Tag Archives: Watt

Reiss on Easing Credit

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Law360 quoted me in With Lessons Learned, FHFA Lets Mortgage Giants Ease Credit (behind a paywall). It reads in part,

The Federal Housing Finance Agency’s plan to boost mortgage lending by allowing Fannie Mae and Freddie Mac to purchase loans with 3 percent down payments may stir housing bubble memories, but experts say better underwriting standards and other protections should prevent the worst subprime lending practices from returning.

FHFA Director Mel Watt on Monday said that his agency would lower the down payment requirement for borrowers to receive the government-sponsored enterprises’ support in a bid to get more first-time and lower-income borrowers access to mortgage credit and into their own homes.

However, unlike the experience of the housing bubble years — where subprime lenders engaged in shoddy and in some cases fraudulent underwriting practices and borrowers took on more home than they could afford — the lower down payment requirements would be accompanied by tighter underwriting and risk-sharing standards, Watt said.

“Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account ‘compensating factors,’” Watt said at the Mortgage Bankers Association’s annual meeting in Las Vegas, according to prepared remarks.

*     *     *

The realities of the modern mortgage market, and the new rules that are overseeing it, should prevent the lower down payment requirements from leading to Fannie Mae, Freddie Mac, and by extension taxpayers taking on undue risk, Brooklyn Law School professor David Reiss said.

Tighter underwriting requirements such as the Consumer Financial Protection Bureau’s qualified mortgage standard and ability to repay rules have made it less likely that people are taking on loans that they cannot afford, he said.

Prior to the crisis, many subprime mortgages had the toxic mix of low credit scores, low down payments and low documentation of the ability to repay, Reiss said.

“If you don’t have too many of those characteristics, there is evidence that loans are sustainable” even with a lower down payment, he said.

The FHFA is also pushing for private actors to take on more mortgage credit risk as a way to shrink Fannie Mae and Freddie Mac. There is a very good chance that private mortgage insurers could step in to take on the additional risks to the system from lower down payments, rather than taxpayers, Platt said.

“You’ll need a mortgage insurer to agree to those lower down payment requirements because they’re going to have to bear the risk of that loss,” he said.

The 97 percent loan-to-value ratio that the FHFA will allow for Fannie Mae and Freddie Mac backing is not significantly higher than the 95 percent that is currently in place, Platt said.

Having the additional risk fall to insurers could mean that the system can handle that additional risk, particularly with the FHFA looking to increase capital requirements for mortgage insurers, Reiss said.

“It could be that the whole system is capitalized enough to take this risk,” he said.

The Other GSE Conservatorship Lawsuit

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While there has been a lot of attention over Judge Lamberth’s ruling on the shareholders’ cases regarding Fannie and Freddie’s conservatorships, much less has been given to Judge Cooke’s dismissal of Samuels v. FHFA (No. 13-22399 S.D. Fla. ) (Sept. 29, 2014 ). The low-income and organizational plaintiffs in Samuels challenged the FHFA’s decision to suspend Fannie and Freddie’s obligation to fund the Housing Trust Fund after they entered into conservatorship. The Housing Trust Fund was to be funded by contributions by that were based on Fannie and Freddie’s annual purchases. The FHFA took the position that they GSEs need not pay into the fund while they themselves were in such a precarious financial position. Judge Cooke held that “The Individual and Organizational Plaintiffs lack Article III standing because their alleged injuries are too remote from and not fairly traceable to the Defendants’ allegedly unlawful conduct.” (13)

I found the dicta in the case to be the most interesting. The court found that the relevant provision from the Housing and Economic Recovery Act of 2008

provides no meaningful standards for determining when “an enterprise” is financially instable, undercapitalized, or in jeopardy of unsuccessfully completing a capital restoration plan. Considering the history of Fannie Mae and Freddie Mac; the government’s placing Fannie Mae and Freddie Mac in conservatorship; the Treasury Department providing liquidity to Fannie Mae and Freddie Mac through preferred stock purchase agreements, the mortgage backed securities purchase program, and an emergency credit facility; it is not for this Court to judicially review Defendants’ statutorily mandated suspension of payments into the Housing Trust Fund. (13)

My takeaway from this opinion is that we  now have another federal judge finding that the federal government is to be given great deference in its handling of the financial crisis. And this deference derives not just from the text of the relevant statute but also from the particular historical events that led to its adoption and that followed it. This seems like an important trend, as far as I am concerned.

