Here is latest Mel Watt’s proposal on GSE reform – sounds somewhat similar to Moelis’s plan.
Here is the details of the plan (FHFA_Perspectives_on_Housing_Finance_Reform)
Mortgage Guarantors Should Become Utilities, GSE Overseer Says
By
Joe Light
January 17, 2018, 12:13 PM PST Updated on January 17, 2018, 2:07 PM PST
• FHFA Director Mel Watt says MBS guarantees should be explicit
• Watt sends letter to senators in response to request for views
Fannie Mae and Freddie Mac’s regulator is throwing its voice into the debate about what to do with the two companies at the center of the U.S. mortgage system.
In a proposal obtained by Bloomberg News, Federal Housing Finance Agency Director Mel Watt wrote that he and agency staff believe the mortgage market should be supported by shareholder-owned utilities with regulated rates of return and an explicit government guarantee of mortgage bonds.
Watt sent the document, titled “Federal Housing Finance Agency Perspectives on Housing Finance Reform” along with a letter dated Tuesday to Senate Banking Chairman Michael Crapo, an Idaho Republican, and Senator Sherrod Brown of Ohio, the panel’s top Democrat.
By sharing the perspectives now, “we seek to provide our views independently and transparently to those who have requested them while continuing to provide technical assistance to the committee and its members on other proposals that may be introduced,” Watt wrote.
Lawmakers’ Responsibility
He added that he still had a “strongly held view that it is the prerogative and responsibility of Congress, not FHFA, to decide on housing finance reform.”
Spokeswomen for the FHFA and Crapo declined to comment, while a spokeswoman for Brown didn’t respond to an emailed request for comment.
The proposal from Watt and the FHFA adds yet another wrinkle to the nine-year struggle by Congress and other policy makers to overhaul the U.S. housing-finance system. The government took over Fannie and Freddie in 2008, eventually injecting them with nearly $188 billion in bailout money. Since then, several lawmakers have introduced legislation that would reform or overhaul the companies, which back nearly half of the mortgage market. No proposal has gained traction.
Fannie and Freddie don’t make mortgages themselves, but buy them from lenders, wrap them into securities and make guarantees to investors in case the loans default.
Changes to their operations, or whatever replaces them, would have wide implications for the housing market, mortgage borrowers, taxpayers and one of the largest bond markets in the world.
New Push
This year, lawmakers are expected to make another push for housing-finance legislation. One Senate proposal, being worked on by Banking Committee members Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, would preserve Fannie and Freddie’s operations but attempt to introduce more competition into the market.
The FHFA’s suggestions appear to differ from the senators’ plan in key ways. Watt and the regulator said future “secondary market entities” should be utilities with regulated rates of return. Such a feature wasn’t included in recent drafts of the Corker-Warner proposal, according to people familiar with the matter. The FHFA’s document also warned against having too many mortgage guarantors, arguing that an abundance of companies “could increase the potential for a race to the bottom” in loan standards.
Similar to the senators’ and other lawmakers’ views, however, the FHFA said mortgage-backed securities issued by the guarantors should have an explicit, paid-for guarantee by the U.S. government. The companies themselves should be allowed to fail, the proposal said.
Despite the differences with the potential Senate plan, the FHFA’s recommendations could build support for housing-finance legislation, Cowen analyst Jaret Seiberg wrote in a Wednesday note to clients.
“We see this document as helpful to efforts in the Senate to enact housing finance reform by giving FHFA’s seal of approval to the basic framework that banking committee leaders have been working on,” Seiberg wrote.
Transfer Risk
The FHFA document said future mortgage guarantors should be required to transfer credit risk to the private market when it’s economically feasible and that the companies should have enough capital to withstand a housing crash akin to the one that devastated the financial markets a decade ago. Rather than having a specific amount of capital dictated in legislation, the FHFA said it should be up to the companies’ regulator to set and adjust the needed level.
FHFA officials wrote that the future mortgage guarantors should be required to operate nationwide, have affordable-housing mandates, and provide equal access to the mortgage-finance system for large and small lenders.
