On Monday, Treasury Secretary Mnuchin sounded the death knell for GSE reform in this Congress and didn’t seem all that sorry to do so. Why not? With Mel Watt’s term as FHFA director coming to a close, Treasury will have ample opportunity to redefine Fannie and Freddie without the bother of working with Congress. And, even if Treasury were otherwise disposed not to use its power, the ability of a Treasury-redesigned mortgage market to pick winners and losers for years to come is not only understood, but also sought. Facing the 2020 election, who could resist making so much of a difference in so important a sector, especially given that failing to act quickly could lead to near-term crisis on President Trump’s watch.
What near-term crisis? As an in-depth FedFin Report earlier this week laid out, the GSEs’ 2018 stress test will be a killer. It is based on the Fed’s 2018 CCAR round which, as we noted, is particularly punitive to residential and multi-family real-estate obligations. More credit-risk transfers might cushion some of these blows, but entities with the infinitesimal capital buffers allowed the GSEs that are also coming under current expected credit loss (CECL) accounting have zero margin for error. A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse.
Assume, though, that there’s no draw and nothing even worse. Treasury surely will act rather than allow mortgage finance to be defined by default for yet another decade.
The scope of its authority under current law was detailed in a recent report and American Bankerstory on it. Using its power soon advances Treasury’s policy objectives for a more privatized mortgage market, a political win for the White House, and a new secondary market that favors those closest to the Administration’s ears.
And, even if none of this stirs Treasury – and Mr. Mnuchin’s comments show that all of it has – there’s a third reason Treasury will need to act in 2019: the impact of an array of pending rules on the largest U.S. banks. We have issued in-depth reports on the new stress-capital buffers, theeSLR, and CECL along with another report summarizing the cumulative impact of all of these rules on the secondary mortgage market. In short, all of these rules will push the largest banks to portfolio only the shortest-term mortgages with the greatest underlying collateral and hold loans or RMBS with significant amounts of eligible third-party credit enhancement. The U.S. government is of course the most eligible credit enhancer of all.
Each big bank will balance all of these rules in concert with broader market realities to define what’s left of their portfolio-mortgage strategies. Slicing underlying mortgage books into credit-risk tranches with varying terms, layers of credit enhancement, and LTV ratios creates considerable scope for putting private capital – including that of the very biggest banks – ahead of the companies that will come to succeed Fannie and Freddie. Why would big banks play in credit risk transfers given that they are now sitting them out? The rebalanced framework of risk-based and leverage rules combines with CECL to create a new playing field, with each bank then carefully defining its position in it based on an array of complex factors.
Is this enough to make a TBA market for thirty-year fixed-rate mortgages? I doubt it. As a result, the sum total impact of these changes is to make a secondary market with at least a USG backstop, if not direct guarantee, a critical element to any Administration that wants to keep thirty-year fixed-rate mortgages flowing – and Treasury clearly does.
The odds of crafting a safe course to a TBA market through all these regulatory rapids are considerably higher via administrative fiat than yet another legislative round. For proof, see not only Congress’s general inability to do more than delegate questions this complex. Still not convinced? Then, remember the fifteen years that have passed since Sen. Shelby first tried to redefine the GSEs followed by subsequent efforts by Sens. Corker and Warner, among others, to redefine Fannie and Freddie by law.
Mr. Mnuchin clearly knows this – indeed, that’s what he’s saying quite directly. What he’s not saying so far is what Treasury wants other than ending the conservatorships ASAP, reviving the role of private capital, and retaining thirty-year, “middle-class” mortgages. Easier said than done. Fortunately, Treasury is skilled not only in knowing its political needs and policy wants, but also how the new regulatory framework redefines what big banks can do to play the part Treasury seeks in a far more privatized mortgage market. Who else wins? What do new mortgages look like? At how much taxpayer risk? Does FHA just take over from the GSEs for much of the market? Keep those cards and letters coming in to Treasury.
TimelessInvestor
Mnuchin again delays the GSEs reform to 2019 and here is the speculation on why he wants to do so
Mnuchin again delays the GSEs reform to 2019 and here is reasonable speculation on why he wants to do so. – this sounds to me a quite complex fix. Does he really want to do so? What will happen with the investors? big unknown.
Mnuchin wants GSE reform in 2019. There’s a problem with that – from American Banker
Treasury Secretary Steven Mnuchin confirmed Monday what we already knew: Reform of the government-sponsored enterprises isn’t happening this year.
Still, Mnuchin remained bullish about prospects for picking up the debate in 2019.
“We’ll come back to this next year and this will be a big focus of mine post the elections,” he told Fox Business in an interview. “I’m determined that we have a fix to the GSEs and don’t leave them in conservatorship for the rest of time.”
This may prove to be wishful thinking.
“What gets done here will need to be done on a bipartisan basis,” said Treasury Secretary Steven Mnuchin. But that’s easier said than done.Bloomberg News
It’s true that the Trump administration has the opportunity to nominate a new director to the Federal Housing Finance Agency to replace Mel Watt, whose term expires in January. And a new FHFA chief could impose a number of changes on Fannie Mae and Freddie Mac — not the least of which might involve cutting off affordable housing contributions or even more structural changes to the entities.
But doing so will still take time, not to mention the ability to confirm a nominee. Under the Housing and Economic Recovery Act, Watt can remain in his position until a successor is appointed. Given the slow pace in assembling a financial regulatory team up to this point — with vacancies still pending at the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. — there’s no indication that this will be an immediate priority for the White House or Congress.