Housing Goals and Housing Finance Reform

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The Federal Housing Finance Agency issued a proposed rule that would establish housing goals for Fannie and Freddie for the next three years. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required that Fannie and Freddie’s regulator set annual housing goals to ensure that a certain proportion of the companies’ mortgage purchases serve low-income households and underserved areas. Among other things, the proposed rule would “establish a new housing subgoal for small multifamily properties affordable to low-income families,” a subject that happens to be near and dear to my heart.(54482)

This “duty to serve” is very controversial, at the heart of the debate over housing finance reform. Many Democrats oppose housing finance reform without it and many Republicans oppose reform with it. Indeed, it was one of the issues that stopped the Johnson-Crapo reform bill dead in its tracks.

While this proposed rule is not momentous by any stretch of the imagination, it is worth noting that the FHFA, for all intents and purposes, seems to be the only party in the Capital that is moving housing finance reform forward in any way.

Once again, we should note that doing nothing is not the same as leaving everything the same. As Congress fails to strike an agreement on reform and Fannie and Freddie continue to limp along in their conservatorships, regulators and market participants will, by default, be designing the housing finance system of the 21st century. That is not how it should be done.

Comments are due by October 28, 2014.

Top Ten Issues for Housing Finance Reform

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Laurie Goodman of the Urban Institute has posted A Realistic Assessment of Housing Finance Reform. This paper is quite helpful, given the incredible complexity of the topic. The paper includes a lot of background, but I assume that readers of this blog are familiar with that.  Rather, let me share her Top Ten Design Issues:

  1. What form will the private capital that absorbs the first loss take: A single guarantor (a utility), multiple guarantors, or multiple guarantors along with capital markets execution? How much capital will be required?
  2. Who will play what role in the system? Will the same entity be permitted to be an originator, aggregator, and guarantor?
  3. How will the system ensure that historically underserved borrowers and communities are well served? To what extent will the pricing be cross subsidized?
  4. Who will have access to the new government-backed system (loan limits)? How big should the credit box be, and how does that box relate to FHA?
  5. Will mortgage insurance be separate from the guarantor function? (It is separate under most proposals, but in reality both sets of institutions are guaranteeing credit risk. The separation is a relic of the present system, in which, by charter, the GSEs can’t take the first loss on any mortgage above 80 LTV. However, if you allow the mortgage insurers and the guarantors to be the same entity, capital requirements must be higher to adequately protect the government and, ultimately, the taxpayers.)
  6. How will small lenders access the system? (All proposals attempt to ensure access, some through an aggregator dedicated to smaller lenders—a role that the Home Loan Banks can play.)
  7. What countercyclical features should be included? If the insurance costs provided by the guarantors are “too high” should the regulatory authority be able to adjust capital levels down to bring down mortgage rates? Should the regulatory authority be able to step in as an insurance provider?
  8. Will multifamily finance be included? How will that system be designed? Will it be separate from the single-family business? (The multifamily features embedded in Johnson-Crapo had widespread bipartisan support, but the level of support for a stand-alone multifamily legislation is unclear.)
  9. The regulatory structure for any new system is inevitably complex. Who charters new guarantors? What are the approval standards? Who does the stress tests? How does the new regulator interact with existing regulators? What enforcement authority will it have concerning equal access goals? What is the extent of data collection and publication?
  10. What does the transition look like? How do we move from a duopoly to more guarantors? Will Fannie and Freddie turn back to private entities and operate as guarantors alongside the new entrants? How will the new entities be seeded? What is the “right” number of guarantors, and how do we achieve that? How quickly does the catastrophic insurance fund build? (16-17)

None of this is new, but it is nice to see it all in one place. These design issues need to thought about in the context of the politics of housing reform as well — what system is likely to maintain its long-term financial health and stay true to its mission, given the political realities of Washington, D.C.?

