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Discussion › Investors Unite Event/Teleconferences › STEGMAN’S REMARKS AT HOUSING BLOOM PANEL DISCUSSION.

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April 15, 2015 at 9:46 am#5458

STEVES
Participant
PARTIAL TRANSCRIPT OF STEGMAN’S REMARKS AT HOUSING BLOOM PANEL DISCUSSION.
VIDEO AVAILABLE HERE: http://livestream.com/FSRoundtable/HousingBloom

The U.S. Housing Market: Ready to Bloom; Ripe for Reform

Stegman (starts at 1:05:30)
from our standpoint the housing recovery continues to be mixed, with single family starts slightly above the range of recent years, despite declines in the last two months. if we take a longer view, single family starts and new home sales remain very low relative to historical norms. and while multifamily construction has recovered to its pre crisis range, supply.. new supply.. has been concentrated at the higher end of the affordability scale , with supply of more affordable units remaining seriously constrained. meanwhile home prices have recovered much of their decline during the housing bust, lifting millions of homeowners out of negative equity . home price appreciation has moderated from the rapid pace of 2013, many analysts expect a further modest slowing in the year ahead, there’s some variation in analyst views there, still housing doesn’t seem to be overvalued in our view in the aggregate. The distress associated with the housing bust continue to wane, delinquencies foreclosures and distress sales all remain on a downtrend. and while home price appreciation has eroded housing affordability, affordability still remains above its historic norm, and furthermore mortgage credit availability we think should increase as the economy continues to strengthen. Improving economic conditions should continue to provide some support for the housing market going forward, and while mortgage rates are relatively low, strict lending standards continue to remain in place and wage growth continues to be subdued. these factors, along with all-cash single-family investors pulling back from the market will likely lead to moderation in home price growth. Additionally both supplies of new and existing homes remain tight which will continue to constrain sales growth in the near term, is our view.
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1:19:00
Mr Leonard asks Stegman:
Why is housing finance reform still needed?
Let me just start with, you know the market is functioning now, why is reform still needed??, I’ve said it many times before, but the status quo is unsustainable for a number of reasons.. one the taxpayers again remain at risk, market participants are truly uncertain about the government footprint in the market, that’s not good for mortgage credit, and quite frankly access and pricing decisions ought to be in the hands of private market actors and not government agencies. and the only reason the market is ..in your terms paul [leonard] functioning now, is because the conservatorship has preserved a key feature of what we keep referring to as the GSE’s flawed business model, it’s the implicit guarantee of the government that comes at taxpayer expense and I’d like to use this time to correct the record as well as answer your question. Let me remind everyone, that in public filings since 2008, Fannie and Freddie have stated that they are no longer being managed for the benefit of shareholders. As Treasury Secretary Hank Paulson stated on September 7, 2008 and I quote “because the GSEs are in conservatorship they will no longer be managed with a strategy to maximize common shareholder returns, which historically encouraged risk taking”.
Under the Preferred Stock Purchase Agreement as entered into in 2008 there is no mechanism for taxpayers to be repaid for the value of the capital support and backstop that has been provided to the GSEs. The dividends that Treasury receives are not a repayment for the capital support and backstop that treasury has provided. Pursuant to the terms of the PSPA, the GSEs are required to pay treasury each quarter a dividend equal to their net worth over applicable reserves amount. These are not a repayment of the treasury’s provided. The fact is that the PSPA provided tremendous value to the GSEs. market participants continue to have confidence in the GSEs and continue to buy 30 year securities because of the remaining capital support left under the PSPAs. The capital support also gives the GSEs access to low borrowing costs. So the dividends Treasury receives must be viewed in light of the value of the extraordinary commitment Treasury and the taxpayers made and continue to make in the GSEs.
So if Congress fails to act before the next crisis, by virtue of the PSPAs Congress could be called on once again to bailout .

