GSEs (Fannie/Freddie),FHA&HUD

Some Bullet Point Thoughts on Reform...

Posted on Thursday, March 25, 2010

Geithner
Government Intent clear from conservatorship v. receivership and Christmas Eve “blank check.”
No change until mod to late 2011. Want to put distance between new model and crisis
Not included in budget
U.S. House Committee on Financial Services; sub-committee Capital Markets, Insurance and GSEs
Democrat Majority; Barney Frank
Recent 180 degree shift; clear not as safe as US government. Last month said abolish and rebuild from ground zero.
Republican Minority; Spencer Bachus. H.R. 3310 Consumer Protection and Regulatory Enhancement Act
Private capital should be primary source for housing.
4 year wind down.
2 year elevated loan limit in high cost areas (“millionaire mortgage”) phase out
4 year mortgage portfolio holding reduction @ 25% per year
4 year capital requirement phase in to reduce leverage
Bridge gap between long term commitment and short term borrowing
Create IG for FHFA to submit regular reports to Congress for conservatorship
Moe liabilities onto federal budget/subject to national debt limit
Suspend executive compensation packages.
“Financial Frankenstein”
Congressman Spencer Bachus; Control 90% of residential mortgage market. Phase out credit privileges over time and introduce competition. America is about competition. Federal model is not efficient. “Not the American model.”
Committee Member Congressman Kanjorski; Re-making the world. Main concern is too large, interconnected, systemic risk. Exposure. 5 or 6 alternatives – I favor making 10 to 12 mini entities. Hearing purpose is get input for joint decisions. Get ship back on course, not redirect altogether. Wall Street caused. Housing was 1.3 million a year, now 400k
Bernanke; “No Mans’ Land”
NAR; Convert existing two into government charter not for profits. Because of existing infrastructure and prominence in Mortgage Securities. Government clearly guarantee and mitigate taxpayer risk with mortgage insurance and guarantee fees.
Discussion
Short term priority is navigate crisis. Keep mortgage money available and rates low to stabilize housing. Keep MBS market stable; Dollar amount of securities outstanding. $1,318 trillion held by foreign investors. Derivative counter-parties would be overwhelmed by defaults
Short term; how to use GSEs to mitigate problems; make mortgage money available, mitigate foreclosures. Verses long term, how to fix problems.
Inherent conflict; Public policy goal – increase home mortgage availability thru secondary liquidity via MBS credit guarantees or purchasing MBS for portfolio. Receive public support; congressional charters grant benefits created perception of government backing. “Implicit” guarantee gives funding advantages over other mortgage market participants. Verses private shareholder gain.
Must decide; Governments role in mortgage and housing policy. What amount of subsidies are appropriate. Stabilization has to be first priority. U.S has many policies that subsidize housing.
Implicit guarantee. Support needs to be explicit or not at all.
Decide how much credit risk to take. All new mortgages having government backing is not sustainable long term, Private involvement is critical to efficient resource allocation.
Part of Solution
Helping Housing Recover: A Report on Fannie Mae’s Mission Performance. $823.6 billion to help keep the single-family and multifamily mortgage markets operating during 2009. More than 40 percent of the mortgage-related securities issuances. More than 40 percent of financing for rental housing. Mortgage funding for 3.1 million borrowers. Helped 2.5 million borrowers refinance. 600,000 borrowers buy Aided in the purchase, refinance, or rehabilitation of 372,000 rental units. More than 160,000 borrowers with Fannie Mae-owned loans were able to keep their homes through a loan modification or other loan assistance.