More crucially, the Trump administration appears, at least for now, to be pushing for a legislative overhaul of the GSEs.
“What gets done here will need to be done on a bipartisan basis,” Mnuchin said on Monday. Earlier this year, he underscored that he has a “strong preference” to work with Congress to address the housing finance system rather than pursuing administrative changes.
Supporters of this approach have argued that it offers the cleanest, most viable way to transform the system and ensure a stable transition.
The problem is that Congress hasn’t been able to advance a plan to overhaul the GSEs for nearly a decade. The threat of FHFA action could very well put discussions back on the table, but that doesn’t mitigate the fact that lawmakers have yet to reach even a broad consensus about what a future system might look actually like.
ArticleUnderwriting self-employed borrowers
fort occurred in 2014, and though it made it out of the Senate Banking Committee, it lacked support to make it to the full Senate. Lawmakers have been trying again since last year, but it’s notable that they haven’t even made it as far as the previous effort. Negotiations between Banking Committee Chairman Mike Crapo and key Democrats have yet to yield the formal introduction of a bill after a draft was leaked earlier this year.
Even without the possibility of a wave election — Democrats have decent odds at reclaiming the House and at least a slim shot at winning a Senate majority — there’s no reason to believe this political stalemate is going to get worked out anytime soon.
Reasonable speculation on why he wants to do so
Karen Petrou on Why Treasury Will Recraft Housing Finance – from Federal Finance Analytics
Karen Petrou on Why Treasury Will Recraft Housing Finance
On Monday, Treasury Secretary Mnuchin sounded the death knell for GSE reform in this Congress and didn’t seem all that sorry to do so. Why not? With Mel Watt’s term as FHFA director coming to a close, Treasury will have ample opportunity to redefine Fannie and Freddie without the bother of working with Congress. And, even if Treasury were otherwise disposed not to use its power, the ability of a Treasury-redesigned mortgage market to pick winners and losers for years to come is not only understood, but also sought. Facing the 2020 election, who could resist making so much of a difference in so important a sector, especially given that failing to act quickly could lead to near-term crisis on President Trump’s watch.
What near-term crisis? As an in-depth FedFin Report earlier this week laid out, the GSEs’ 2018 stress test will be a killer. It is based on the Fed’s 2018 CCAR round which, as we noted, is particularly punitive to residential and multi-family real-estate obligations. More credit-risk transfers might cushion some of these blows, but entities with the infinitesimal capital buffers allowed the GSEs that are also coming under current expected credit loss (CECL) accounting have zero margin for error. A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse.
Assume, though, that there’s no draw and nothing even worse. Treasury surely will act rather than allow mortgage finance to be defined by default for yet another decade.
The scope of its authority under current law was detailed in a recent report and American Bankerstory on it. Using its power soon advances Treasury’s policy objectives for a more privatized mortgage market, a political win for the White House, and a new secondary market that favors those closest to the Administration’s ears.
And, even if none of this stirs Treasury – and Mr. Mnuchin’s comments show that all of it has – there’s a third reason Treasury will need to act in 2019: the impact of an array of pending rules on the largest U.S. banks. We have issued in-depth reports on the new stress-capital buffers, theeSLR, and CECL along with another report summarizing the cumulative impact of all of these rules on the secondary mortgage market. In short, all of these rules will push the largest banks to portfolio only the shortest-term mortgages with the greatest underlying collateral and hold loans or RMBS with significant amounts of eligible third-party credit enhancement. The U.S. government is of course the most eligible credit enhancer of all.
Each big bank will balance all of these rules in concert with broader market realities to define what’s left of their portfolio-mortgage strategies. Slicing underlying mortgage books into credit-risk tranches with varying terms, layers of credit enhancement, and LTV ratios creates considerable scope for putting private capital – including that of the very biggest banks – ahead of the companies that will come to succeed Fannie and Freddie. Why would big banks play in credit risk transfers given that they are now sitting them out? The rebalanced framework of risk-based and leverage rules combines with CECL to create a new playing field, with each bank then carefully defining its position in it based on an array of complex factors.
Is this enough to make a TBA market for thirty-year fixed-rate mortgages? I doubt it. As a result, the sum total impact of these changes is to make a secondary market with at least a USG backstop, if not direct guarantee, a critical element to any Administration that wants to keep thirty-year fixed-rate mortgages flowing – and Treasury clearly does.
The odds of crafting a safe course to a TBA market through all these regulatory rapids are considerably higher via administrative fiat than yet another legislative round. For proof, see not only Congress’s general inability to do more than delegate questions this complex. Still not convinced? Then, remember the fifteen years that have passed since Sen. Shelby first tried to redefine the GSEs followed by subsequent efforts by Sens. Corker and Warner, among others, to redefine Fannie and Freddie by law.
Mr. Mnuchin clearly knows this – indeed, that’s what he’s saying quite directly. What he’s not saying so far is what Treasury wants other than ending the conservatorships ASAP, reviving the role of private capital, and retaining thirty-year, “middle-class” mortgages. Easier said than done. Fortunately, Treasury is skilled not only in knowing its political needs and policy wants, but also how the new regulatory framework redefines what big banks can do to play the part Treasury seeks in a far more privatized mortgage market. Who else wins? What do new mortgages look like? At how much taxpayer risk? Does FHA just take over from the GSEs for much of the market? Keep those cards and letters coming in to Treasury.
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.