Translate by Glenn Bradford,
1) GSE RECAP: Volume Sank Lower; Freddie Passed; Fannie Is Thursday
2) Fannie, Freddie’s Vanishing Portfolios Are Quelling Volatility
3) BI Company Research Primer: Fannie Mae
567) Mortgage Guarantors Should Become Utilities, GSE Overseer Says
4) *U.S. SHOULD PROVIDE EXPLICIT GUARANTEE OF MORTGAGE BONDS: FHFA
5) *COMPANIES SHOULD BE CHARTERED BY REGULATOR, FHFA SAYS
6) *MORTGAGE GUARANTORS SHOULD BE PRIVATE, SHAREHOLDER OWNED: FHFA
7) *MORTGAGE GUARANTORS SHOULD BE REGULATED UTILITIES: FHFA
8) *WATT SAYS ANY PLAN SHOULD PRESERVE 30-YEAR FIXED RATE MORTGAGE
9) *FHFA’S MEL WATT COMMENTS IN LETTER TO SENATORS CRAPO AND BROWN
10) *WATT WANTED TO PROVIDE VIEWS `INDEPENDENTLY AND TRANSPARENTLY’
11) *WATT SUBMITS FHFA’S VIEWS ON HOUSING-FINANCE REFORM TO SENATORS
Courtesy of kip on iHub:
Audio recording of Craig Philips statements at the housing luncheon. Skip to around the 12 min mark for relevant info.. This link would not work on mobile for me (had to use desktop browser), but you have may better luck.
Tim Howard’s comments
I’ve finally been able to read the FHFA proposal, and with a few quibbles I think it’s very good–it has a lots of features I like (and have recommended), along with a couple of favorable surprises. And I think it’s quite constructive to have Fannie and Freddie’s regulator on record favoring a sensible path to get the companies out of conservatorship.
My quibbles involve CRTs, the Mortgage Insurance Fund (MIF), and the government guaranty. FHFA says in bold print, “Require Credit Risk Transfer”–which I’ve said repeatedly is a terrible idea–but then they immediately backpedal by saying “when such transactions are economically sensible.” My question to FHFA would be, “economically sensible for whom?” The CRTs Fannie and Freddie have been doing for the last four years are economically sensible (indeed, overly so) for investors but not the companies, and when the market changes to where they would become economically sensible for Fannie and Freddie to issue the investor base almost certainly will back away. As regulator, FHFA will have to be VERY careful with how they handle CRTs to avoid ending up weakening the companies’ ability to handle stress. I’m not wild about either the MIF or a government guaranty of the guarantors’ securities–again for reasons I’ve written about previously–but in the grand scheme of things if these need to be part of the deal to make it go through so be it.
The surprises are FHFA’s proposed government guaranty of credit guarantors’ debt–even I hadn’t gone that far–and also the proposal that Fannie and Freddie (and any other guarantors created) be allowed to use their on-balance sheet portfolios to hold certain affordable housing loans.
Overall, a good proposal, and good to have out there.
Let’s set aside government guarantees on debt for the moment (since I very much doubt those will fly), and just focus on government guarantees on MBS. It’s not clear to me that a government guaranty of Fannie or Freddie MBS will lead to a lower security yield (and thus rate to a mortgage borrower) than could be obtained through some other approach to catastrophic risk. It all will depend on the capital required in each case. One of my main concerns about a government guaranty of MBS is that the alleged “protectors of the taxpayer” will require the credit guarantors whose securities would benefit from a government guarantee to hold unnecessarily high levels of capital to qualify for it. This excessive capital will push mortgage rates up a lot; an explicit government guaranty would then lower them to some degree, but they still would be high. Compare that to a true risk-based capital framework, which sets required capital as the amount necessary to survive a defined environment of economic stress. The latter approach, if endorsed by Treasury as “meeting current government standards of safety and soundness,” should (a) earn AAA/Aaa ratings from the ratings agencies, and (b) facilitate (relatively low-cost) private catastrophic reinsurance on top of that, since the cat reinsurers will know (because of the risk-based standard) both the parameters of the credit risk the companies have and the amount of their capital that has to be burned through before the cat risk coverage is tapped. I believe this second method will result in a notably lower mortgage rate to the homebuyer than a government guaranty layered on top of credit guarantees from overcapitalized private companies.
And one other point. Advocates of government guarantees (including, now, FHFA) keep saying that we will be guaranteeing “only the securities, not the companies that issue them.” That’s balderdash. If you set up the guarantors as regulated utilities, with caps on their returns and regulatory control of their pricing, they all (however many there are, and I don’t think there will be that many) will have very similar performance. If one gets into trouble they all will, and if you guarantee “only the securities and not the companies” you’ll be left with no functioning entity to issue NEW credit guarantees as the crisis is unfolding, and the system will melt down. The government then will step in and say, “Well, whoever could have predicted that,” and guarantee the companies.
About Timeless Investor
My name is Samual Lau. I am a long-term value investor and a zealous disciple of Ben Graham. And I am a MBA graduated in May 2010 from Carnegie Mellon University. My concentrations are Finance, Strategy and Marketing.
