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186 thoughts on “The Economics of Reform”

Sean JANUARY 30, 2018 AT 4:15 PM

Tim,

Finally, the Senate Hearing video w Mnuchin is finally up on the Senate’s website:

When you have a chance, listen to Corker questioning Mnuchin on Housing Finance Reform and please share your thoughts. In particular Corker tests Mnuchin on several points, in particular he gets him to acknowledge guaranteeing MBS securities & not the entities, then unsuccessfully pushes hard on Administrative reform & possible receivership, and for the first time on camera, potentially acknowledges shareholder rights It starts at 1hr:14min:50sec…

https://www.banking.senate.gov/public/index.cfm/hearings?ID=E073F06D-48F0-4013-9645-61BF4431C57A

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jtimothyhoward

JANUARY 30, 2018 AT 10:13 PM

I’ve now listened to the Corker/Mnuchin session, and have a few reactions worth mentioning. First, you missed a subtlety on the “guarantee the MBS” issue. Corker phrased his question about guaranteeing MBS versus entities this way: “If we have a government guarantee in the future, would it not be your preference that it be at the actual security level and not the entity level?” To which Mnuchin responded, “That would be my preference.” That’s not the same as Mnuchin saying he thinks there SHOULD be a government guaranty on MBS. Second, when Corker asked Mnuchin if he had “thought about” receivership for Fannie and Freddie, Mnuchin declined to take the bait, responding, “We’ve thought about and considered lots of things; I don’t really want to go through in this format publicly all the different alternatives you and I have spoken [about].”

But I think the most interesting exchange was around the topic of legislative mortgage reform. Corker asked Mnuchin what Treasury’s options would be if Congress didn’t act. When Mnuchin gave Corker the response I’m sure he thought Corker was looking for—“There are certain options we have; these entities are very complicated; I would just say my strong preference would be to work with Congress on a bipartisan basis to reach a long-term solution,” Corker paused for a moment, then said in a low, flat monotone, “Yeah.” Then he added, “But in the event this great bipartisanship doesn’t survive, and we don’t get this done—it’s a very complicated topic—what are some of the steps you might take?” Having just finished reading the “Staff discussion draft 29” of what’s been called Corker-Warner 2.0—which as I note below totally punts on all of the difficult implementation issues associated with replacing Fannie and Freddie with the proposed 5 to 6 de novo credit guarantors—I strongly suspect Corker knows this legislation isn’t going anywhere. His answer to Mnuchin’s call for bipartisan legislation certainly seemed (to me) to reflect that.


Draft of the Senate Bill:

http://bankrupt.com/CRL_FMCC_013018_182330.pdf

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jtimothyhoward

JANUARY 30, 2018 AT 10:03 PM

Well, I’ve finally been able to plow my way through all 82 pages of this document. I can’t tell if it’s the current version of the draft Senate bill or not. The heading says “staff discussion draft 29,” and after finishing it my reaction was, “If this is the twenty-ninth draft of the Senate bill, what on earth did the first 28 look like?”

What we’ve all been saying about the task of trying to replace a $5 trillion secondary market system based on Fannie and Freddie that has proven to work efficiently and effectively (invented criticisms to the contrary notwithstanding) is that advocates for doing so have the challenge of addressing, and answering, some very difficult and complex questions: about capital (both capital standards and raising new capital at a time when the government is expropriating the capital of the two credit guarantors that exist), about affordable housing, about the nature and operational details of any new potential credit guarantors, and about the complex legal and market problems associated with the transition from the existing system to the envisioned new one, including the treatment of Fannie and Freddie’s existing preferred and common shareholders who are in the midst of litigation against the government.

The solution seized upon by the authors of staff discussion draft 29 is, “We’ll let FHFA (and in a few cases, Ginnie Mae) figure out how to solve all those problems, AFTER Congress passes our bill.” I lost track of the numbers left blank in the draft–whether for capital, fees paid to Ginnie Mae, fees charged to the credit guarantors for the affordable housing fund, or other things. FHFA will figure out what criteria to use to grant charters to the 5 to 6 new credit guarantors that somehow will spring up (whose guaranteed MBS then will be eligible for government guarantees.) Not surprisingly, credit-risk sharing is mandatory for the new guarantors. There is a vague section in the capital requirements that says, “a credit guarantor shall maintain…eligible credit risk transfer arrangements that together cause credit risk transfer counterparties to bear, to the extent economically sensible, a significant portion of the credit risk on the collateral that guarantees mortgage-backed securities,” with FHFA left to work out how to evaluate those risk-transfer arrangements so that the companies end up with enough real capital to back the risks they’re taking. I could go on and on about the plethora of details FHFA has to get right to make this new system work.

And the transition? FHFA is given five years to get the new credit guarantors set up and fully capitalized (by now it’s no surprise that how it does that is left unsaid), and running sufficiently well that it can certify that “a competitive secondary mortgage market has been achieved.” Once FHFA makes that declaration, Fannie and Freddie will be put into receivership and liquidated. And if for some reason a competitive secondary market CAN’T establish itself within five years, FHFA will “endeavor to exercise the authorities under section 403 and this Act to foster the organization of additional small lender guarantors,” and, failing that, simply go to back to Congress and ask for new legislation to “remediate the impediments” to the competitive market it seeks.

It’s all so simple and easy. Why didn’t I think of that?


https://howardonmortgagefinance.com/2017/11/30/the-economics-of-reform/#comments