Tag Archives: Watt

U.S. Dismissive of Frannie Suits

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The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:

The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.

Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)

While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.

Two (or Three) Cheers for DeMarco’s Swan Song

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FHFA acting Director Edward Demarco gave a thoughtful speech, Housing Finance, Systemic Risk, and Returning Private Capital to the Mortgage Market, on the future of federal housing finance policy.  Given that the Administration has nominated Mel Watt as his permanent replacement, it is likely that DeMarco is seeking to leave a good final impression.  I give the speech two real cheers, no more and no less.

First Cheer.  The speech provides a review of two reasons why the government might intervene in the housing market.  First, a “potential market failure could arise in housing finance if market participants have undue or unnecessary concerns about the ongoing stability and liquidity of mortgage credit in a purely private market across various economic environments.” (2)  Second, another “potential market failure is what is often thought of as the positive externality associated with homeownership. In this view, the benefits of homeownership extend beyond the individual household to the broader aspects of society, hence if left solely to the market the number of homeowners will be less than optimal.” (3)

Second Cheer. The speech also provides a very nice summary of the two main approaches that the government can take to address housing market failures.  First, is the issuer-based approach, which “is generally associated with a financial institution guaranteeing principal and interest repayment to investors. In this model, the issuer’s guarantee is backed by its shareholders’ capital. While not necessarily part of an issuer-based approach, typically this approach assumes a further credit enhancement in the form of a government guarantee on the securities issued.” (4)  Second is the securities-based approach.  With this approach, “as opposed to credit risk being absorbed by the equity of the securities issuer, credit risk would be absorbed through capital markets.” (6)

And One Bronx Cheer.  That’s right, no real third cheer for DeMarco.  Does he take a clear stand as to what course we should follow?  No.  Like the Administration in its oft-discussed White Paper, DeMarco sets forth the options and effectively punts on the trillion dollar question.

My two cents?  The federal housing finance infrastructure should focus on two goals:  (i) increasing housing affordability for low- and moderate-income households and (ii) providing a backstop during liquidity crises.  Leadership is needed now, before Congress gets riproaringly drunk on Fannie and Freddie’s massive return to profitability.  Otherwise, we have let one perfectly good crisis go to waste.