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Replies to post #746994 on Fannie Mae-No Politics (FNMA)
02/01/23 11:52 PM
Here is what Tim Howard said about FanniegateHero's comments promoting a cramdown:
While you’ve asked me to address the “merit of the poster’s position,” I can’t tell what that position is. The only specific thing Fanniegate Hero says is, “Biden admin can lock in its perspective on housing finance reform and allocate the proceeds that the Trump admin unlocked when it stopped the sweep (began retaining earnings).” Yet the Trump administration did not “stop the sweep;” it simply suspended it—while increasing Treasury’s liquidation preference on a. dollar-for-dollar basis—until Fannie and Freddie fully meet the (indefensible) requirements of Calabria’s ERCF, when the sweep will turn back on again. I also have no idea what “proceeds” Fanniegate Hero thinks the Trump administration “unlocked,” nor do I know what “perspective on housing reform” FH thinks the Biden administration would be “locking in” by taking the actions (converting the senior preferred to common and restoring the dividends on the junior preferred) he recommends. There’s too much that’s incorrect or incomplete, and too little that’s concrete, in the Fanniegate Hero comment for me to be able to evaluate it.
You also ask, “What is to stop the government from taking the greed route and treating the preferred and commons in the way presented in the post – legally, politically, or on principle?” My answer is that doing this may not align with the government’s objective for removing Fannie and Freddie from conservatorship.
Here I think you have to go back to the reality of where the companies are, and how they got there. Fannie and Freddie have been put in an enormous capital hole by the legitimization of net worth sweep by the Supreme Court, and they’ve been given a non-economic “risk-based” capital standard by a former FHFA director who thinks they shouldn’t exist. Their current books of business would permit them to survive a stylized repeat of the home price declines of the Great Financial Crisis with no initial capital at all, but it will take them two decades to get out of conservatorship with retained earnings alone.
THAT’s the problem that needs to be fixed, by some administration, before 2040. Whichever administration does so will get to pick the objectives it sets for Fannie and Freddie’s “recap and release.” Neither I nor anyone else can predict what tactics (including the treatments of the senior preferred, liquidation preference, and junior preferred) will be used before we know what the objectives to be achieved are.
My personal view, as expressed in the current post, is that it would be in the best interests of the Biden administration to switch from the fiction-based policies of past administrations toward Fannie and Freddie to fact-based policies going forward. Were this administration to do that, it would cancel the net worth sweep and Treasury’s liquidation preference—and not convert the senior preferred to common—have FHFA re-do the Calabria standard to make it truly risk-based, with a 2.5 percent minimum, then exercise Treasury’s warrants for future sale at a share price that reflects the earnings power of two companies without a huge net worth sweep hole, and with a capital standard that allows them to return to doing large volumes of profitable affordable business on terms borrowers can afford. This very likely will continue to be my position, and expectation, for the next two years. Then, if nothing has been done to change the status quo for the companies, I will try to gauge the likely policy objectives for Fannie and Freddie of the next administration, and set my new expectations for the treatments of the senior preferred, liquidation preference and junior preferred shares accordingly.
02/02/23 9:53 AM
AI
