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David Fiderer: GSEs Have Been Ill-Served by Balance Sheet Equity 'Experiment'
http://www.nationalmortgagenews.com/news/voices/gses-have-been-ill-served-by-balance-sheet-equity-experiment-1094111-1.html
Fantastic ... thank you Letgo !
looks like David Fiderer is just getting the party started ....
GSE Reform And A Conspiracy Of Silence Part II
https://www.scribd.com/document/335097112/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-3-1
GSE Reform And A Conspiracy Of Silence Part I
https://www.scribd.com/document/334826631/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-4
David Fiderer : GSE Reform And A Conspiracy of Silence
https://www.scribd.com/document/334826631/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-4
David Fiderer : GSE Reform And A Conspiracy of Silence
https://www.scribd.com/document/334826631/GSE-Reform-and-a-Conspiracy-of-Silence-Draft-1-4
New David Fiderer Up !
GSE Reform Advocates Ignore Risk Diversification
http://www.fidererongses.com/params/post/1038699/gse-reform-advocates-ignore-risk-diversification
New David Fiderer
The old "implicit-guarantee-of-GSEs-didn't-work-so-make-the-government-guarantee-private-mortgage-securitizations" routine
http://www.fidererongses.com/params/post/1035246/the-old-implicit-gse-guarantee-didnt-work-so-make-the-government-guarantee-
There is a new post on Howard on Mortgage Finance, titled “A Welcome Reset.”
In this post, Tim refers to the pledge by Treasury Secretary-designate Mnuchin to “get Fannie and Freddie out of government ownership….reasonably fast” as a welcome reset, which moves the locus of the debate over mortgage reform from Washington to New York.
For participants in negotiations to settle the plaintiffs’ lawsuits against Treasury and FHFA Tim offers the following advice for determining what the post-conservatorship secondary market system ought to look like: pick the best model, get the capital right, and be realistic about the role of government.
The post can be found here: howardonmortgagefinance.com
There is a new post on Howard on Mortgage Finance, titled “Investors Unite Risk Sharing Call.”
This post reproduces the prepared remarks Tim gave this morning on a conference call hosted by Investors Unite titled, “What is Risk Sharing, and How Does it Work?
The post includes a short addendum, “Turning the Tables,” that was not included in the call but adds some useful perspective on the issue.
The post can be found here: howardonmortgagefinance.com
What could a utility model look like ....
https://howardonmortgagefinance.com/2016/10/25/getting-real-about-reform/#comment-1572
jtimothyhoward
NOVEMBER 10, 2016 AT 12:49 PM
My utility model for Fannie and Freddie begins with their regulator, FHFA, setting specific risk-based capital standards for their single-family credit guaranty business, by “risk buckets” (combinations of loan-to-value ratios and credit scores). Based on my analysis of the companies’ credit losses in the 2008-2012 period– that is, post-housing market collapse–on the types of mortgages Fannie and Freddie are guarantying today (excluding interest-only adjustable-rate mortgages and low- or no-documentation loans, among others), I estimate that Fannie and Freddie could protect against a 25 percent future decline in home prices with less than 2 percent equity capital. In my “Fixing What Works” proposal (available on this website), I recommend a minimum capital requirement for the companies of 2 percent equity capital, and higher capital should their mix of business change to include greater amounts of higher-risk loans. Two percent equity capital on Fannie and Freddie’s current $4.5 trillion in single-family mortgages is “only” $90 billion, not the $158 billion the authors of the Promising Road proposal and DeMarco and Bright claim is needed for their systems.
