Replies to post #751016 on Fannie Mae-No Politics (FNMA)

[Robert from yahoo bd]

Don Layton does a good job explaining the Implicit Federal Government Guarantee in Footnote 15: "But, at its core, the implied guarantee was based on the fact that the role played by the GSEs was so pivotal to the economy that the government could not take the pain of their failure. While there were subsequent legal requirements for the government to officially disavow any guarantee of GSE debt, in 2008 the implied guarantee was shown to be very real, with the conservatorship and PSPA being operated to make the creditors of the two companies whole (although shareholders were not). Interestingly, the credit rating agencies (e.g., Moody’s, Standard & Poor’s) stated clearly in their credit rating publications of the time that the AAA given to the two GSEs was based on that implied guarantee, just as they do today (in technical language) for other organizations which still enjoy such an implied guarantee (e.g., the Federal Home Loan Bank system)."

Footnote 16 ain't bad either: "Thus, only the government had a strong interest in ensuring the financial strength of the GSEs. Unfortunately, it did not do so prior to conservatorship. During much of conservatorship (specifically 2012 to 2019), strangely, capital was depleted by design. However, beginning in late 2019, capital began to be accumulated and currently stands at $97 billion for the two firms."

Later in the paper: "Thus, to eliminate the current policy inconsistency, which emanates from the switch to the ERCF from CCF, solely by increasing the average G-fee would require it to go from 0.46 percent to about 0.66 percent (or, with the separate 0.10% excise tax that the government adds to G-fees included, from 0.56% to 0.76%)."

Recall that pre 2008 the Net Interest Margin from the Mortgage Portfolios (non MBS Mortgages held by the GSES) was approximately greater than 1%, THUS SUBSIDIZING THE PRE-CONSERVATORSHIP MBS GFEE OF 20 BASIS POINTS.

[Robert from yahoo bd]

"Simply put, a large financial intermediary does not need to be capitalized at nearly 70 times38 its worst-case government-defined stress test loss.39

[38] The ERCF at $319 billion divided by the $4.5 billion loss equals 70.9 times. This covers both GSEs.

[39] I have previously written on this topic, concluding that the ERCF is well too high (more than double) what is needed to be consistent with the latest stress test results. See “The Latest GSE Stress Test Results: Showcasing the Need for Regulatory Capital Revision (part 2), August 2022. https://furmancenter.org/thestoop/entry/the-latest-gse-stress-test-results-showcasing-the-need-for-regulatory-capital-revision. "

"The primary reason is that it does not seem to account for the extremely high earnings volatility of the mortgage business43 in contrast to the rather stable electric utility business – which I believe mainly drives the latter’s lower cost of capital rather than just the fact that it is price-regulated. However, as described above, if and when serious planning begins on conservatorship exit, it will be real investors who might purchase the shares of the two companies, which will set the cost of capital via what price they would be willing to pay at that time – and not what policy specialists, whether at the FHFA or elsewhere, say it should be."

"
I see no need for a large G-fee increase at all. Instead, my recommendation for eliminating the policy uncertainty is based on my long-held conclusion that the ERCF is just too high, as strongly validated by its obvious inconsistency with the extremely low loss shown by the official stress test results. Thus, the path forward to resolve the current average G-fee inconsistency versus the ERCF is to revise the capital requirement down significantly by replacing it with an updated CCF. "

[Wise Man]

Layton is clueless. FnF charge fully private sector guarantee fees.
The average guarantee fee on new acquisitions in 2022 posted by Freddie Mac was 51 bps, which excludes the 10 bps g-fee they charge additionally, but later syphoned off to UST quarterly under the illegal legislative TCCA fees, now renamed BBB fees. So, 61 bps g-fee in total. That's a fully private sector g-fee to compete with the private sector on a level playing field, assuming that the Charters are revoked.
The 10 bps g-fee is illegal in the Charter Act, regardless that it was enacted by Law. There can't be two confronting statutory provisions in the same Act, and the key, this PROHIBITION is part of the Charter dynamics.
This is why the recent resecuritization fee or Catastrophic-Loss Reinsurance charged by FnF, is fairly priced at 9.375 bps, the grounds for a Housing Finance System revamp that brings in more competition in the private sector, regardless that this Reinsurance could also be Govt Reinsurance or both running in parallel.
These are the only numbers that matter. But Layton writes numbers like mad, comparing the average g-fee of the portfolios in 2021 with the only valid figure, which is the g-fee on new business in 2022 that I have posted.
He claims that they will have to raise more (2x since 2008 at 28 bps) in order to meet the Capital requirements, when, first of all, FnF have been recapitalized in-house during the last 14.5 years (this is what the suspension of dividend payments is for) under a Separate Account plan authorized in the conservator's Incidental Power "best interests" (we can see how it works in my signature image at the end of this post) and secondly, on the other side, under the conspirators' Govt theft story, with $401 billion Capital shortfall over Minimum Leverage Capital requirement ($303 billion capital shortfall officially posted by FnF in their 2022 Earnings reports, pending the adjustment for the SPS increased for free that reduces the Retained Earnings, concealed with Financial Statement fraud. These SPS don't appear on the balance sheets), it's impossible to think that they will be met raising the g-fees, because it'd be necessary a 500 bps hike.
I posted yesterday their adjusted capital metrics under the Separate Account plan (Common Equity = accumulated Total Comprehensive Income adjusted for charges with the changes in the Accounting Standards + CRT expenses, net + PLMBS lawsuit settlement), evidence that 2x the g-fee of 2008 has worked, though it'd have been met sooner had FnF been allowed to keep the TCCA fees (I stopped requesting a refund long time ago)

As of end of 2022, Fannie Mae had $163B of Total Capital, which is a $58B Capital Surplus (55%) over $105B Risk-Based Capital requirement.
Freddie Mac's Total Capital, $158B. It's an $86B Capital Surplus (119%) over $72B Risk-Based Capital requirement.

(*) I have included the Allowance for Loan Losses as Tier 2 Capital, because it seems that the figures of Total Capital posted by FnF in their Earnings reports, do it as well.

Layton works at Harvard University thanks to a $400 million gift from John Paulson. It would also explain why he saddled Freddie Mac with credit losses during his tenure, with loans sold to Goldman Sachs at a deep discount.
Finally, Don Layton paid to rewrite history, peddling the big lie of Govt Implicit Guarantee on MBSs,

The GSEs were then each able to exploit this free implied guarantee to create a giant, profit-making subsidy for themselves.

when the true reason why FnF charged a low g-fee at the time (28 bps), as mandated by the Charter's purposes (Public Mission: charge less to low- and moderate- income families, countercyclical role in the secondary mortgage market), is because there is a UST backup of the enterprises in plain sight. So, it isn't a "perception" as the FHFA claims in its reports to congress.
The only exception to the PROHIBITION of UST to profit off the GSEs in the Charter Act, posted above.