50% of mortgages served by GSEs. Other servicing contracts follow. Role in MHA. Streamline “IndyMac “ model developed by FDIC.
Attempts to Fix; Raising down payments, credit scores, MIP. Accounting standards. FNMA and FRED Accountability and Transparency for Taxpayers Act of 2010. Incentives to buy REOs. Require shrink portfolios.
The Catch 22
HERA of 2008 requires receivership if FHFA Director determines GSE has net worth deficit 60 days after end of fiscal quarter. FHFA required to request additional Treasury funds under Preferred Stock Purchase Agreement to avoid mandatory receivership. Dividends GSEs pay or accrue to Treasury investment (especially as amount funded increases) adversely affects their net worth, leading to need for more funds to maintain net worth and avoid receivership. Dividend obligations plus inability to pay draw downs under Preferred Stock Purchase Agreement due to net worth deficit concerns, will insure government dependency.
Possible Models
Nationalization. Less than optimal-no private credit risk evaluation or innovation.
Partial Guarantee; for MBS Creates floor on MBS losses for investors but requires them to evaluate risk. Problematic.
Privatization; remove all government support and break up size.
Housing Utility; could be best way to resolve inherent conflict. Purchase and securitize mortgages with credit guarantee backed y government. No investment portfolio. Privately owned but rate setting commission also approves products and underwriting innovations.
Problem
Treasury and Federal Reserve have commitments to invest over $1 trillion in GSE Preferred Stock, MBS, and debt. As of December 2009 – January 2010;
Treasury GSE Preferred Stock purchases – over $127 billion( $59.9 billion FNMA/$50.7 billion FREDDIE)
Treasury GSE MBS purchases - $226 billion
Federal Reserve MBS purchases - $1.25 trillion
Federal Reserve GSE Debt purchases - $175 billion.
$1.425 trillion added to Fed Reserve balance sheet to support GSEs
$1.318 trillion in agency and GSE securities held by foreign investors
$291 billion added to Federal debt in 2009 to support GSEs per CBO
$1.7 trillion guaranteed debt.
Over $5 trillion in mortgages purchased.
US Taxpayers own 80%.
2009 FNMA $72 billion loss. $58 billion 2008. FRED $21.6 billion losses. Net worth $4.4 billion.
Total losses since 2008 take over as of Feb 2010; FNMA $111 billion. FRED $70 billion. FNMA taken $60 billion from Treasury credit line. FRED $51 billion.
CBO and OMB (oversees President’s budget) calculate GSE cost to taxpayers differently. 2010 taxpayer cost CBO $21 billion/OMB $69 billion.

Background
GSE shareholder owned company created by Congress for public purpose.
FNMA President/CEO Michael Williams. Former KPMG Peat Marwick, DuPont, MBA. 3 business lines; SF, Housing/Community Development, Capital Markets. Safety and soundness regulator OFHEO. Mission regulator HUD.
FRED CEO Charles Haldeman; Harvard MBA and JD. Liquidity, stability, affordability.
GNMA; Theodore Tozer. Guarantees payments on FHA and VA backed loans.
FHA
HUD Shaun Donovan
HFHA director Edward DeMarco
History
1937 HUD US Housing Act of 1937
1938 National Housing Act. FNMA established as Federal agency.
1968 GNMA chartered by Congress as private shareholder-owned company
1970 FRED
1992 wake of S&L Office of Federal Housing Enterprise Oversight created as part of HUD. 2003 Bush tried to create new agency replacing Office of Federal Housing Enterprise Oversight to oversee FNMA and FRED. 2005 Federal Housing Enterprise Regulatory Reform Act would have increased government oversight of FNMA and FRED loans. Capitalization and risk questioned for some time. Regulators didn’t have authority to address. Reform frozen. Crony capitalism. Corruption. 2007 55% had to be low income/minority.
2008 investors lost confidence. Stock plummeted. Government had to move fast. Sept 2008 FHFA Director Lockhart appointed FHFA as conservator. US Treasury Department agreed to provide up to $200 billion (with FRED). Devised Preferred Stock Purchase Agreements /back stop losses per authority granted in HERA of 2008. HERA of 2008 combined OFHEO and FHFB into new FHFA
Feb 2009 raised Senior Preferred commitment to $400 billion.
Dec 31, 2009 removed limits through 2012.
March 2010 Economic Outlook, Wednesday by the GSE’s Economics & Mortgage Market Analysis Group. Surprising drop in both new and existing home sales in January has created a dimmer near-term outlook.
New homes sales fell for the third consecutive month in January to a level that surpassed the previous low recorded a year ago. Existing home sales dropped for the second consecutive month in January but remained nearly 12 percent above their record low. Fannie Mae said home sales will likely fall further in February, suggested by a sharp decline in the pending home sales index in January.
“While we had expected sales to pull back from an unsustainable pace in the fourth quarter, as homebuyers rushed to buy homes before the tax credit was tentatively set to expire, the drop in the current quarter will likely turn on to be larger than we had anticipated,” the report said.
Due to lower projected home sales, Fannie Mae reduced purchase mortgage originations “somewhat” to $716 billion. The GSE also estimated that total mortgage originations will decline to $1.31 trillion in 2010, down from a projected $1.97 trillion in 2009, with a refinance share of 44 percent. In addition, Fannie Mae expects the decline of mortgage debt outstanding to accelerate to 2.6 percent, compared with an estimated drop of 1.7 percent in 2009.
It’s not all bad news, though. As homebuyers rush to close sales before the June expiration of the extended and expanded tax credit, Fannie Mae expects home sales to rebound in the second quarter. In the third quarter, the GSE expects a “payback,” as the tax credit will likely pull some of the


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