That $90 billion would be raised over time (pursuant to a capital plan filed with FHFA), in two ways: by offerings of common equity and preferred stock to private market investors, and through retained earnings on their current business (after the net worth sweep either is ruled illegal or canceled). The need to raise equity in the public markets is one reason I believe supporters of Fannie and Freddie should not advocate allowing Treasury to keep and exercise the warrants for 79.9 percent of the companies’ common stock as part of a negotiated settlement of the net worth sweep lawsuits. Using just Fannie Mae as an example, Treasury’s exercise and sale of the warrants would drop the company’s (post-net worth sweep) stock price from the $75- $100 range to $15- $20. Treasury’s subsequent sale of their Fannie stock (over time) would give $60 to $80 billion to the government (taking it out of the mortgage finance system), while leaving Fannie needing to issue five times as many common shares to reach its capitalization target as it would need had Treasury not been able to convert the warrants. I view warrant conversion as an insurmountable obstacle to recapitalizing Fannie (and Freddie) as a private company, which is one reason I oppose it so strongly. (The other reason is that Treasury unjustifiably and illegally granted itself the warrants after forcing Fannie and Freddie into conservatorship against their will, and I don’t think Treasury should be rewarded for that).
I believe there DOES need to be some form of government guaranty in the future secondary mortgage market, in order to keep mortgage-backed security yields down and thus make the mortgages financed through this system more affordable. In my utility model, I propose what I call an “exchange for consideration” between the companies and the government. Fannie and Freddie’s Boards of Directors agree to accept stringent risk-based capital standards AND regulated maximum returns on their business, in exchange for a promise from the government to provide temporary assistance, through repayable loans, to them in the unlikely event that their risk-based standards prove insufficient to withstand some future unanticipated crisis. A further option would be for the government to explicitly guaranty the companies’ securities in exchange for a modest (say 5 basis point per annum) annual fee, which would be passed on to and paid by the borrowers who use Fannie and Freddie to finance their loans.
Good stuff Letgo ...
There is a new post on Howard on Mortgage Finance, titled “Getting Real About Reform.”
In this post, Tim does an analysis and critique of the two prominent proposals that advocate a risk-sharing model for the future secondary mortgage market: the Urban Institute’s “More Promising Road to GSE Reform” and the Milken Institute’s “Toward a New Secondary Mortgage Market.” he also explains why neither will be able to come close to obtaining the amount of risk-sharing capital they say is necessary to make their models work, and contrast these with his proposed utility model, which not only has been proven to work in the past but will be able to attract the capital it needs to function successfully in the future.
The post can be found here: howardonmortgagefinance.com
There is a new post on Howard on Mortgage Finance.
This post, titled “Response to FHFA on Credit Risk Transfers,” reproduces a letter Tim submitted earlier today to the Federal Housing Finance Agency in response to its request for input on credit risk transfers, made in June (with a revised due date of October 13).
It can be found here: howardonmortgagefinance.com
Tim Howard: A Solution in Search of a Problem.
It can be found here: howardonmortgagefinance.com
This post cites a recent Urban Institute article discussing how loans purchased or guaranteed by Fannie Mae since 2011 are “hardly defaulting at all,” and questions why, given this fact, such a strong consensus still exists that for the system to operate safely Fannie and Freddie must be replaced. It notes that what many call “mortgage reform” is in fact a code phrase for replacing Fannie and Freddie with a favored alternative, and points out that if this does happen, the real problem with the mortgage market—the lack of broad access to affordable housing finance—will remain unaddressed.
New post on Howard on Mortgage Finance
FHFA Fails the Stress Test.
Tim analyzes the recent Dodd-Frank stress tests
http://howardonmortgagefinance.com
Say there stranger ... where might I get me some of that "bad juju"
Does it come in paisley .... polka dots make my hips look big ...
New post on Howard on Mortgage Finance “Far Less Than Meets the Eye.”
It can be found here: howardonmortgagefinance.com
This post stems from a review Tim did recently of the prospectuses of Fannie Mae’s Connecticut Avenue Securities (CAS) risk-sharing transactions. While doing this Tim discovered that the risk-bearing tranches of the CAS deals have been deliberately structured to avoid taking credit losses. Citing tables from the prospectuses, he show how few losses the CAS securities actually will absorb—and discuss the implications of this finding for securitized risk-sharing in general (securitized risk transfers are dramatically inferior to equity capital as a bulwark against mortgage credit risk) and for Fannie’s ongoing CAS program (it should cease immediately).
