Transcript Larry Parks, SVP Federal Home Loan Bank of San Francisco NALHFA – Housing Finance Reform and the Future of Fannie Mae & Freddie Mac New Orleans.

Larry Parks, SVP
Federal Home Loan Bank
of San Francisco
NALHFA – Housing Finance
Reform and the Future of Fannie
Mae & Freddie Mac
New Orleans April 4th 2013
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Starting Where We Finished in 2011
Change the Narrative
1. GSE’s did not cause the crisis.
2. GSEs are the market currently.
3. Raising guarantee and fees and downpayments to get the
PLMBS market or covered bond market going is not pro
consumer.
Change the Structure
4. Homeownership is critical to wealth accumulation for lower,
moderate and middle income families.
5. Change the structure of Fannie/Freddie into cooperative
ownership and strengthen.
6. Put public interest directors on Fannie/Freddie boards.
7. Allow regulated depository institutions of all sizes to use
FHLBanks, Fannie & Freddie going forward. Basel III
8. Maintain the implied –government guarantee so as to
facilitate low cost mortgage credit and not crowd out
appropriated dollars for direct subsidies for affordable
housing.
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Progress made on changing the
narrative
• The number 1 issue with GSEs was to change the
narrative
• This is beginning to happen because of market
forces, the actions of the GSEs and advocates
championing a role for GSEs in housing finance
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State of Play in GSE Reform
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Influences
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Fannie Mae earned $9.6billion in 3rd quarter of 2012
Freddie Mac earned net income of $11billion for the full
year 2012
Fannie Mae paid $28.5billion to Treasury in dividends on
$116.1billion in preferred shares owned by Treasury
Freddie Mac has paid $21.9billion in dividends to Treasury
on $71.3 billion in preferred stock
Pending question of Fannie Mae’s $61.7 billion reversal of
write-down of deferred tax assets
The substantial sums paid by Fannie and Freddie to
Treasury plus the lack of need for Treasury assistance has
significantly affected the commonplace argument that the
entities are wards of the State
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State of Play in GSE Reform
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Warner Bill
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S.563 the “Jumpstart GSE Reform Act” was introduced on
March 14, 2013 in a bipartisan effort by Sen. Corker (R-TN,
with Senators Warner (D-VA), Vitter (R-LA) and Warren (DMA) as original co-sponsors.
The bill:
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Prohibits government use of increases in guarantee fee to
offset an increase in government spending or a reduction in
government revenues for any purpose other than of
Fannie/Freddie business purposes and
Prohibits Treasury sale or transfer of Fannie and Freddie
senior preferred stock until Congress permits it.
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State of Play in GSE Reform
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FHFA Actions
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On March 4, DeMarco announced as a 2013 goal for Fannie
and Freddie the development of a Common Securitization
Platform (CSP) to issue Fannie and Freddie MBS.
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DeMarco said the objective of CSP is “for the platform to be
able to function like a market utility, as opposed to rebuilding
the proprietary infrastructures” of Fannie and Freddie and
that the “overarching goal is to create something of value that
could either be sold or used by policy makers as a
foundational element of the mortgage market of the future.”
CSP is one of a series of moves DeMarco has taken to push
Fannie and Freddie toward extinction – e.g., increased
guarantee fees and shrinking their retained portfolios.
Senators from both parties concerned that these factors
could lead to the end of Fannie/Freddie without Congress
developing a plan for a new housing finance system.
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State of Play in GSE Reform
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During the consideration of the Senate Budget Plan on
March 22, 2013, Senators Johnson (D-SD) and Crapo (R-ID)
offered an amendment to prevent Fannie/Freddie G-fees
from financing unrelated government spending. The
amendment was passed unanimously.
The Senate Budget Committee’s report on its Budget
Resolution further expressed views on Fannie/ Freddie.
The report endorsed a slow, deliberate approach to
changes for Fannie/Freddie.
It listed as priorities:
 Stability in the still fragile housing market and
 GSE Reform not coming at the expense of economic
growth and upward mobility for hard working families
who need access to mortgage credit.
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State of Play in GSE Reform
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Ranking Member Waters (D-CA) is likely to focus on:
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Access to credit issues for middle and lower economic class
of Americans (looking at how derivatives and complex
financial issues impact average working families)
Mortgage finance (access to affordable mortgages)
Continued government support of homeownership
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The Challenge – The Future Structure of
the GSEs
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During the past few years, Rep. Hensarling has been very vocal about
eliminating Fannie and Freddie. He has not included FHLBs in his
comments.
