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Hot Time, Summer in the City

June 23, 2013

The midsummer solstice has brought Washington, DC not only the predictable onslaught of heat and humidity and the “super-est” of 3 “super moons” this year, but also a freshening of interest in tackling long-term reform of the U.S. mortgage finance system.  Trade groups, interest groups, Wall Street investors and many others have promoted various designs to replace Fannie Mae and Freddie Mac.  But only recently have these efforts begun to coalesce around specific features with evident support among influential Members of Congress.

In February, 2013, the Bipartisan Policy Center’s housing commission on which I served issued its report on critical housing policy issues.  It proposed a system in which a new government owned corporation would provide catastrophic credit insurance for qualified mortgage insurance bonds.  This guarantee would stand behind a deep layer of private risk-bearing capital, and come into play only if those private guarantors failed to honor their obligations to investors.  The proposal resembled in many ways how Ginnie Mae (Government National Mortgage Association) works today. But instead of relying on the Federal Housing Administration (FHA) to provide the underlying credit guarantee on the mortgages in the securities, the BPC proposal would rely on private capital to take on this risk. As the transition to this new system is completed, Fannie Mae and Freddie Mac would be wound down.  The proposed insurance would be available both for homeownership and for rental housing finance, with some slight differences in details.

The BPC proposal itself drew on a series of earlier proposals from a wide range of groups, including the Mortgage Finance Working Group convened by the Center for American Progress, the Mortgage Bankers Association, the Financial Services Roundtable’s Housing Policy Council, NYU’s Furman Center, and quite a few others.  The BPC report was distinguished, however, by its  focusing not on the creation of specified and approved entities to issue securities and take a first loss credit position with a government guarantee to a system that would focus on private risk-bearing credit enhancers and many issuers who would purchase the private risk insurance as well as the government’s. 

The BPC housing commission’s report was highlighted in a Senate Banking Committee hearing in March featuring commission co-chair and former Senator/HUD Secretary Mel Martinez.  It drew significant interest and positive comments from a number of Senators, most notably Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA). Rumors began to swirl that these two were collaborating on a draft proposal to implement the basic housing commission recommendations.

Then just last week, a new paper released by the Milken Institute, Moody’s Analytics, and the Urban Institute called for a proposal like the BPC’s – disaggregating the issuance and credit insurance functions, with a catastrophic government guarantee paid for through mortgage fees—with a few important and valuable additional details, especially around the use of a common, government owned mortgage securities issuance platform, and in the creation and funding of a so-called “Market Access Fund” to help provide mortgage credit to underserved and hard-to-serve communities and families.  Authored by a bipartisan quartet of policy experts, the report is another infusion of energy into the discussion.  On the other hand, unlike the BPC report, it lacks any specific recommendations for rental housing finance.

Now it seems as though an actual proposal sponsored by Corker, Warner and perhaps four or more bipartisan colleagues will be put forward the week of June 24, 2013.  Senate Banking Committee Chair Tim Johnson (D-SD) and Ranking Minority Member Mike Crapo (R-ID) have indicated that their first priority is to put the FHA on a firmer footing and that this work will precede any committee consideration of broader mortgage finance reform.  But the release of a Corker-Warner will be hard to ignore, especially if its additional co-sponsors include other Banking Committee members.

The majority leadership in the House Financial Services Committee seems likely to continue to promote the “full privatization” of the mortgage market, with no ongoing federal support like that promoted by the BPC, Corker Warner, and others.  But there also are rumblings that a bipartisan proposal introduced in the last Congress by Reps. John Campbell (R-CA) and Gary C. Peters (D-MI) could quickly become the offer around which the committee’s majority coalesces.  I noted at the time it was introduced that this bill and another introduced around the same time by Reps. Gary G. Miller and Carolyn McCarthy (D-NY) provided an intriguing counterweight to the relatively extreme position espoused by HFSC Chairman Jeb Hensarling (R-TX) and Rep. Scott Garrett (R-NJ), chairman of the subcommittee on Capital Markets and GSEs.  If and when the Corker-Warner proposal surfaces and seems to draw support, it’s possible that one of these bipartisan alternatives could add further momentum in the House.

Still silent since releasing its own White Paper in February, 2011 is the Obama Administration.  There has been no further elucidation of the Administration’s position since its succinct summary of the post-crash mortgage finance landscape.  There are rumors, of course, that the staff drafting Corker-Warner has been consulting regularly with Treasury officials, and that while it doesn’t represent Administration views, the possible proposal may reflect at least some perspectives that the parties would share.  There is also speculation that no firm proposal will emerge from the Administration until the Senate has disposed of – one way or another – the pending nomination of Rep. Mel Watt (D-NC) to be the Federal Housing Finance Agency’s Director.  An actual proposal could force the nominee to navigate a minefield of  detailed questions about any Administration proposal and provide putative reasons to reject his candidacy. Hence the reluctance to issue anything further till the nomination process is concluded.

While there is more consensus on the substance of a future structure than sometimes is obvious, it is by no means unamimous, as evidenced by this Heritage Foundation pre-emptive strike against Corker-Warner. 