Urban Institute : Housing Finance Reform Incubator
http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000853-%20Housing-Finance-Reform-Incubator.pdf
There is a new post on Howard on Mortgage Finance: “The FHFA Letters Decoded.”
https://howardonmortgagefinance.com/
Tim gives his analysis of the three letters written to Federal Housing Finance Agency Director Mel Watt in the last month, linking the timing and content of these letters to recent developments in the court cases.
New Maloni !!!
Blogging, again (but not as often)
http://malonigse.blogspot.com/
New post on Howard on Mortgage Finance, titled “Solving the Wrong Problem.”
It can be found here: howardonmortgagefinance.com
In this post,Tim reviews the essays submitted for the Urban Institute’s “Housing Finance Reform Incubator” series. ALso notes that while many of the contributors have come up with potentially workable ideas for the structure of a reformed secondary market system, not nearly enough analysis has gone into determining the optimum capitalization for credit guarantors in the post-crisis era, nor into ensuring that the proposed new system works effectively for the populations it is intended to serve.
David Fiderer: Washington Post Editorial On Fannie And Freddie Is Based On Two Profoundly False Assumptions
In 2011, The Washington Post published "The Big Lie goes viral," by Barry Ritholtz, who refuted the popular myth that affordable housing goals imposed on Fannie Mae and Freddie Mac were a central cause of the financial crisis. But, like an ever-tenacious virus, a Big Lie keeps mutating, as evidenced by a Post editorial, "This Fannie-Freddie resurrection needs to die."
http://www.fidererongses.com/params/post/882653/washington-post-editorials-18-prevarications-about-fannie-and-freddie
New Tim Howard
Getting From Here to There
https://howardonmortgagefinance.com/
Time will tell ....
Yes sir !!
By far the best source of all things GSE
Do the next best thing ... get on Facebook ... Twitter ... anywhere you can and spread it far and wide !!!
New Tim Howard
Treasury and the Financial Establishment
https://howardonmortgagefinance.com/
From NY Post
Obama official hid Fannie and Freddie’s profit mojo: suit
http://nypost.com/2015/09/10/obama-official-hid-fannie-and-freddies-profit-mojo-suit/
Unsealed Documents in Fannie Mae Suit Shed Light on Bailout
http://www.nytimes.com/2016/04/13/business/fannie-mae-suit-bailout.html?smid=tw-share
Tim Howard had some nice thoughts on the courts in the comments today ... but time will tell
http://howardonmortgagefinance.com/2016/03/31/fixing-what-works/#comments
jtimothyhoward
APRIL 1, 2016 AT 7:58 AM
The “optical win” my proposal has is the capped returns for Fannie and Freddie, which resets what many feel is a balance of charter benefits that unduly favors the companies. I can’t think of any other such wins that don’t impose a disproportionate cost either on homebuyers or Fannie and Freddie’s shareholders.
The biggest win for the government in this proposal, however, is fixing an obviously broken system. I know the administration currently isn’t thinking this way, but I have a high degree of confidence that it’s going to lose the lawsuits challenging both the takeover and the terms of the conservatorships (including, obviously, the net worth sweep). When this or a future administration comes to the same realization–probably, as I note in the paper, after an adverse court action–it should see that it is in everyone’s best interest for it to take the initiative to unwind the conservatorships in a manner that leaves a robust, efficient and low-cost secondary market mechanism in its place.
I am not against an affordable housing fee; I just believe that if Congress is going to levy one, it should be on all mortgages originated. I don’t see any justification for exempting mortgages originated and held by banks from the affordable housing fee, and levying it only on loans financed by Fannie or Freddie. As I said in my paper, that’s an excise tax on secondary market execution, and if the fee gets too large it will discourage the use of secondary market financing.