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Mr. Hensarling’s Congressional website contains the following on
Fannie and Freddie -- “The financial crisis was caused by failed federal
policies that strong-armed, incented, and cajoled financial institutions
into loaning money to people to buy homes that they couldn’t afford to
keep. At the epicenter of this were Fannie Mae and Freddie Mac. The
most disturbing aspect of the Dodd-Frank permanent bailout bill was
the fact that it did nothing to reform Fannie and Freddie. You can’t
address systemic risk while ignoring these two GSEs. I am the only
Member of Congress to have introduced comprehensive reform
legislation for Fannie and Freddie since the start of the credit crisis,
lauded in the media as “a concrete plan for fixing Fannie and
Freddie.”
The Challenge – The Future Structure of
the GSEs
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At a House Financial Services Committee oversight hearing on March
22, 2013 on FHFA, Rep. Hensarling said that there has been little
meaningful progress to bring the Fannie and Freddie
conservatorships to an end and that he is “determined that this
hearing will be the last time that Director DeMarco … will testify before
this Committee before we finally and belatedly mark-up true GSE
reform legislation.”
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Staffers have said that Hensarling will likely reintroduce the bill that
phases Fannie and Freddie out over 3 to 5 years.
The Challenge – The Future of the GSEs
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Bi-Partisan Housing Commission
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Report released February 25, 2013
Proposal favors private sector housing finance system
Limited catastrophic government guarantee on qualified
MBS
The guarantee would be explicit, paid for by premiums
collected.
Congress decides loan sizes for the eligible guarantee. A
range of $250,000 to $275,000 is being recommended.
The proposal received a favorable audience in the Senate
Banking Committee hearing on March 19, 2013.
Major concern is that it explicitly abandons the implied
government guarantee for Fannie and Freddie; thus further
isolating the implied government guarantee for the FHLBs
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Key Outstanding Questions
on Federal Role in Housing Finance
Implied Govt. guarantee
Homeownership as a
goal & policy
for working and middle
income families?
Fannie & Freddie
structure going forward
Coop model?
Public interest director on
the boards?
Lenders for Homeownership
(large banks, community banks,
hedge funds?
Regulatory
impediments
under consideration
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Key Outstanding Questions
on Federal Role in Housing Finance
I. Homeownership as a Goal/policy for working &
middle income families
 Bipartisan Housing Commission Report & push for
multifamily over single family for some population
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Investor class purchasing single family homes as
“solution” to foreclosure crisis
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Why not a both and instead of an either or?
Is this a solution?
Advocacy Community Fracturing over
homeownership policies vs. rental assistance
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FHA undercapitalization
Key Outstanding Questions
on Federal Role in Housing Finance
II. Lenders Vs. Homeownership
 Weigh in on Basel III liquidity rules that are under
consideration
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Be aware of regulatory actions that discourage
community banks from taking down FHLB advances
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As drafted the Basel III liquidity standards would discourage banks from taking down
FHLB advances because they would not fully count for liquidity purposes. Europeans
have successfully lobbied to have covered bonds fully count. The impact on nonQRM mortgage lending from depository institutions could be significant.
Discourages community lending
Reduces AHP funding
Look at policies to see how they impact mortgage
lending such as: Stress test on mortgage affiliates of
large banks
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Increase cost, discourage separate mortgage affiliates
Key Outstanding Questions
on Federal Role in Housing Finance
III. Fannie & Freddie Structure
 Define the problem as shareholder driven and
providing alternative model
 Explain how public interest directors provide
necessary tension in board room to assist mission
compliance
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Ensuring independent public interest director on Fannie/Freddie Boards
Allow GSEs to pay back their loan from Treasury
(Preferred Stock)
Encourage sufficient capitalization of GSEs
Key Outstanding Questions
on Federal Role in Housing Finance
IV. Implied Government Guarantee
 If GSEs are explicitly guaranteed by the government
they will likely be on budget. The GSEs would then
compete with other federal housing programs in the
budget process, most likely FHA. This could be a
way to ensure a permanently shrunken housing
market.
 The implied guarantee has worked. When the GSEs
had trouble there was government intervention,
restructuring and a payback of any funds provided.
Starting Where We Finished in 2011
1) Fix what is broken with the current
intermediaries;
2) Ensure continued access to low cost,
universal credit;
3) Push for housing finance to have transparent
open regulatory structure that balances
consumer needs, risk mitigation and broad
credit access.
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