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Inside The GSEs

March 2, 2018

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GSE MBS Production Declined in February, Footprint Fading

February was another uneven month in terms of single-family business at Fannie Mae and Freddie Mac.The two GSEs issued a total of $61.04 billion of single-family MBS last month, a 9.5 percent drop from January. A decline in February is not unusual; it’s near the lull in the purchase-mortgage market and has fewer business days. But business levels at the two GSEs were not at all the same. Fannie MBS issuance was down 14.1 percent from January, while Freddie production was up 0.5 percent. Still, month-to-month variation in business flows are common in the GSE market. Fannie and Freddie are also in the process of implementing new capital regimes during the first quarter under the direction of the Federal Housing Finance Agency. Read More

AEI Proposal Seeks to Wind Down GSEs Without Legislation

In the latest proposal for reforming the GSEs, the American Enterprise Institute this week recommended winding down Fannie Mae and Freddie Mac by way of “administrative action” to make room for the private market. The conservative think tank said a government guarantee for mortgage-backed securities is not necessary for an effective housing-finance system. Noting that the term of Federal Housing Finance Agency Director Mel Watt expires in January 2019, AEI said many of its recommendations could be implemented by whomever President Trump taps to take over the agency. “This is important since Congress has been unable to develop or agree on a workable housing-finance system since the financial crisis nine and a half years ago,” said AEI. Read More

Is it Too Soon to Start Talking About Mel Watt’s Successor?

Although Federal Housing Finance Agency Director Mel Watt has nearly 11 months left on his term, that isn’t stopping the mortgage rumor mill from talking about who might succeed him. At the very least, no one in the industry has predicted that Watt, a former Democratic Congressman from North Carolina, would be offered a second, five-year term. Two names that are being actively discussed in the industry are Mark Calabria, chief economist to Vice President Mike Pence, and Craig Phillips, who currently serves as counselor to Treasury Secretary Steven Mnuchin. Of course, just because the industry is talking about them, doesn’t necessarily mean the White House is. Both men are quite familiar with the... Read More

Supreme Court Declines to Hear GSE Shareholders Case

GSE shareholders lost their latest battle against the government’s preferred stock purchase agreement as the U.S. Supreme Court declined to hear their case last week. After a lower court ruled against claims arguing the validity of the Treasury sweep of Fannie Mae and Freddie Mac profits, investors hoped to plead their case to the high court. Plaintiffs, including Fairholme Funds, Perry Capital and other shareholders, filed a writ of certiorari last year asking the Supreme Court to intervene in their cases. Both Perry and Fairholme have large holdings of the GSEs’ preferred shares. Back in 2014, a judge for the District of Columbia U.S. District Court dismissed claims brought against the government saying that the Housing and Economic Recovery Act of 2008 gives... Read More

NY Fed Reserve Suggests Improvements to GSE CRTs

The Federal Reserve Bank of New York said the GSEs’ credit-risk transfer programs are a positive step towards reforming the housing-finance system and suggested a few improvements, including expanding the investor base. In a FRBNY report titled “Credit-Risk Transfer and De Facto GSE Reform,” the authors credit the CRT initiative for improving the stability of the housing-finance system and advancing a number of objectives critical to GSE reform. CRTs have reduced the GSEs’ exposure to mortgage credit risk without disrupting the stability of the secondary mortgage market, they said, adding that they have also created a growing new financial market for pricing and trading risk. Read More

Federal Home Loan Bank Earnings Up 1.4 Percent in 4th Quarter

The Federal Home Loan Bank System’s net income was up 1.4 percent in the fourth quarter and was off 0.6 percent for the full year. Earnings dropped some in the last three months of the year to $866 million, from $854 million in the third quarter, rounding out the year with a net income total of $3.376 billion. The FHLBank Office of Finance noted that the quarterly decrease was primarily due to lower gains on derivatives and hedging activities. Meanwhile, lower gains on litigation settlements contributed to the yearly decrease. Total assets for the FHLBanks were nearly steady going to $1.10 trillion from $1.09 trillion, and total liabilities were $1.03 billion, both representing greater than 4 percent year-over-year increases for 2017. Read More

