12-15 rosner teleconference transcript
DESCRIPTION
WASHINGTON, Dec. 16, 2015 /PRNewswire/ -- Joshua Rosner, Managing Director of Graham Fisher & Co., was joined by several housing finance policy experts Tuesday in calling for recapitalizing Fannie Mae and Freddie Mac as the first step to reforming the secondary mortgage companies.In a conference call, he announced the release of his paper, "GSE Reform: Something Old, Something New, And Something Borrowed." The paper summarizes the historic role the government sponsored enterprises have played in facilitating homeownership, the policy changes that put the enterprises at the center of the 2007-8 financial crisis and the steps needed to create a better mortgage finance system.Rosner was joined by Center for Responsible Lending (CRL) President Mike Calhoun; Community Mortgage Lenders of America (CMLA) Executive Director Glen Corso; Independent Community Bankers of America (ICBA) Senior Vice President Ron Haynie; National Community Reinvestment Coalition (NCRC) President and CEO John Taylor and Director of Policy & Government Affairs Gerron Levi; and Community Home Lenders Association (CHLA) Executive Director Scott Olson.They echoed the view that Fannie and Freddie have played critical roles in promoting access to homeownership and affordable housing for many decades. They agreed that reforms are needed and that the GSEs should be required to build and retain capital. They also opposed actions that could delay reforms, notably the Jumpstart GSE Reform bill, elements of which have been added to an omnibus spending bill Congress is set to vote on by the end of the week. The Jumpstart language only serves to delay necessary reforms and places the public at risk.TRANSCRIPT
Final Transcript
GSE Reform: Something Old, Something New, and Something Borrowed December 15, 2015/9:30 a.m. EST
SPEAKERS Josh Rosner Mike Calhoun Ron Haynie Glen Corso Scott Olson Gerron Levi PRESENTATION Moderator Ladies and gentlemen, thank you for standing by, and welcome to the GSE
Reform Conference call. At this time, all participants are in a listen-only
mode. Later, we will conduct a question and answer session. Instructions
will be given at that time. (Operator instructions.) As a reminder, this
conference is being recorded.
December 15, 2015/9:30 a.m. EST Page 2
I’d now like to turn the conference over to our host, Mr. Josh Rosner.
Please go ahead, sir.
Josh Thank you very much, and thank you, everyone, for joining us. I’d like to,
before we start, just make a quick comment because it seems timely about
the New York Times editorial this morning by Mark Zandi and Jim Parrott,
which I think continues to miss the point. Nobody is calling for return to
the status quo ante. First of all, HERA would not allow for that. FHFA
has made many significant changes.
Secondly, more importantly, if their view was an intellectual consistent
view, they would be calling for the GSEs to have capital given that part of
the problem with the GSEs before the crisis was significant lack of capital.
In any case, thank you for joining the call. I’d like to introduce the
speakers we have in addition that we’re very happy to have had join us.
First, we have Mike Calhoun from the Center for Responsible Lending;
Ron Haynie from the Independent Community Bankers of America; Glen
Corso from Community Mortgage Lenders of America; Scott Olson from
Community Home Lenders Association, and Gerron Levi from National
Community Reinvestment Coalition.
December 15, 2015/9:30 a.m. EST Page 3
So, let’s start with a question for Mike Calhoun. First of all, when each of
the speakers speak, they might want to give a minute about what their
organization does, but Mike, what is it that you see as common to all of
the speakers on the call?
Mike Well, I think as will become apparent from our conversation today and
from the written materials that the various organizations and speakers have
previously issued that there are differences among us regarding the causes
and cures of the housing financial crisis. But, we agree on core values as
to how we should move forward.
Going to the causes, your paper that you released today adds a lot of new
depth and information to the other announces that are out there. For us,
and by way of introduction, the Center for Responsible Lending is the
policy affiliate of Self-Help, which is one of the larger community
development lenders in the country, and we provided a substantial number
of mortgage loans to first-time homebuyers, including through the 2000s
and through the housing boom.
And so, we had over 50,000 mortgages, which we had all the credit and
legal risk on in 48 states across the country. They were made to borrowers
with incomes in the low-$30,000 with small down payments, put some
December 15, 2015/9:30 a.m. EST Page 4
cash into the deal, and they performed extremely well even through the
crisis. It was not a great secret.
