It seems to me that even MBA’s CEO David Stevens wants to defend his proposal on killing GSE, he is really not sure how to act without wracking the housing market. And let us also see Tim Howard’s great arguments.
David Stevens’ arguments
- Open Mind on GSE Reform (Open Mind on GSE Reform)- There is much more to the draft text that was leaked but it is important to make clear that the model actually works towards a level playing field for all lenders and not just those who might be able access the capital markets in a more sophisticated manner to their own benefit.
- GSE reform bill could be Congress’ last chance (GSE reform bill is last chance)- I think you know that I am retiring at the end of the year. If we do get a more conservative posture at the regulator and things start scaling back, I will definitely be saying a lot of “I told you so” to people, that we should have done it when we could. In the meantime, the real challenge right now is getting enough supporters on the Senate banking committee to say, “You know what, we really need to do this.” That is the effort that is taking place right now.
Tim Howard’s arguments
No, I’m not aware of any discussions as to what has to happen for Corker-Warner 2.0 to be declared “officially dead.” But I strongly suspect that having draft 29 become public–allowing everyone to see how far from anything remotely ready to be acted upon the C-W effort currently is–coupled with what everyone knows are the great difficulties for this Congress in getting anything passed at all (let alone something as controversial as a “why-not-give-it-a-try” total remake of a $10 trillion financial market at the heart of the U.S. economy), the air should start coming out of the legislative mortgage reform balloon pretty quickly. But it’s still going to be up to Mnuchin to decide when to initiate administrative reform discussions, and I have no basis for predicting that.
On the issue of Watt’s successor next year, I know that some people are saying that a change in the director of FHFA could make a difference in the reform outcome, but I think that’s overstated, particularly as it relates to the TBTF banks. What they want requires legislation, and if they can’t get legislation (as I believe they won’t), that greatly limits the scope of their influence. And I also don’t believe the new FHFA director will drive administrative reform, no matter what his or her views are on Fannie and Freddie. Mnuchin has very clearly staked out mortgage reform as his territory, and Treasury (not FHFA) also is the entity that stands to gain financially from converting the Fannie and Freddie warrants to common stock, then selling it.
I hadn’t heard that Hensarling and Corker were telling Democrats that administrative reform “means risking affordable housing mandates,” but if that’s what the two are saying they’re using the term “affordable housing” in a specific and limited sense.
When I was at Fannie, we used “affordable housing” to refer to the loans we purchased or guaranteed that had been made to people with low- and moderate incomes who fell into one of several categories of “underserved borrower.” By the end of my tenure at Fannie, in 2004, over half of the total business we did satisfied affordable housing goals set for us by our program regulator, HUD.
But that’s not the type of affordable housing Hensarling and Corker (and the big banks) are referring to. Both Corker-Warner bills (1.0 and 2.0) as well as Hensarling’s PATH Act include a provision requiring credit guarantors to contribute an amount equal to a certain percentage of their outstanding credit guarantees–typically between 5 and 10 basis points–to an “affordable housing fund,’ whose proceeds would be used to subsidize certain types of affordable housing programs. Guarantors, of course, would have to add this affordable housing fee to the guaranty fees they charge, so other homebuyers would end up bearing it. (Banks are big fans of this approach to affordable housing, because they don’t have to pay it; the fee only gets charged when a loan is sold into the secondary market, making it in effect a tax on secondary market financing, from which primary market originators are exempt.) Fannie and Freddie currently have a similar fee–created by the 2008 Housing and Economic Recovery Act–but it’s set at a fixed 4.2 basis points. Corker and Hensarling are telling Democrats, apparently, that if they want more than 4.2 basis points per year going into an affordable housing fund they’ll have to pass legislation to get it.
That’s true. But Corker and Hensarling are silent about the OTHER, much larger, aspect of affordable housing–the cost and availability of mortgages made to people with low and moderate incomes. The key to these is capital, and Corker and Hensarling both would require credit guarantors to hold large fixed, “bank-like,” amounts of capital, which would unnecessarily push up guaranty fees for millions of affordable housing borrowers. When you take into account both definitions of affordable housing, homebuyers would be much better off passing on legislative reform and pushing for administrative reform that includes a true risk-based capital standard, which would keep guaranty fees as low as possible while still providing a very high level of taxpayer protection.
The Stevens piece you linked gives his arguments for why he thinks the goals draft 29 is trying to achieve are good ones. I don’t agree with much of what he says, but that’s really not the point. We’ve heard these arguments before, and here as in prior pieces Stevens says nothing about how you implement the new ideas in the legislation he’s advocating. “God is in the detail,” and as I noted in this post, draft 29 leaves virtually all of that detail to be figured out by somebody else at some later time. Why? What are they waiting for?
Until somebody lays out their ideas for precisely HOW you get 5 or 6 de novo credit guarantors chartered, capitalized and up running to the point that FHFA can “certify that a competitive market exists” (which is essential to evaluating whether there is any realistic chance of raising capital for these entities), HOW they are to be capitalized (if you don’t know what their required capital is, you can’t possibly claim your new system will be effective at providing affordable housing for borrowers with family incomes at or below their area median), and HOW you navigate the legal minefield of running Fannie and Freddie through receivership before liquidating them, all of this is just lofty talk. The Moelis plan is a real plan, with concrete steps to achieve the recapitalization and release from conservatorship of Fannie and Freddie. In contrast, draft 29 is just an aspiration (or, dare I say it, a “half-as…piration”).