TimelessInvestor
Mel Watt’s proposal on GSE reform – from Bloomberg
Here is latest Mel Watt’s proposal on GSE reform – sounds somewhat similar to Moelis’s plan.
Here is the details of the plan (FHFA_Perspectives_on_Housing_Finance_Reform)
Mortgage Guarantors Should Become Utilities, GSE Overseer Says
By
Joe Light
January 17, 2018, 12:13 PM PST Updated on January 17, 2018, 2:07 PM PST
• FHFA Director Mel Watt says MBS guarantees should be explicit
• Watt sends letter to senators in response to request for views
Fannie Mae and Freddie Mac’s regulator is throwing its voice into the debate about what to do with the two companies at the center of the U.S. mortgage system.
In a proposal obtained by Bloomberg News, Federal Housing Finance Agency Director Mel Watt wrote that he and agency staff believe the mortgage market should be supported by shareholder-owned utilities with regulated rates of return and an explicit government guarantee of mortgage bonds.
Watt sent the document, titled “Federal Housing Finance Agency Perspectives on Housing Finance Reform” along with a letter dated Tuesday to Senate Banking Chairman Michael Crapo, an Idaho Republican, and Senator Sherrod Brown of Ohio, the panel’s top Democrat.
By sharing the perspectives now, “we seek to provide our views independently and transparently to those who have requested them while continuing to provide technical assistance to the committee and its members on other proposals that may be introduced,” Watt wrote.
Lawmakers’ Responsibility
He added that he still had a “strongly held view that it is the prerogative and responsibility of Congress, not FHFA, to decide on housing finance reform.”
Spokeswomen for the FHFA and Crapo declined to comment, while a spokeswoman for Brown didn’t respond to an emailed request for comment.
The proposal from Watt and the FHFA adds yet another wrinkle to the nine-year struggle by Congress and other policy makers to overhaul the U.S. housing-finance system. The government took over Fannie and Freddie in 2008, eventually injecting them with nearly $188 billion in bailout money. Since then, several lawmakers have introduced legislation that would reform or overhaul the companies, which back nearly half of the mortgage market. No proposal has gained traction.
Fannie and Freddie don’t make mortgages themselves, but buy them from lenders, wrap them into securities and make guarantees to investors in case the loans default.
Changes to their operations, or whatever replaces them, would have wide implications for the housing market, mortgage borrowers, taxpayers and one of the largest bond markets in the world.
New Push
This year, lawmakers are expected to make another push for housing-finance legislation. One Senate proposal, being worked on by Banking Committee members Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, would preserve Fannie and Freddie’s operations but attempt to introduce more competition into the market.
The FHFA’s suggestions appear to differ from the senators’ plan in key ways. Watt and the regulator said future “secondary market entities” should be utilities with regulated rates of return. Such a feature wasn’t included in recent drafts of the Corker-Warner proposal, according to people familiar with the matter. The FHFA’s document also warned against having too many mortgage guarantors, arguing that an abundance of companies “could increase the potential for a race to the bottom” in loan standards.
Similar to the senators’ and other lawmakers’ views, however, the FHFA said mortgage-backed securities issued by the guarantors should have an explicit, paid-for guarantee by the U.S. government. The companies themselves should be allowed to fail, the proposal said.
Despite the differences with the potential Senate plan, the FHFA’s recommendations could build support for housing-finance legislation, Cowen analyst Jaret Seiberg wrote in a Wednesday note to clients.
“We see this document as helpful to efforts in the Senate to enact housing finance reform by giving FHFA’s seal of approval to the basic framework that banking committee leaders have been working on,” Seiberg wrote.
Transfer Risk
The FHFA document said future mortgage guarantors should be required to transfer credit risk to the private market when it’s economically feasible and that the companies should have enough capital to withstand a housing crash akin to the one that devastated the financial markets a decade ago. Rather than having a specific amount of capital dictated in legislation, the FHFA said it should be up to the companies’ regulator to set and adjust the needed level.
FHFA officials wrote that the future mortgage guarantors should be required to operate nationwide, have affordable-housing mandates, and provide equal access to the mortgage-finance system for large and small lenders.