They were all carefully underwritten mortgages. They were fully
documented. They had 30-year fix rate; so, no payment shock. They had
full escrow, and the vast majority of subprime mortgages had none of
those features when they were written and when they crashed in the 2000s.
To add onto Josh’s comments about the change, we’re in a very different
environment than we were in 2007. First of all, as most of you know,
HERA was passed in 2008 in full recognition of the crisis, including the
housing market’s key role in it, specifically designed with broad bipartisan
support to create a stronger and safer housing market. Then the biggest
change has been the development of standards for mortgages themselves,
the CFPB and their qualified mortgage and ability to repay because many
countries experienced housing booms and crashes in the 2000s.
The US was almost the worst though in the fallout because we had the
most unaffordable mortgages in place at the time that housing values fell.
Not only were people underwater. More importantly, they had not been
paying their mortgages through just their regular income. They were
relying on unsustainable house appreciation to keep refinancing. When
December 15, 2015/9:30 a.m. EST Page 5
that option ended, they couldn’t pay their mortgages, and the foreclosures
piled on.
But going forward, the key principles that all of us here agree on are first
that the housing finance market serves a sector that is about a fifth of the
US economy, and is also the leading mechanism for families to build
wealth and move into the middle class. To be effective, it needs to, first of
all, serve all lending institutions, not just large lenders. We have the
independent community bankers here who provide incredibly important
financing along with Glen and Scott’s members, particularly in rural areas.
They have to have access to the secondary market in order to be able to
make loans.
Second, it needs to provide financing for all qualified borrowers. As
Gerron will address further, we are looking at a very different housing
market where the majority of new household growth is among Latino and
African American households. If those households are not served, the
whole housing market contracts because if they’re not new starter homes
being built and purchased, and people can’t sell their existing homes to
move up, the pipeline of our housing system just doesn’t work.
December 15, 2015/9:30 a.m. EST Page 6
Third, a system has to serve all geographies. We expect any system will
provide credit, quite frankly, to those who least need it in hot markets,
high wealth borrowers who can readily obtain credit at any time. But,
much of the country will get passed over unless the system specifically
requires that there’s a duty to serve throughout the nation.
Then finally, it has to be a system that performs throughout the credit
cycle. There will be additional housing ups and downs. That’s the nature
of this market and other markets. We have seen too often that a lot of the
capital flees when the market turns down. If there had not been Fannie
Mae and Freddie Mac providing $5 trillion of housing credit following the
beginning of the Great Recession we would still be deep in that recession.
Then finally, we need this to be a system that does not tilt our private
financial institutions, the banking system, to a greater concentration by
squeezing out the smaller lenders and other important players. So, let me
stop there because we have many others who need to add to this
conversation.
Josh Yes, that’s terrific. I appreciate that. I think it makes sense since we are
in the middle of the appropriation season to just take a minute and talk
about what of the GSE Jumpstart language is rumored to, or may be in the
December 15, 2015/9:30 a.m. EST Page 7
bill, and why it matters to you. So, why don’t we start with just a quick
round from everyone on the call. Ron, Ron Haynie from ICBA.
Ron Thanks, Josh. Yes, and ICBA represents over 6,000 community banks
nationwide and certainly community banks are an integral part of the
housing system, the housing finance system. Many of our members
depend on access to the GSEs on a daily basis.
What’s key about the GSE is the fact that they’re sort of a friendly
aggregator in that they don’t compete in the primary market with
community banks for other financial services, which obviously larger
national aggregators actually do. And so, it’s very important to our
members to make sure that that access is preserved, and is well capitalized
and safe and sound.
The Jumpstart provisions and, again, as Scott mentioned, obviously no one
is really sure what all is in the bill, if any of it at this point. But, our
concern is that certain provisions of Jumpstart actually would prevent the
regulator, FHFA, from acting in the best interest of the marketplace and
certainly the best interest of taxpayers by basically impairing their ability
to take certain actions.
December 15, 2015/9:30 a.m. EST Page 8
While it’s difficult to project what could possibly happen or whatever, the
fact that the regulator does have a considerable amount of authority to be
able to make sure that the system remains liquid, remains viable, remains
accessible for all lenders of all sizes at all times, and so that it does need—
the regulator does need to be able to act to make sure that occurs. And so,
our concern is that those things, certain provisions in that bill could
actually impair that ability. That eventually obviously hurts the housing
market, as well as taxpayers. So, those are our concerns.
