The Financial Stability Oversight Council Annual Report to Congress
jtimothyhoward
JANUARY 31, 2018 AT 11:01 AM
It’s clear to me that Mnuchin meant to say he didn’t want to leave Fannie and Freddie around for another 10 years in conservatorship (had he meant “leave them around at all” he wouldn’t have added the 10 year period).
In this appearance before the Senate Banking Committee Mnuchin spoke in very general terms about possible alternatives for reform–both legislative and administrative–and didn’t explicitly rule anything out, including getting rid of Fannie and Freddie. But in an interview at a Wall Street Journal CEO Council session last November, he did. An interviewer said to him, “A lot of very conservative economists have been arguing a long time [that Fannie and Freddie] are fundamentally market-distorting institutions and that they should just be done away with. Would you go that far?” Mnuchin responded, “No, I wouldn’t,”
On the issue of an explicit government guaranty Mnuchin was noncommittal, saying, “We don’t have to do that,” but he went on to say, “If we DO [put the taxpayer at risk with a government guaranty], that the taxpayer be compensated and that there won’t be any implicit guaranty that they’re not compensated for.” I read that as Mnuchin saying that if there is some form of federal “embrace” of the new versions of Fannie and Freddie, short of an explicit guaranty–that allows the range of domestic and international investors to hold the companies’ MBS as eligible investments–this arrangement would need to be paid for.
Well, I’ve finally been able to plow my way through all 82 pages of this document. I can’t tell if it’s the current version of the draft Senate bill or not. The heading says “staff discussion draft 29,” and after finishing it my reaction was, “If this is the twenty-ninth draft of the Senate bill, what on earth did the first 28 look like?”
What we’ve all been saying about the task of trying to replace a $5 trillion secondary market system based on Fannie and Freddie that has proven to work efficiently and effectively (invented criticisms to the contrary notwithstanding) is that advocates for doing so have the challenge of addressing, and answering, some very difficult and complex questions: about capital (both capital standards and raising new capital at a time when the government is expropriating the capital of the two credit guarantors that exist), about affordable housing, about the nature and operational details of any new potential credit guarantors, and about the complex legal and market problems associated with the transition from the existing system to the envisioned new one, including the treatment of Fannie and Freddie’s existing preferred and common shareholders who are in the midst of litigation against the government.
The solution seized upon by the authors of staff discussion draft 29 is, “We’ll let FHFA (and in a few cases, Ginnie Mae) figure out how to solve all those problems, AFTER Congress passes our bill.” I lost track of the numbers left blank in the draft–whether for capital, fees paid to Ginnie Mae, fees charged to the credit guarantors for the affordable housing fund, or other things. FHFA will figure out what criteria to use to grant charters to the 5 to 6 new credit guarantors that somehow will spring up (whose guaranteed MBS then will be eligible for government guarantees.) Not surprisingly, credit-risk sharing is mandatory for the new guarantors. There is a vague section in the capital requirements that says, “a credit guarantor shall maintain…eligible credit risk transfer arrangements that together cause credit risk transfer counterparties to bear, to the extent economically sensible, a significant portion of the credit risk on the collateral that guarantees mortgage-backed securities,” with FHFA left to work out how to evaluate those risk-transfer arrangements so that the companies end up with enough real capital to back the risks they’re taking. I could go on and on about the plethora of details FHFA has to get right to make this new system work.
And the transition? FHFA is given five years to get the new credit guarantors set up and fully capitalized (by now it’s no surprise that how it does that is left unsaid), and running sufficiently well that it can certify that “a competitive secondary mortgage market has been achieved.” Once FHFA makes that declaration, Fannie and Freddie will be put into receivership and liquidated. And if for some reason a competitive secondary market CAN’T establish itself within five years, FHFA will “endeavor to exercise the authorities under section 403 and this Act to foster the organization of additional small lender guarantors,” and, failing that, simply go to back to Congress and ask for new legislation to “remediate the impediments” to the competitive market it seeks.
It’s all so simple and easy. Why didn’t I think of that?