Speaking of politics, her prognosis for reform in the near term is not too hopeful:

The current state of the GSEs can best be summed up in a single word: limbo. Despite the fact that Fannie Mae and Freddie Mac were placed in conservatorship in 2008, with the clear intent that they not emerge, there is little progress on a new system, with a large role for private capital, to take their place. Legislators have realized it is easy to agree on a set of principles for a new system but much harder to agree on the system’s design. It is unclear whether any legislation will emerge from Congress before the 2016 election; there is a good chance there will be none. (26)

She does allow that the FHFA can administratively move housing finance reform forward to some extent on its own, but she rightly notes that reform is really the responsibility of Congress. Like Goodman, I am not too hopeful that Congress will act in the near term. But it is crystal clear that there is a cost of doing nothing. In all likelihood, it will be the taxpayer will pay that cost, one way or another.

Here: Complaint in Louise Rafter et al. v. U.S.

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Here is a copy of the Complaint in Louise Rafter et al. v. U.S., Pershing Square’s Takings case in the U.S. Court of Federal Claims. I will blog about it later, but thought that some might want to see it as soon as possible because it is not widely available yet.

Fannie+Freddie=FRANNIE?!?

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The Federal Housing Finance Agency (FHFA) has posted a Request for Input on “the proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac.” The FHFA’s press release states that

The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities by creating a Single Security that is eligible for trading in the to-be-announced (TBA) market.  FHFA is requesting public input on all aspects of the proposed Single Security structure and is especially focused on issues regarding the transition from the current system to a Single Security.  Specific questions FHFA is asking relate to TBA eligibility, legacy Fannie Mae and Freddie Mac securities, potential industry impact of the Single Security initiative, and the risk of market disruption.

 The particular questions for which the FHFA invites feedback are

  1. What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?
  2. What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?
  3. As discussed above, this is a multi-year initiative with many stakeholders. What operational, system, policy (e.g., investment guideline), or other effects on the industry should be considered?
  4. What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption? (8)

The FHFA states it is most concerned with achieving “maximum secondary market liquidity,” so it is particularly interested “in views on how to preserve TBA eligibility and ensure that legacy MBS [mortgage-backed securities] and PCs [participation certificates] are fully fungible with the Single Security.” (8)

I must say that I am a little skeptical about the reasons for this move to a Single Security. It is unclear to me that this is an urgent need for the FHFA, the two companies, originating lenders or borrowers. While I have no doubt that it could slightly increase liquidity and slightly decrease the cost of credit, I do not see this move as having a dramatic effect on either.

I would say, though, that this move is consistent with an agenda to move toward a new model of government-supported housing finance, one that could contemplate an end to Fannie and Freddie as we know them and the beginning of a more utility-like securitizer like those proposed in the Johnson-Crapo and Corker-Warner bills. Perhaps the regulator will lead the way to housing finance reform when Congress and the Executive have failed to do so . . ..

Input is due by October 13, 2014.

 

GSE Shareholders Taking Discovery

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Judge Sweeney of the Court of Federal Claims issued an Opinion and Order regarding jurisdictional discovery as well as a related Protective Order in the GSE Takings Case brought by Fairholme against the United States.  I had previously discussed the possibility of a protective order here.

By way of background, and as explained in the Opinion and Order,

Defendant [the U.S.] has filed a motion to dismiss, contending that the court lacks jurisdiction to hear this case, that plaintiffs’ claims are not ripe, and that plaintiffs [Fairholme et al.] have failed to state a claim for a regulatory taking. Plaintiffs respond that defendant’s motion relies upon factual assertions that go well beyond, and in many respects, conflict with, their complaint. The court thus entered an order on February 26, 2014, allowing the parties to engage in jurisdictional discovery. (1-2)

Judge Sweeney discussed the likely scope of jurisdictional discovery in a hearing on June 4th. She suggested that the big issue would be the extent to which she was going to defer to the federal government as to its request the discovery be limited in order to allow the government discretion in its operational and policy roles in the housing finance system. The judge indicated that she might be open to a limited protective order that allowed the plaintiffs to examine documents under certain restrictions so that they are not made public.The judge also made clear that she was not going to authorize a fishing expedition.

The Opinion and Order is pretty consistent with what she had suggested in June, but I would characterize it as a tactical win for the plaintiffs. Judge Sweeney signaled that she was not going to be overly deferential to the federal government.  This was clear throughout the Opinion and Order, regarding the scope of the Court’s jurisdiction over matters involving the FHFA, regarding the scope of the deliberative process privilege and regarding the overall scope of jurisdictional discovery that the Court will allow.  The plaintiffs should very happy with this result.