Finally, I never have liked using FDIC insurance as an example of “what banks pay for government support.” It’s not; it’s what they pay to have their deposits insured by the federal government so that consumers will put money in banks without having to worry they’ll lose it. And it’s not a fair payment for services received; it’s a grossly underpriced government subsidy. Think of what would happen if we were to apply the same principle of “private market solutions” to bank deposit insurance that most now are applying to secondary mortgage market guarantees. This would involve replacing FDIC deposit insurance with insurance from private companies. If that were done, three things would happen. First, private insurers would charge MUCH higher premiums, because they would have to hold significant capital to back their guarantees, and have to earn a return on that capital. Second, a private insurer would place much stricter limits on the investments banks could make with their insured deposits than the FDIC now does. And third, consumers would require much higher deposit rates to put their money in a bank that had private versus government insurance. In reality, banks pay NO fee for the “too big to fail” government support they get, and the FDIC fee they pay for their deposit insurance conveys a massive subsidy relative to private deposit insurance.
That has a nice ring to it ... doesn't it
You got that right ... he sure seems like a straight shooter
Lots of clues here as well...
http://www.urban.org/tim-howard-fixing-what-works
Tim Howard: Fixing What Works
Serious proposals for housing finance reform must have clearly defined objectives against which they can be evaluated, and must be derived from a clear-eyed analysis of the causes of the previous crisis so that by addressing and fixing those causes we minimize the chance of a similar crisis happening again.
My proposed reform objective is the following: to create a capital markets-based secondary market mechanism capable of financing at least $1 trillion of 30-year fixed-rate mortgages annually throughout the business cycle, at the lowest cost to homebuyers consistent with an agreed-upon standard of taxpayer protection. The emphasis on homebuyer cost is deliberate. Low-, moderate-, and medium-income homebuyers suffered the most during the 2008 crisis and received no significant relief from the government. These same families have seen little growth in their incomes during the recovery, so it should be a policy priority to provide them with the greatest possible access to mortgage credit at the lowest possible cost.
Fixing the correct problem is the second essential element of mortgage reform. Immediately after the crisis, Fannie Mae and Freddie Mac were singled out as its primary cause. Based on indisputable data, however, we now know that this was not true. To the contrary, Fannie and Freddie were the most disciplined sources of mortgage finance in the years leading up to the crisis. During the summer of 2008, the serious delinquency rate on the single-family loans owned or guaranteed by the companies was about one-third the serious delinquency rate of other prime lenders, and less than one-tenth that of subprime lenders. The subsequent performance of Fannie’s and Freddie’s loans was equally superior: the loss rates on their single-family loans from 2008 to 2015 averaged less than 50 basis points per year—about one-third the average loss rate on comparable mortgages held by banks, and less than one-fifth the loss rates on loans financed with private-label securities.
We also now understand why Fannie and Freddie had to take $187 billion in senior preferred stock from the Treasury Department. It was not because of operating losses. Through 2011, the companies’ business revenues—net interest income, guaranty fees, and other income—exceeded their combined credit losses and administrative costs. Their draws of senior preferred stock were made necessary by $151 billion in noncash expenses (plus $36 billion in dividend payments) booked by their conservator, the Federal Housing Finance Agency (FHFA), based on highly pessimistic estimates of future losses. The large majority of those losses did not materialize, and as a consequence, Fannie and Freddie had enough income to pay Treasury $158 billion—more than the $151 billion in noncash expenses taken earlier—in just 18 months, beginning in the fourth quarter of 2012. The companies never needed the $187 billion “bailout” they received from the government.
When invented narrative is replaced with verifiable fact, Fannie and Freddie cease to be a “failed business model” that must be wound down and replaced; they instead become valuable resources that must be built upon and improved. My proposal—outlined below—does that. It makes fundamental changes to Fannie and Freddie in three key areas: relationship with the government, capital, and regulation. It also preserves the companies’ ability to support affordable housing and can be implemented administratively.
Relationship with the government. Experts generally agree that the role of the government in the charters of Fannie and Freddie is too ambiguous, and that the balance of benefits tilts too far in the direction of the companies. Moving to a “utility model,” with limited returns and a more focused business purpose, addresses both issues. In the model I propose, Fannie and Freddie would remain shareholder-owned but would agree to accept (1) a cap on the average return they could target in their guaranty fee pricing (I suggest 10 percent after-tax), (2) restrictions on the size and use of their portfolios (limited to 10 percent of outstanding credit guarantees and to purposes ancillary to the guaranty business), and (3) standards for minimum and risk-based capital determined by administration policymakers with percentages set and imposed by FHFA. In an “exchange for consideration,” the government would commit to provide temporary support to the companies should their capital ever prove insufficient (which by design would be highly unlikely).