The best time to act on housing reform is when the housing market is well on the path to normalizing, not on the precipice of a new economic shock. Now the remaining undrawn taxpayer commitment to the GSEs is 258.1 billion dollars. It is the fact that taxpayer continues to provide the GSEs with this extraordinary capital support that gives the market confidence in their solvency, not the GSEs’ de minimis capital buffer which have been the topic of much recent attention. Despite their vanishing cap buffer, spreads on Fannie Mae and FreddieMac MBSs are at historical tights. As Goldman Sachs recently highlighted they didn’t widen significantly, indeed they didn’t really widen at all in response to the release of 4th qtr earnings report or the FHFA IG report that many point to. The fact is the agency MBS market remains one of the most liquid fixed income markets in the world despite the fact that the companies have minimal capital levels. And although taxpayers remain exposed to potential future losses of the GSEs through the PSPAs, let me remind you that both recapitalization and draws against the existing Treasury backstop due to potential future losses both come at taxpayer expense. The only difference is that recapitalization costs would be borne by taxpayers immediately while a draw is a future contingency.
So that is why comprehensive housing reform is the only way to responsibly end the conservatorship of the GSEs.
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1:39
I mean theres nothing that Laurie said that I would not, and we would not agree with .. we have talked about the importance… you talk about front end, before delivery, before the GSE guarantee credit enhancing, we think that its very important to broaden as much as possible the variety of credit risk transfer mechanisms, to broaden the investor base, so we think the conservatorship is just doing as much piloting, testing and price discovery front end and back end as possible to give more data points to congress and others as possible.. as you begin to think again about permanent kind of fixes to the future system.. with respect to the platform ummm you know again Laurie mentioned it.. this is a very heavy investment that taxpayers are footing the bill for. There’s not a vision for a future system that doesn’t really have a role for a market utility that serves the broad securitization needs of the market ,not just further institutionalizing the role of a duopoly in the future system and so what we’ve said is it would really be important for the longer term vision of the platform to include that next stage, that next phase, which is how do you get from the kind of e plumbing to serves the needs of fnma and freddie versus a larger market need. and we’ll continue to have those conversations.. one last thing.. we are very supportive of the development of the credit risk transfer market, and what we can learn from all of these transactions. So in order to help understand what is required for further development of that market we have convened an intra-agency working group to explore what the implications are for various regulators and others in the development of that market.
I think thats just reflecting the importance of private capital taking right credit risk before the government guarantee which we see increasingly as a catastrophic risk guarantee.
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what has been Treasury’s efforts to build confidence in the purely private mbs mkt?

we’ve certainly talked about from a broad housing reform standpoint.. we think it important to have a healthy robust responsible non-guarantee securitization channel.. or MBS private label security and so on.
we all know the problems and breakdowns leading up to and into the crisis and we’ve been working with market participants, structured finance industry groups and others about what kind of reforms needed to get the kind of confidence of the institutional investors back into this marketplace and i think we all kind of recognize that as we’ve been talking about first loss credit risk and so on that if you think about the non guarantee market 90% or more of the transactions really are around who is going to buy the triple-A the senior bonds, and those purchasers are out of the market.. those big investors, the asset managers, the Pimco’s, Black Rock, Met Life, those who buy these bonds are just not coming back without structural reforms that give them confidence in the collateral and in protecting their rights and so on we’ve been working with the industry a lot on what it would take to bring back that confidence and we’ve developed a concept of a benchmark transaction..while a lot of really good work is going on in the industry to develop consensus standards , we’re working with subgroups of the industry around what the terms and conditions for a significant transaction might be , that would put in place sufficient investor protections that would give these big institutional investors the confidence to come back and invest in a significant transaction, and we are bringing to Treasury at the end of the month the market participants who have indicated the strongest interest in the concept of a benchmark transaction to talk about the progress that they’ve made and i will say and i’ll have more to say about this in a conference in a couple weeks but part of a center piece is around the role of a new player if you will in these transactions, the independent deal agent who represents the interests of the investors who would really be at the heart of determining whether there are breaches in the reps and warrants reporting that to the trustee, having some duty to serve, other real protections that a number of investors have been interested in, and well be talking about the development of that concept in the coming weeks.****
I would just like to say something about the affordability issue.. i couldn’t agree more with Laurie that that is a key element. we argued outside that as a part of housing reform that there are other ways of doing affordability and supporting borrowers and those the market couldn’t support without subsidy but within the conservatorship there are a set of affordable requirements and mandates that the GSEs continue to have to meet and we are bringing increasingly private capital in front of the GSE guarantee.. Laurie talked about the portion of the book that is risk shared and thats going up and up and will go up significantly. i think that within the conservatorship if you can prove that you can protect the affordable housing requirements of the GSEs as private capital continues to take more and more of that credit risk, that should be a pretty important set of data points for the next round of housing finance reform legislation. So I would look for that very important part of the evolving conservatorship..

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