Fannie Mae-No Politics (FNMA)

[Robert from yahoo bd]

Upset? I think we all are! Here's the latest from Don Layton. https://www.jchs.harvard.edu/blog/gse-stress-test-results-good-news-troubling-decisions

Here's TH's latest comments: "Yes, I had read the Layton piece (which came out yesterday).

The results of the 2020 and 2021 Dodd-Frank stress tests run on Fannie and Freddie were released earlier this month, and have received almost no publicity. I find that surprising, since they reveal that the tests run this year (on year-end 2020 data) showed that neither Fannie nor Freddie needed ANY capital to pass them, and Fannie also was able to pass the 2020 test (run on year-end 2019 data) with no capital.

In this piece, Layton points out that FHFA did not publish the results of the 2020 test–which should have come out a year ago–until this month, when it released the results of both the 2020 and 2021 tests together. He speculates that Director Calabria may have withheld the 2020 results, using Covid as a (weak) pretext, because they did not conform with the capital standard he was proposing, which had a “risk-based” requirement of more than 4.0 percent. I find it hard to argue with this interpretation, which Layton says “appear to show politics and ideology unduly distorting proper regulation.”

The timing of both the release of the FHFA Dodd-Frank stress tests for Fannie and Freddie and Layton’s analysis of it are helpful for the piece on Fannie and Freddie’s capital that I will be putting up next week. The companies now are locked into an essentially endless conservatorship by a series of actions based on a provably fictitious view of their past and present risks. In next week’s piece I will give actual data on Fannie’s historical and current credit risk–which are publicly available–and note that if you plug today’s data into the companies’ Great Financial Crisis experience they would need NO initial capital to survive it. I’ll also discuss how Calabria came up with his requirement that Fannie had to have 4.55 percent capital for its June 30, 2020 book to be considered “adequately capitalized.” (Preview: his 4.0 percent minimum is imposed arbitrarily, and his “risk-based” requirement is full of assumptions, exclusions, and cushions engineered to produce a result that exceeds that minimum.)

To get Fannie and Freddie out of conservatorship and back to being able to price the one product they are allowed to offer–credit guarantees on residential mortgages–on an economic basis, all the Biden administration has to do is abandon the fictions and embrace the (readily available) facts about them. It is in its best interest to do so."