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
Mnuchin’s testmony Jan 30 2018
The Financial Stability Oversight Council Annual Report to Congress
jtimothyhoward
JANUARY 31, 2018 AT 11:01 AM
It’s clear to me that Mnuchin meant to say he didn’t want to leave Fannie and Freddie around for another 10 years in conservatorship (had he meant “leave them around at all” he wouldn’t have added the 10 year period).
In this appearance before the Senate Banking Committee Mnuchin spoke in very general terms about possible alternatives for reform–both legislative and administrative–and didn’t explicitly rule anything out, including getting rid of Fannie and Freddie. But in an interview at a Wall Street Journal CEO Council session last November, he did. An interviewer said to him, “A lot of very conservative economists have been arguing a long time [that Fannie and Freddie] are fundamentally market-distorting institutions and that they should just be done away with. Would you go that far?” Mnuchin responded, “No, I wouldn’t,”
On the issue of an explicit government guaranty Mnuchin was noncommittal, saying, “We don’t have to do that,” but he went on to say, “If we DO [put the taxpayer at risk with a government guaranty], that the taxpayer be compensated and that there won’t be any implicit guaranty that they’re not compensated for.” I read that as Mnuchin saying that if there is some form of federal “embrace” of the new versions of Fannie and Freddie, short of an explicit guaranty–that allows the range of domestic and international investors to hold the companies’ MBS as eligible investments–this arrangement would need to be paid for.
Well, I’ve finally been able to plow my way through all 82 pages of this document. I can’t tell if it’s the current version of the draft Senate bill or not. The heading says “staff discussion draft 29,” and after finishing it my reaction was, “If this is the twenty-ninth draft of the Senate bill, what on earth did the first 28 look like?”
What we’ve all been saying about the task of trying to replace a $5 trillion secondary market system based on Fannie and Freddie that has proven to work efficiently and effectively (invented criticisms to the contrary notwithstanding) is that advocates for doing so have the challenge of addressing, and answering, some very difficult and complex questions: about capital (both capital standards and raising new capital at a time when the government is expropriating the capital of the two credit guarantors that exist), about affordable housing, about the nature and operational details of any new potential credit guarantors, and about the complex legal and market problems associated with the transition from the existing system to the envisioned new one, including the treatment of Fannie and Freddie’s existing preferred and common shareholders who are in the midst of litigation against the government.
The solution seized upon by the authors of staff discussion draft 29 is, “We’ll let FHFA (and in a few cases, Ginnie Mae) figure out how to solve all those problems, AFTER Congress passes our bill.” I lost track of the numbers left blank in the draft–whether for capital, fees paid to Ginnie Mae, fees charged to the credit guarantors for the affordable housing fund, or other things. FHFA will figure out what criteria to use to grant charters to the 5 to 6 new credit guarantors that somehow will spring up (whose guaranteed MBS then will be eligible for government guarantees.) Not surprisingly, credit-risk sharing is mandatory for the new guarantors. There is a vague section in the capital requirements that says, “a credit guarantor shall maintain…eligible credit risk transfer arrangements that together cause credit risk transfer counterparties to bear, to the extent economically sensible, a significant portion of the credit risk on the collateral that guarantees mortgage-backed securities,” with FHFA left to work out how to evaluate those risk-transfer arrangements so that the companies end up with enough real capital to back the risks they’re taking. I could go on and on about the plethora of details FHFA has to get right to make this new system work.
And the transition? FHFA is given five years to get the new credit guarantors set up and fully capitalized (by now it’s no surprise that how it does that is left unsaid), and running sufficiently well that it can certify that “a competitive secondary mortgage market has been achieved.” Once FHFA makes that declaration, Fannie and Freddie will be put into receivership and liquidated. And if for some reason a competitive secondary market CAN’T establish itself within five years, FHFA will “endeavor to exercise the authorities under section 403 and this Act to foster the organization of additional small lender guarantors,” and, failing that, simply go to back to Congress and ask for new legislation to “remediate the impediments” to the competitive market it seeks.
It’s all so simple and easy. Why didn’t I think of that?
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.