additional risks or costs to the Enterprises or taxpayers.
This should be an urgent priority, as we are seeing significant numbers of lower income and minority Enterprise borrowers stuck in rates 30 to 60 percent higher than the current average. There are even a surprising number of Enterprise borrowers who have been diligently paying the mortgages they received in the 2000s but are still having to pay rates of more than 6 percent. To assist these borrowers in lowering their monthly payments, the Enterprises will remove the 10-year seasoning cap from the original program.
Clearly, we still have work to do to ensure mortgage credit reaches everyone on an equitable basis. Our economic recovery has been uneven, and not everyone is necessarily in a place to qualify for a refinance. But that alone doesn't explain the gaps we are seeing in refinances to creditworthy Enterprise borrowers.
And we know from experience with HARP and with programs for lower income and minority borrowers that those with smaller balances tend to get left behind when it comes to refinancing opportunities.
I strongly encourage all originators to see if they can help advance equity in our housing system by connecting Enterprise borrowers to affordable, sustainable refinance opportunities.
Success will require ensuring the inclusion of communities of color that have faced setbacks in building wealth through homeownership for generations. FHFA's regulated entities have a responsibility to promote access to mortgage credit across the Nation, and we must ensure it reaches everyone on fair and equitable terms. We are developing our capabilities to address this challenge through avenues such as the new equitable housing finance plans for the Enterprises, and FHFA's own growing fair lending infrastructure.
Since Secretary Fudge was just on stage, I want to say how much I have appreciated our agencies' collaboration on fair lending. I was proud to cross the street between our offices to sign a historic Fair Lending Memorandum of Understanding between FHFA and HUD, which will help both agencies better fulfill our fair lending oversight responsibilities. FHFA is also an active member of the interagency Appraisal Bias task force led by Secretary Fudge and Ambassador Rice.
While I am on the topic of the valuation process, appraisal modernization is an issue we have been examining for a long time. We know that frictions in the appraisal process can slow or even stop the extension of mortgage credit. This can be particularly challenging in rural communities, where an appraiser has to allocate even more of their day driving from property to property.
We were already discussing the future of the appraisal industry when, last year, the country was hit by a sudden health emergency that at times kept appraisers out of homes altogether. FHFA quickly announced a number of short-term appraisal flexibilities to keep the mortgage market functioning once COVID-19 hit.
While all COVID origination flexibilities expired earlier this year, FHFA has been reviewing the data gained from the use of these flexibilities, as well as the feedback we received from practitioners across the industry on our appraisal RFI.
I can tell you now that both Enterprises will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.
The housing market is always changing, and we need to ensure that our structures and systems grow and evolve with it by fully using all the appropriate tools and available information. With desktop appraisals, an appraiser brings their valuation expertise to information that has already been made available to them, such as through listings. This can help each appraiser complete more loans in a day, and it can also help rural communities more readily obtain a necessary appraisal when the borrower is purchasing a property.
With desktop appraisals included in the selling guides, what was one of the temporary flexibilities with an uncertain future has been adjusted to mitigate risk for use over the long-term and will now become an established option for originating Enterprise loans. An option that lenders can count on.
This certainty should allow lenders, borrowers, and appraisers alike to take advantage of the efficiency gains that desktop appraisals can provide and to continue the work of making our mortgage finance system more effective.
You can see that FHFA's approach to our work is careful and thorough.
We are always monitoring our regulated entities as well as conditions in the housing market. When we identify problems or potential issues that could affect the safety and soundness or mission of our regulated entities, we take the time to get a holistic view of the issue, taking into account all relevant factors, including but not limited to a policy's potential effects on risk management, affordability, and access to credit.
And we ensure that we have the right policy for the job, whether that involves one of our tried-and-true supervisory tools, or a new solution tailored to the challenge at hand.
We roll out new policies deliberately, in ongoing dialogue with informed stakeholders. We will not make sudden changes that disrupt in-process pipelines, as we have a responsibility to promote stability in housing finance markets. But we do continuously respond to the discrete needs of our regulated entities' mission responsibilities and safety and soundness.
We recognize that all families should have equitable access to long-term, affordable housing opportunities, and that we have a duty to identify and overcome barriers to sustainable homeownership and affordable rental housing. And all our policies are built on those twin pillars of sustainability and affordability.
This is how we will approach our work going forward.
Thank you for the opportunity to speak with you today, and Kristy, I look forward to our conversation here onstage.
Nice! Thanks, refreshing to hear that the current conservator believes a mono line insurance company that is the backbone of the Secondary Mortgage Market should hold a sufficient capital buffer!
I agree that the HERA did NOT want the tail to wag the dog in allowing its Incidental Powers to override the Primary Power of conserve and preserve, so too did the 5th Circuit EnBanc Panel in its much more well reasoned opinion!
But despite the SCOTUS's disappointing opinion (which is now the law of the land), they did give the 5th Circuit a sliver of an opening to provide some potential remedy to the beleaguered shareholders, although I am not optimistic on much if any recovery.
The only way to correct the SCOTUS ruling is to have the US Congress rewrite that section of HERA and thats not going to happen.
The court said FHFA has the Incidental Power to override the Primary Power to conserve and preserve the gses' assets so long as it's in the best interests of the public the FHFA serves. The court also said that the Collins Plaintiffs could pursue possible damages from the unconstitionally insulated FHFA Director with some of the justices expressing skepticism over resulting damages. So yes, unconstitutional actions (e.g., the Takings Clause or Separation of Powers violations) are not barred by Collins.
In a separate case decided by the SCOTUS (another slam dunk for the Pacific Legal Foundation) last term, Cedar Point Nursery said that Plaintiffs whose private property rights had been taken, EVEN TEMPORARILY, were entitled to relief under the 5th Amendment Takings Clause: “Nor shall private property be taken for public use, without just compensation.”
https://pacificlegal.org/supreme-court-victory-cedar-point-nursery-v-hassid/
I think they told MC how tough it would be (if not impossible) to release them with the capital requirement so high and after the FHFA had drained $308B over 7 years from the gses retained earnings and sent it to the UST. Then of course the impossibility of the warrants and LP.