Hensarling, Watt Disagree on Housing Trust Fund Payments

Rep. Jeb Hensarling, R-TX, wrote Federal Housing Finance Agency Director Mel Watt demanding he explain why Fannie Mae and Freddie Mac will continue to make contributions to affordable housing funds while needing a draw from the Treasury to stay afloat. He called Watt’s refusal to automatically stop GSE payments to the funds “unjustifiable.” In the letter, the House Financial Services Committee chairman reminded Watt of his earlier statement saying he won’t make payments to the Housing Trust Fund and Capital Magnet Fund if a draw from Treasury is needed. In the wake of the Tax Cuts and Jobs Act of 2017, the GSEs had to reduce their deferred tax assets by... Read More

UI Report Says Current Cross-Subsidy Plan Could Work Better

The cross-subsidization baked into current GSE guarantee-fee pricing could be made to work better, according to Urban Institute researchers. Current GSE pricing under guidelines from the Federal Housing Finance Agency are not fully adjusted to risk: low-risk borrowers pay a little more than they should and higher-risk borrowers pay a little less. Urban Institute researchers Jim Parrott and Laurie Goodman in a new paper say there are shortcomings in the existing cross-subsidy system that result in support going to borrowers who may not need it. “First, it does not effectively target those who need the help,” they said, adding that close to one of four beneficiaries of the subsidy are not in the low- to moderate-income category. Read More

FHFA-OIG Says MIs More Stable, Warrants Continued Monitoring

With three mortgage insurers providing about two-thirds of the mortgage insurance coverage to Fannie Mae and Freddie Mac, the Federal Housing Finance Agency Office of Inspector General warned of potential risk down the road. Meanwhile, mortgage insurers seek to confirm their place in housing-finance reform discussions. Although mortgage insurers are more stable today, emerging trends point to a number of potential risks to the GSEs that warrant monitoring. One of the OIG’s concerns is that relying on a small number of counterparties increases the GSEs’ exposure to any individual counterparty. The report noted that although six PMIs are approved to provide coverage for the GSEs as of the end of September 2017, three insurers provided the bulk of their coverage. Read More

Concerns on Draft Plan Continue to Grow from Some Groups

Concerns have begun to mount for the Senate housing-finance reform draft proposal being developed by Sen. Bob Corker, R-TN, as the Center for Responsible Lending and National Urban League warned the plan would cost more and deliver less. The groups published a new research paper on March 1 outlining how the proposed legislation would be a blow to affordable housing by replacing current public interest mandates with “weak incentives.”“A doubtful structure of guarantors awarded unenforceable duties is simply not in our nation’s best interest. Nor is supporting systemic changes that omit community banks, credit unions, and other small lenders,” said Mike Calhoun, CRL’s president. Read More

Survey: Eliminating AH Goals Will Impact Underserved Borrowers

Economists and real estate executives warn that getting rid of the GSEs’ affordable housing goals, as suggested in some housing-finance reform proposals, will most likely lead to fewer options for underserved borrowers. Currently, Fannie Mae and Freddie Mac have affordable housing goals that work in tandem to their duty-to-serve underserved markets mandates. But a draft reform proposal by Sen. Bob Corker, R-TN, would replace the affordable housing goals with a new fee-based incentive system.“A potential reduction in federal backing for home loans issued to underserved borrowers as a result of ongoing GSE reform efforts is likely to decrease lending in these communities,” said... Read More

GSE Roundup

CRT Market Better Able to Warn of Downturn. The credit-risk transfer market created in recent years by Fannie Mae and Freddie Mac is better poised to warn of systemic risk than the MBS market was prior to the financial crisis, according to new research by Susan Wachter of the University of Pennsylvania’s Wharton School. The Wharton professor noted that the future structure of the housing-finance market, in particular the number of issuers of government-backed MBS, may change how the CRT market functions.A multiple-guarantor model, with each offering its own CRT deals, may be less liquid than the current market with just two issuers, Wachter suggested. Fannie Hires New Communications VP. Fannie Mae has hired Duncan Burns as vice president of... Read More

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