Homeowners and the government each would benefit from this arrangement. The government backstop would produce the lowest possible yield on the companies’ mortgage-backed securities, benefiting homeowners, while the government would limit its risk—and control moral hazard—through rigorous capital standards, close regulation and supervision of Fannie and Freddie, and caps on their returns.
There are many advantages to the government’s supporting utility-like companies rather than the companies’ securities. Individual pools of securitized mortgages have limited diversification and can experience much higher loss rates than the companies that issue them. Even in normal times, guarantees on securities will require the government to make unrecoverable payments to investors. Worse, if the government guarantees only securities but not the issuing companies, in a crisis there may be no surviving entities to issue new securities and keep the system from collapsing. Having the government stand behind companies keeps the system intact and allows the government to recover any outlays after the crisis has passed.
Capital. With strict limits on their portfolios, Fannie and Freddie will be taking one type of risk (credit) on one high-quality asset (residential mortgages) in one country and one currency. Proposals for Fannie and Freddie to adopt the Basel III bank capital standards therefore contradict the principle that capital must be related to risk. Large multinational banks can take many types of risks on many types of assets (including very risky ones) in countries and currencies around the world. Giving Fannie and Freddie bank-like capital requirements without bank-like asset powers would doom them to failure.
Fortunately, there is a proven way to set capital standards for a company that deals in a single, homogenous asset type: require that company to hold enough capital to withstand a defined, worst-case stress scenario. In my proposal, administration policymakers would pick that scenario. I recommend that they require Fannie and Freddie to hold sufficient capital to survive a 25 percent nationwide decline in home prices over five years. Even though such a price decline did happen between 2006 and 2011, both major factors that precipitated it—very risky mortgage types like no-documentation loans or interest-only ARMs with teaser rates now prohibited by the Consumer Financial Protection Bureau (CFPB) and the dominance of a financing method, private-label securitization, that placed few limits on the risks of the mortgages it accepted—will be absent in the future, making the chance of a repeat of the previous episode vanishingly small.
Fannie’s prior experience suggests how it would have to capitalize against a future 25 percent home price decline. With the loans it had in 2008 and using its guaranty fees (but none of its portfolio or other income) to help absorb credit losses, Fannie would have needed less than 2 percent capital to survive the previous crisis. And if we remove from the data the loan types no longer permitted by CFPB regulations—which accounted for roughly half the company’s postcrisis credit losses—it could have survived with only about 50 basis points of capital.
If FHFA confirms these results, it should set Fannie and Freddie’s minimum capital ratio at 2 percent, and then specify a supplemental risk-based standard that imposes capital requirements by product type and risk category (defined at a minimum by paired combinations of loan-to-value ratios and credit scores). FHFA would grade the companies’ business as it comes in and require them to hold the greater of the risk-based or minimum capital amounts. All of the companies’ capital would have to be retained earnings or common or preferred stock.
Fannie and Freddie could make their minimum standard binding by holding down the risk of the mix of business they acquire. With 2 percent capital and a 10 percent target return, Fannie and Freddie’s average charged single-family guaranty fee would be about 40 basis points, which—after the 4.2 basis point affordable housing fee and the 10 basis point payroll tax fee (through October 2021)—would be a little over 50 basis points to the borrower. At this level, the companies could use cross-subsidization effectively to attract a broad range of business, including affordable housing loans. Should the risk mix of the companies’ business rise, their risk-based standard would cause their capital and average guaranty fees to rise as well.
Regulation. After a stress standard for the companies has been chosen, FHFA will need to analyze Fannie and Freddie’s credit performance during the prior housing market collapse to determine the percentage of minimum capital—for the types and characteristics of loans the companies are permitted to acquire today—that would allow them to comfortably withstand that stress. FHFA would use that same data to determine the stress capital percentages by product type and risk category used to calculate required risk-based capital.
