Mortgage Bankers Plan is Too Complex, Too Reliant on Congress
- April 24, 2017
Last week, the nation’s mortgage bankers unveiled a plan that is solely dependent on Congressional action despite the fact that there is no Congressional action in sight. The MBA plan introduces unnecessary complexity (without any supporting financial analysis) in its recommendations for a “transition phase” that would keep Fannie and Freddie as guarantors, while transitioning their legacy operations and paving the way for new competitors, and completely ignores existing shareholder litigation and the rights of shareholders in general.
However, in a notable reversal from prior positions the organization has taken, the MBA now recognizes that completely doing away with Fannie Mae and Freddie Mac is impractical and that capital retention at both companies is necessary to protect taxpayers.
We’re encouraged to see that MBA has changed its position on both of these issues and we also note that in their paper, MBA acknowledges the role of the Federal Housing Finance Agency FHFA), as anticipated under the Housing and Economic Recovery Act (HERA), in stabilizing the companies during the conservatorship. One notable excerpt: “Indeed, the GSEs today, operating in conservatorship and subject to strict regulation, (we would add, already mandated by HERA) are in a state that is already closer to our recommended utility-model end state, relative to the pre-crisis GSE system that required dramatic federal intervention in 2008.”
Positively, the MBA proposal also affirms certain principles that have guided public policy in housing for generations: The right mix of public and private activity helps qualified buyers access the dream of homeownership through products such as the 30-year fixed mortgage and enabling people at all income levels to attain decent housing is a societal goal that should undergird public policy. This was the historic mission of Fannie Mae and Freddie Mac and the FHFA, as the conservator of these companies, has played a crucial role as regulator in refocusing the companies on this mission over the past eight years.
While the MBA recognizes FHFA’s role in managing the conservatorship, at the same time, the MBA refuses to recognize FHFA’s powers under HERA, or objectives that HERA (and also Dodd-Frank) has already addressed, i.e. mandating capital, extinguishing investment portfolios, establishing strict regulations such as the Qualified Mortgage rule. This omission exposes a primary weakness of the proposal – its dependence on Congressional action when such action is unlikely to occur anytime soon.
Clearly, catalyzing Congressional action was part of the strategy in unveiling the proposal at this time. In the opening of the proposal, a bold headline proclaims, “The Essential Role of Congress: Why Congress Needs to Act.” MBA President David Stevens was also quoted about Congress’ role in Politico, “We’re getting to the decision makers before they’ve come to firm opinions on anything. We think it can be a good advisory document to finally move this conservatorship off the stalemate.”
The MBA’s proposal for a “transition” period includes a complex set of recommendations that seemed aimed at accomplishing two objectives: 1) Creating a mechanism to manage legacy assets of Fannie and Freddie as they transition to new guarantors; 2) Creating a process for the entrance of additional guarantors as competitors to Fannie and Freddie.
Under the MBA proposal, the existing GSE framework would be essentially reconstituted as multiple guarantor companies based on a for-profit, shareholder-owned public utility model. Like Fannie and Freddie, these new entities would bundle and sell residential mortgage securities to pension funds, banks and other investors. To facilitate the entrance of new competitors, the existing Common Securitization Platform (CSP) which, despite being non-operational after more than $450 million of taxpayer investment, would be transferred to a newly created government-owned corporation that would issue single security mortgage backed securities (MBS) and make decades of GSE market data available to any guarantor market entrant (presumably without compensating Fannie and Freddie).
In addition to requiring Congressional action to implement these recommendations, MBA ignores a far more straight-forward solution for recapitalizing Fannie and Freddie that FHFA as conservator already has the powers under HERA to implement. In fact, the “AIG approach” cited by MBA in its paper could be implemented right now by FHFA Director Mel Watt. He can simply exercise FHFA’s existing statutory powers to end the Net Worth Sweep, declare the Government’s preferred stock paid off (Fannie and Freddie have paid more than $70 billion in excess of the $187 billion they were advanced in 2008), and selling the Treasury’s common stock into the marketplace. None of this would require Congressional action, and most importantly, stopping the sweep and allowing the companies to rebuild their capital base would bring the conservatorship into compliance with existing law (HERA).
A recent report from Moody’s surveys a range of options for GSE reform, including the utility model. The report tries to anticipate what a post-Fannie and Freddie marketplace would look like and notes the range of significant and possibly unintended consequences of various options. Moody’s recognizes that legislation would be needed for bringing about comprehensive reform but concludes such legislation is unlikely by Congress in the foreseeable future. Moody’s is right on this point. For now, the Trump Administration should use the statutory authority it already has and end the Net Worth Sweep. While Congress holds hearings on and debates proposals such as the MBA’s, Fannie and Freddie could begin rebuilding their capital. This would protect taxpayers from a bailout of Fannie and Freddie and restore the rights of shareholders as well.