So the summer starts with a fresh burst of energy.  And almost certainly, controversy. It’s still unclear if it will it provide more questions or more answers to the vexing question of,  “what will replace Fannie and Freddie?”

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BPC housing commission coverage

March 19, 2013

The Bipartisan Policy Center’s housing commission on which I served over the last year released its report in late February, and it’s been getting a lot of play in the press, Washington, DC., and elsewhere.  

Commission co-chair and former HUD Secretary and FL Republican Sen. Mel Martinez testified earlier today before the Senate Committee on Banking, Housing and Urban Affairs on the commission’s secondary market reforms.  He was joined by Janneke Ratcliffe, a senior fellow at Center for American Progress, who outlined the mortgage system reform plan drafted by the Mortgage Finance Working Group that CAP sponsored starting in 2008.  AEI’s Peter Wallison rounded out that panel.

Meanwhile, outside the Beltway, I was participating in Minnesota Public Radio’s Daily Circuit in a discussion about housing in MN, the nation, and the BPC commission report.  Tomorrow I head out to the ULI meeting in Seattle to join a panel with fellow commissioners Ron Terwilliger and Renee Glover to discuss the report on Thursday, and on April 4 I’ll be in MN meeting with a variety of groups and board and staff of the MN Housing Finance Agency.  A highlight will be joining MN Democratic Rep. Keith Ellison at a forum from 10-12 CDT hosted by the MN Housing Partnership.

If you missed the Daily Circuit broadcast you can listen to it here.

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CFPB Cements Important Mortgage Protections

January 17, 2013

The Consumer Financial Protection Bureau (CFPB) issued new rules on January 10, 2013, putting in place important protections for mortgage borrowers.  The so-called "ability to repay" rule implements provisions of the Dodd-Frank Act that require lenders to underwrite mortgage loans with a reasonable belief that the borrower can repay the loan on the terms at origination.

Seems like common sense, right?  But we learned during the mortgage boom that when regulators fall asleep at the wheel, and lenders are given free rein to compete in a race to the bottom, really bad things happen and common sense is the first thing to go out the window.

I discussed the new rule and its implications for lenders and consumers on Minnesota Public Radio the morning the rules came out.  Enjoy.

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Judge Clears Raines

September 23, 2012

Eight years after leaving Fannie Mae under a cloud of accusations that he manipulated earnings and knowingly violated accounting rules to enrich himself and others at the expense of shareholders, Judge Richard J. Leon of the US District Court for the District of Columbia cleared former Chairman and CEO Frank Raines of the allegations by granting a motion for summary judgment to dismiss the shareholder class action led by the Ohio Public Employees Retirement System and the state's Teachers Retirement System.  In dismissing the suit, Judge Leon wrote that

"There is  not only no direct evidence that Raines intended to deceive Fannie Mae's investors, there is no evidence that he even knew his statements were false....Additionally, plaintiffs fail to offer sufficient evidence to conclude that Raines's statements that they specifically identify as misrepresentations are even false.  Instead, plaintiffs merely carve up Raines's statements to fit their story."

The judge's acerbic and detailed dismissal of the  accusations leveled against Raines -- and in companion suits that have not yet been resolved, against former CFO Timothy Howard and Controller Leanne Spencer -- is a great relief to him, of course.  But it is also to those of us who worked at Fannie Mae when the company's accounting rules were questioned first by our regulator, OFHEO, and later ruled improper by the SEC.  To be clear, those facts are not in dispute:  the company misapplied generally accepted accounting rules in a number of areas.  The resulting earnings restatement cost millions of dollars, upended the company, ended careers, tarnished many reputations, and brought on significant changes in senior leadership, culture and focus within the company.  But the company had made a mistake.  It had to be rectified.  It was.

It's just a shame that the company's mistakes became the center of a feeding frenzy in which the integrity of everyone in the company -- from Frank on down -- was questioned.  Fannie wasn't the only large US company forced to restate earnings because of accounting rules.  It won't be the last.  But the eagerness with which the errors were blamed on deliberate attempts to manipulate earnings stands out.  Many of us spent long evenings trying to explain the intricacies of the actual accounting problems to friends and colleagues.  All of you said you hadn't heard them in the media.  Some of you were gracious and accepted that the errors were real, but the motivations ascribed to Frank and others were not.  Many others simply dismissed the explanations and concluded the worst about Frank and the company.

Leon writes in his decision that 

"At bottom, plaintiffs make much ado about earnings management, but plaintiffs present no evidence that Raines was ever aware that these transactions may have violated GAAP or, more importantly, were being used for an improper purpose....plaintiffs have not identified any evidence that Raines knew or, indeed, had any reason to know, that Fannie Mae's accounting violated GAAP. Further, plaintiffs have not identified any evidence that Raines intentionally misled investors through his statements concerning the implementation and operation of these accounting policies."

Leon has yet to rule on the other class actions involving other Fannie Mae executives.  I look forward to reading them when published, and I hope for the best for all of them.  But the dismissal of the class action against Raines hopefully offers strong caution against leaping to conclusions or attributing evil intent when people or organizations make mistakes or misapply complicated rules.  Raines released a statement after the ruling in which he noted that

“Today’s decision puts to rest unwarranted allegations that I have spent eight years refuting.  These reckless charges have wreaked untold damage on me, my family, my career ,and  my reputation.  But I cannot help but echo the question asked by former Labor Secretary Ray Donovan when he asked ‘which office do I go to to get my reputation back.’”