Translate by Glenn Bradford,
1) GSE RECAP: Volume Sank Lower; Freddie Passed; Fannie Is Thursday
2) Fannie, Freddie’s Vanishing Portfolios Are Quelling Volatility
3) BI Company Research Primer: Fannie Mae
567) Mortgage Guarantors Should Become Utilities, GSE Overseer Says
4) *U.S. SHOULD PROVIDE EXPLICIT GUARANTEE OF MORTGAGE BONDS: FHFA
5) *COMPANIES SHOULD BE CHARTERED BY REGULATOR, FHFA SAYS
6) *MORTGAGE GUARANTORS SHOULD BE PRIVATE, SHAREHOLDER OWNED: FHFA
7) *MORTGAGE GUARANTORS SHOULD BE REGULATED UTILITIES: FHFA
8) *WATT SAYS ANY PLAN SHOULD PRESERVE 30-YEAR FIXED RATE MORTGAGE
9) *FHFA’S MEL WATT COMMENTS IN LETTER TO SENATORS CRAPO AND BROWN
10) *WATT WANTED TO PROVIDE VIEWS `INDEPENDENTLY AND TRANSPARENTLY’
11) *WATT SUBMITS FHFA’S VIEWS ON HOUSING-FINANCE REFORM TO SENATORS
Courtesy of kip on iHub:
I’ve finally been able to read the FHFA proposal, and with a few quibbles I think it’s very good–it has a lots of features I like (and have recommended), along with a couple of favorable surprises. And I think it’s quite constructive to have Fannie and Freddie’s regulator on record favoring a sensible path to get the companies out of conservatorship.
My quibbles involve CRTs, the Mortgage Insurance Fund (MIF), and the government guaranty. FHFA says in bold print, “Require Credit Risk Transfer”–which I’ve said repeatedly is a terrible idea–but then they immediately backpedal by saying “when such transactions are economically sensible.” My question to FHFA would be, “economically sensible for whom?” The CRTs Fannie and Freddie have been doing for the last four years are economically sensible (indeed, overly so) for investors but not the companies, and when the market changes to where they would become economically sensible for Fannie and Freddie to issue the investor base almost certainly will back away. As regulator, FHFA will have to be VERY careful with how they handle CRTs to avoid ending up weakening the companies’ ability to handle stress. I’m not wild about either the MIF or a government guaranty of the guarantors’ securities–again for reasons I’ve written about previously–but in the grand scheme of things if these need to be part of the deal to make it go through so be it.
The surprises are FHFA’s proposed government guaranty of credit guarantors’ debt–even I hadn’t gone that far–and also the proposal that Fannie and Freddie (and any other guarantors created) be allowed to use their on-balance sheet portfolios to hold certain affordable housing loans.
Overall, a good proposal, and good to have out there.
Let’s set aside government guarantees on debt for the moment (since I very much doubt those will fly), and just focus on government guarantees on MBS. It’s not clear to me that a government guaranty of Fannie or Freddie MBS will lead to a lower security yield (and thus rate to a mortgage borrower) than could be obtained through some other approach to catastrophic risk. It all will depend on the capital required in each case. One of my main concerns about a government guaranty of MBS is that the alleged “protectors of the taxpayer” will require the credit guarantors whose securities would benefit from a government guarantee to hold unnecessarily high levels of capital to qualify for it. This excessive capital will push mortgage rates up a lot; an explicit government guaranty would then lower them to some degree, but they still would be high. Compare that to a true risk-based capital framework, which sets required capital as the amount necessary to survive a defined environment of economic stress. The latter approach, if endorsed by Treasury as “meeting current government standards of safety and soundness,” should (a) earn AAA/Aaa ratings from the ratings agencies, and (b) facilitate (relatively low-cost) private catastrophic reinsurance on top of that, since the cat reinsurers will know (because of the risk-based standard) both the parameters of the credit risk the companies have and the amount of their capital that has to be burned through before the cat risk coverage is tapped. I believe this second method will result in a notably lower mortgage rate to the homebuyer than a government guaranty layered on top of credit guarantees from overcapitalized private companies.
And one other point. Advocates of government guarantees (including, now, FHFA) keep saying that we will be guaranteeing “only the securities, not the companies that issue them.” That’s balderdash. If you set up the guarantors as regulated utilities, with caps on their returns and regulatory control of their pricing, they all (however many there are, and I don’t think there will be that many) will have very similar performance. If one gets into trouble they all will, and if you guarantee “only the securities and not the companies” you’ll be left with no functioning entity to issue NEW credit guarantees as the crisis is unfolding, and the system will melt down. The government then will step in and say, “Well, whoever could have predicted that,” and guarantee the companies.
About Timeless Investor
My name is Samual Lau. I am a long-term value investor and a zealous disciple of Ben Graham. And I am a MBA graduated in May 2010 from Carnegie Mellon University. My concentrations are Finance, Strategy and Marketing.