Once the minimum standard and the risk-based requirements are in place, Fannie and Freddie would be permitted to price their business as they saw fit—including using cross-subsidization—as long as their guaranty fees in the aggregate were consistent with no more than a 10 percent return on capital. FHFA would monitor the companies’ pricing, and if it found their average fees to be too high, it could take whatever remedial action it deemed appropriate. FHFA would track each company’s business and calculate its required risk-based capital on a quarterly basis, with adjustments as warranted for any risk-sharing transactions they do.
Affordable housing. Fannie and Freddie’s role in supporting affordable housing is limited by the fact that they only can purchase or guarantee the loans lenders originate. Despite this, FHFA should set affordable housing goals for the companies. FHFA also should have the power to impose penalties for failing to meet those goals, but only if the percentage of affordable business Fannie or Freddie does fall short of the percentage originated by lenders that year.
FHFA should not increase the amount it requires Fannie and Freddie to contribute to affording housing funds beyond the 4.2 basis points mandated by legislation. Fees for affordable housing imposed only on the companies are an excise tax on the secondary market. Should Congress wish to increase support for affordable housing through additional fees, it should levy them on all mortgages. This would raise more money—or raise the same amount at a lower fee rate—and not favor primary market over secondary market financing.
Implementation. The above changes could be effectuated through administrative action, as were the 2008 Preferred Stock Purchase Agreement and its amendments. With the written consent of the boards of directors of Fannie and Freddie, FHFA as conservator would make binding commitments on behalf of the companies, and Treasury and FHFA would make binding commitments on behalf of the government.
Before these reforms could take effect, the government would need to settle all of the lawsuits against it for its treatment of Fannie and Freddie before and during the conservatorships. It likely will take rulings adverse to the government’s current position to trigger that settlement. Assuming such rulings are forthcoming, Treasury should cancel the warrants it holds for 79.9 percent of the companies’ common stock, allow them to use proceeds from the reversal of the net worth sweep to repay their senior preferred stock, and retroactively replace the 10 percent dividend on that stock with a more reasonable 1 percent markup over the cost of the funds Treasury borrowed to give the companies the $187 billion they did not need.
Treasury is prohibited by the “Jumpstart GSE” legislation from liquidating Fannie and Freddie’s senior preferred stock before January 2018. Until then, FHFA should stop paying dividends on it, and notionally credit the companies with the amount of capital they will have when the stock is repaid, to assist them in planning for their recapitalization.
Timothy Howard is former vice chairman and chief financial officer at Fannie Mae. After six years as senior financial economist for Wells Fargo Bank in San Francisco, Howard joined Fannie Mae as chief economist in 1982 and soon became involved with the financial management of the company. He was given responsibility for Fannie Mae’s largest business in 1987 and became the company’s chief financial officer in 1990. He became chief risk officer in 2000 and was named vice chairman of the board in 2003. When he left Fannie Mae in 2004, it was safely and profitably financing more than 25 percent of all US home loans.
In 2013, Howard published The Mortgage Wars, a book on Fannie Mae and the financial crisis. He offers periodic commentary on mortgage-related issues on his website, Howard on Mortgage Finance.
Howard owns common and preferred shares of Fannie Mae, which he addressed in a post on his website on February 15, 2016.
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What are you talking about ... please quote the parts in his piece
where Fiderer is "pointing out that information contained in public filings and annual reports is sufficient warning for investors (and, by extension, investment ADVISORS) to gain insight and truth into a company's financial health"
ty
HOWARD ON MORTGAGE FINANCE : The Takeover and the Terms
http://howardonmortgagefinance.com/
A new post is available on “Howard on Mortgage Finance.”
Some Context, and the Coming Bailout Charade
It is available here:
howardonmortgagefinance.com
David Fiderer: My Take On The Third Amendment Sweep Litigation
http://www.fidererongses.com/params/post/767938/my-take-on-the-third-amendment-sweep-litigation
Will the Real Tim Howard please sign in
HOWARD ON MORTGAGE FINANCE
http://howardonmortgagefinance.com/
Hey NP !!
And I hope you have a safe and very Merry Christmas !
Sorry not a clue on that one ...