Tag Archives: Rural Housing Service

GSE Investors Propose Reform Blueprint

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Moelis & Company, financial advisors to some of Fannie and Freddie investors including Paulson & Co. and Blackstone GSO Capital Partners, has release a Blueprint for Restoring Safety and Soundness to the GSEs. The blueprint is a version of a “recap and release” plan that greatly favors the interests of Fannie and Freddie’s private shareholders over the public interest. The blueprint contains the following elements:

1. Protects Taxpayers from Future Bailouts. This Blueprint protects taxpayers by restoring safety and soundness to two of the largest insurance companies in the United States, Fannie Mae and Freddie Mac. This is achieved by (a) rebuilding a substantial amount of first-loss private capital, (b) imposing rigorous new risk and leverage-based capital standards, (c) facilitating the government’s exit from ownership in both companies, and (d) providing a mechanism to substantially reduce the government’s explicit backstop commitment facility over time.

2. Promotes Homeownership and Preserves the 30-Year Mortgage. This Blueprint ensures that adequate mortgage market liquidity is maintained, the GSE debt markets continue to function without interruption, and the affordable 30-year fixed-rate conventional mortgage remains widely accessible for every eligible American.

3. Repositions the GSEs as Single-Purpose Insurers. Given the substantial reforms implemented by the Federal Housing Finance Agency (“FHFA”) since 2008, the GSEs can now be repositioned and safely operated as single-purpose insurers, bearing mortgage credit risk in exchange for guarantee fees with limited retained investment portfolios beyond that necessary for securitization “inventory” and loan purchases.

4. Enables Rebuild of Equity Capital while Winding Down the Government Backstop. The Net Worth Sweep served the purpose of dramatically accelerating the payback of Treasury’s investment in both companies. The focus must now turn to protecting taxpayers by rebuilding Fannie Mae’s and Freddie Mac’s equity capital and winding down the government’s backstop.

5. Repays the Government in Full for its Investment during the Great Recession. Treasury has retained all funds received to date during the conservatorships. The government has recouped the entire $187.5 billion that it originally invested, plus an additional $78.3 billion in profit, for total proceeds of $265.8 billion. Treasury’s profits to date on its investment in the GSEs are five times greater than the combined profit on all other investments initiated by Treasury during the financial crisis.

6. Produces an Additional $75 to $100 Billion of Profits for Taxpayers. Treasury can realize an estimated $75 to $100 billion in additional cash profits by exercising its warrants for 79.9% of each company’s common stock and subsequently selling those shares through secondary offerings. This monetization process, which follows the proven path of Treasury’s AIG and Ally Bank (GMAC) stock dispositions, could bring total government profits to $150 to $175 billion, the largest single U.S. government financial investment return in history.

7. Implements Reform Under Existing Authority. This Blueprint articulates a feasible path to achieving the Administration’s GSE reform objectives with the least amount of execution risk. It can be fully implemented during the current presidential term by FHFA in collaboration with Treasury utilizing their existing legal authorities. Congress could build on these reforms to develop an integrated national housing finance policy that accounts for the Federal Housing Administration, the Department of Veterans Affairs, and Rural Housing Service, and emphasizes (i) affordable housing, (ii) safety and soundness, and (iii) universal and fair access to mortgage credit for all Americans. (1)

As can be seen from the last paragraph, GSE investors are trying to use the logjam in the Capitol to their own advantage. They are arguing that because Congress has not been able to get real reform bill passed, it makes sense to implement a reform plan administratively. There is nothing wrong with such an approach, but this plan would benefit investors more than the public.

My takeaway from this blueprint is that the longer Fannie and Freddie remain in limbo, the more likely it is that special interests will win the day and the public interest will fall by the wayside.

Feds Financing Multifamily

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Brett VA

The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,

Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)

This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?

This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?

We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.

 

 

 

Better to Be a Banker or a Non-Banker?

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The Community Home Lenders Association (CHLA) has prepared an interesting chart, Comparison of Consumer and Financial Regulation of Non-bank Mortgage Lenders vs. Banks.  The CHLA is a trade association that represents non-bank lenders, so the chart has to be read in that context. The side-by side-chart compares the regulation of non-banks to banks under a variety of statutes and regulations.  By way of example, the chart leads off with the following (click on the chart to see it better):

CLHA Chart

The chart emphasizes all the ways that non-banks are regulated where banks are exempt as well as all of the ways that they are regulated in the identical manner. Given that this is an advocacy document, it only mentions in passing the ways that banks are governed by various little things like “generic bank capital standards” and safety and soundness regulators. That being said, it is still good to look through the chart to see how non-bank regulation has been increasing since the passage of Dodd-Frank.