Replies to post #632203 on Fannie Mae-No Politics (FNMA)

[kthomp19]

I found one other section interesting. Calabria devotes a lot of text to FHFA's added resources in research and data collection/analysis. I bet this is preparatory to him arguing that he has more data on capital requirements than any of the objectors to the 4% level. This aligns well with his later point that 4% would have been the cap level needed in 2008 to keep the housing market afloat in a safe and solvent way.

While you very well might be right, I certainly hope this isn't true. The capital rule pretty drastically overstates the amount of losses FnF actually sustained in the aftermath of the crisis. My comment letter included a section showing that FnF's true cumulative losses were at least $61B less than the $265B number in the capital rule, though I am under no illusions that Calabria will actually take my suggestions to heart.

Unsaid, but likely implied is the answer to any question about why the GSEs both objected to the rule he proposed... they want early release to get true executive pay and performance incentives. Freddie's former CEO actually has stated he took the job as a public service commitment and not for what it paid.

I thought I remembered HERA containing some sort of hard cap for the CEO's pay (though not other executives), but searching the text of HERA for "executive" and "$" didn't yield any results relevant to that. Perhaps I'm just looking in the wrong place.

One thing I did find, though, is a reference to 12 USC 4616(c):

(c) Restriction on compensation of executive officers
A regulated entity that is classified as significantly undercapitalized in accordance with section 4614 of this title may not, without prior written approval by the Director—
(1) pay any bonus to any executive officer; or
(2) provide compensation to any executive officer at a rate exceeding the average rate of compensation of that officer (excluding bonuses, stock options, and profit sharing) during the 12 calendar months preceding the calendar month in which the regulated entity became significantly undercapitalized.

"Significantly undercapitalized" is what FnF will be as long as they have less than $152B in core capital, assuming they aren't "critically undercapitalized" instead. This means no executive bonuses or even raises until that level of core capital is met. That provides the boards even more incentive to hit $152B in core capital as fast as possible.

Freddie's CEO said the following in the Q3 2019 earnings call transcript:

I won’t forecast when we will reach a point where we have sufficient capital to exit conservatorship, but I will tell you it will be as soon as we responsibly can. Until then, our “speed to exit” will remain top of mind.

and

This consistent business performance should help us achieve our top priority of exiting conservatorship more quickly.

So even if he doesn't necessarily care about his own pay and bonuses, he wants Freddie out of conservatorship ASAP.

The other thing that struck me is his intense focus on minority related FHFA initiatives and staffing enhancements, followed later by a review of losses sustained by African American and Hispanic homeowners during and following the 2008 Financial Crisis. He is making the point that capital is the only defense to a repetition of that phenomenon. Clearly he is targeting Waters and Brown with this focus.

His comment on renters whose landlords were being covered by GSEs payment forbearance was quite surprising and something I had not considered too much. Impressive help to virus-furloughed renters.

Good points. I think Waters is trying to find a way to make Calabria look out-of-touch and indifferent to low-income homebuyers and affordable housing in general, and as a response to that I think Calabria's testimony is fantastic.

[TRCPA]

Agree completely. Just read the entire report. This testimony was clearly targeted toward the Democrats, leading me to believe that Calabria was looking to strengthen his position no matter what happens in the elections.

Regarding the capital standards and his specific words....A couple of things stood out to me. His quotes in bold.

1) FHFA has made progress in building capital at the Enterprises. Their combined leverage ratio improved from roughly 1,000 to 1 when I started last year to roughly 250 to 1 today. But more work remains.

But he doesnt even mention that this was only achieved by allowing the GSE's to retain their own earnings.

2) This May, FHFA took a critical step toward solving this problem when we released a re-proposed capital framework for Fannie Mae and Freddie Mac. The framework targets an eventual 25 to 1 leverage ratio, or capital equal to roughly 4 percent of Adjusted Total Assets.

The key word in the above statement is......eventual. There is no hint of a date attached to that word, which leaves the timing of events very open ended. Eventual does not reflect any sense of urgency.

He also makes no mention of how the GSE's are to reach that level of capital, which one would think would be one of the most important.....if not the most important....piece to the whole presentation.