As Leon concludes,

"A failure to understand, or even negligent behavior, is not the equivalent of the necessary intent to deceive or conscious disregard of obvious risks."

In this season of increasing hyperbole and name-calling, it's judicial advice worth keeping in mind.

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Freaky Friday

August 22, 2012

It must have seemed like “Freaky Friday” to the Treasury Department last week after it announced that the government is replacing the 10 percent quarterly compounding dividend it’s been charging Fannie Mae and Freddie Mac with a sweep of all of Fannie Mae’s and Freddie Mac’s profits. Republican congressional leaders attacked the move, the conservative commentator Peter Wallison lauded it, and Democratic congressional leaders ignored it.

It’s not every day that the US Government effectively takes over private companies.  The Administration actually has worked very hard to avoid it in the case of auto companies and other failed financial services companies that got bailed out.  But Fannie and Freddie are now working 24/7 for the American taxpayer.  And the change greatly reduces the likelihood that they will need further capital infusions to cover their guarantees, further protecting taxpayers.  

Think of this as the part in the gangland movie when the loan shark informs the hapless borrower that they’ve run out of time to repay and the Mob is now taking over their business. 

You’d think that those who have been the fiercest critics of the GSEs and the rescue of their MBS investors through Treasury capital infusions would be ecstatic.  No more capital infusions.  All profits flowing to the taxpayer.  No qualification that the sweeps will end when the total principal already invested is paid off.  Plus a clear statement that the Administration is committed to winding down the companies and an acceleration of the mandated run-off of their portfolios.

But that’s not how it worked out on Freaky Friday.

Instead, Republican congressional leaders attacked the decision.

“The reduction of the dividend payments for Fannie Mae and Freddie Mac will ensure the American taxpayers remain on the hook for the bailout of these two failed institutions for the foreseeable future,” said Rep. Scott Garrett (R-NJ) in a press release. The chairman of the Capital Markets Subcommittee of the House Financial Services Committee continued, “The crony-capitalism that has become a centerpiece of the Administration’s failed economic policy must come to an end.”    His colleague Rep. Spencer Bachus (R-AL), Chairman of the full House committee, added in his own release that “Eliminating the dividend that is owed to taxpayers irresponsibly benefits speculators and pre-conservatorship GSE stockholders at the expense of the American public.” 

 “Crony capitalism?”  The only cronies this move benefits are taxpayers, for whom the two companies are now working full time.  “…benefits speculators and preconservatorship GSE stockholders…?”  The Administration’s move actually finishes off any hopes speculators might still have had.  Common shares of the companies remain around $0.25, about where they were before the announcement and down from around $80 per share in 2004.  Their perpetual preferred stock, privately held mostly by speculators hoping the companies would eventually be rebooted as private entities, fell 55 percent on the announcement.  The companies are dead meat for investors until a “final solution” is crafted.  Even then, the Administration has made it clear that Fannie and Freddie as they existed before the financial meltdown are dead and gone.

Garrett’s and Bachus’ central complaint, that the Administration has not offered a comprehensive exit strategy and new mortgage finance system design, can’t be denied.  The Administration said as much themselves calling the change an interim step on the road to a full decommissioning of the companies.  Although these members are in the House majority, Republicans there also have failed to produce any legislation at the full Committee level to move past the current situation. 

Meanwhile, over at the American Enterprise Institute (AEI), the deep well of conservative thought and anti-GSE advocacy from which House Republicans usually drink heartily, senior scholar Peter Wallison was singing a different tune.  In an interview with BloombergBusinessWeek.com, Wallison said,

“The most significant issue here is whether Fannie and Freddie will come back to life because their profits will enable them to re-capitalize themselves and then it will look as though it is feasible for them to return as private companies backed by the government. What the Treasury Department seems to be doing here, and I think it’s a really good idea, is to deprive them of all their capital so that doesn’t happen.”

Meanwhile, House and Senate Democrats, and Senate Republican leaders on the Banking Committee have been shrouded in radio silence.  I searched their websites and Google News for quotes or reactions and found none.  Even the normally irrepressible Sen. Chuck Schumer (D-NY) took a pass on the issue. 

Freaky Friday, indeed.

Market Response

The biggest driver of the Treasury’s changed policy was the looming cap on new capital infusions that takes effect at the end of this year.  Market fears that this cap might erode the effective government guarantee behind GSE mortgage backed securities had widened spreads between GSE bonds and Ginnie Mae bonds.  The latter carry an unambiguous full faith and credit guarantee.  The Treasury strategy seems to have worked, at least initially.  BloombergBusinessWeek.com reported on August 17 that spreads had narrowed, albeit by only a small amount, in the immediate wake of the announcement.  An analyst quoted in the article speculated that some buyers who have been wary of the GSE bonds because of the potential cap on Treasury support would be more likely to return after the announcement.

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