Josh Okay. Gerron?
Gerron Yes, good morning. I represent the National Community Reinvestment
Coalition. We are a grassroots member organization. We have about 600
grassroots organizations across the country, and collectively, we are
devoted to helping working families across the country build wealth and to
obtain homeownership.
People in traditionally underserved markets, low and moderate income
borrowers. So, we see ourselves as having a tremendous stake in this
debate for a little over 25 years now. NCRC has been focused on
preserving and protecting the affirmative obligations on lenders in the
market to provide conventional loans to low and moderate income
December 15, 2015/9:30 a.m. EST Page 9
borrowers. In the primary market, that’s the Community Reinvestment
Act. In the secondary market, Fannie Mae and Freddie Mac have an
affirmative obligation to facilitate financing of affordable housing for low
and moderate income borrowers. That is manifested through their
affordable housing goal.
We think those affirmative obligations in statute, in their charter, the
charter of the government-sponsored enterprises, Fannie Mae and Freddie
Mac are critical to the flow of credit and conventional loans, conforming
loans getting to low and moderate income borrowers, and traditionally
underserved borrowers; rural areas of the country, minority borrowers, all
of those.
So, we think the stakes are quite high. So, when you look at the Jumpstart
GSE Reform Bill and specifically the provision that would block the
ability of these two entities to exit conservatorship, we’re very concerned
about that. First of all, we’re concerned about how Fannie and Freddie
may be wound down under any future Administration. So, there’s a
certain political uncertainty. We’re facing the prospects of a new
Administration. We don’t know what the policies will be there, and so,
how these entities are managed and potentially wound down could have a
December 15, 2015/9:30 a.m. EST Page 10
tremendous effect on the affordable housing goals and the affirmative
obligations that they have.
We’re also concerned about policy uncertainty. Clearly, there has not
been a consensus in Congress on a new or rebuilding the housing finance
system. There is no consensus. There are a number of structural reforms
happening administratively. But anyway, we are concerned about how
any new system may be built and whether that new system will have an
affirmative obligation.
So, we think Fannie and Freddie, as Mel Watt, the Director of FHFA said
recently, we think the conservatorship is not sustainable as he made clear.
How these entities are managed really matters to their profitability, to the
kind of products we see in the market, just many facets. We also think
who the conservator is really matters.
The tenure of Ed DeMarco is striking, is quite different from the tenure of
Mel Watt, whether it be on guarantee fees, whether it be on capitalizing
the Housing Trust Fund and the Capital Magnet Fund, whether it be on
having low down payment products in the market, making homeownership
more accessible for low and moderate income communities.
December 15, 2015/9:30 a.m. EST Page 11
So, we don’t want to see the path blocked under this Administration, or
recapitalizing, and these entities exiting the conservatorship.
Josh Thank you. We’ll go now to Glen Corso.
Glen Thanks, Josh. The organization that I manage is composed of a
membership of community-based lenders, both community banks and
independent mortgage companies. The average member in our group
originates—about half of their loan volume is conventional conforming
loans that end up with either Fannie Mae or Freddie Mac. So, Fannie and
Freddie are critical to our members being able to serve the home financing
needs of their borrowers.
We’re extremely concerned with the Jumpstart provisions because we’ve
heard that the Jumpstart provisions could either prevent, or be interpreted
to prevent the recapitalization of Fannie Mae and Freddie Mac. We think
a capital cushion, an adequate capital cushion for both of those
organizations is absolutely critical. Frankly, our members very carefully
manage their capital and make sure that they exceed all of the minimum
standards. To them, how the two biggest entities in the housing market
are running on such little capital is just baffling beyond belief to them.
December 15, 2015/9:30 a.m. EST Page 12
The second concern we have with Jumpstart is we understand that the
common securitization platform that Fannie and Freddie are selling may
be transferred away from them, and our members are extremely concerned
about that. They view that common securitization platform as the next
step in the evolution of the secondary mortgage market. Having it
transferred away from Fannie and Freddie and potentially subject to the
influence of Wall Street and the big banks, or the control of Wall Streets
and the too big to fail banks makes our members extremely concerned.
So, that’s our concerns with the Jumpstart provisions.
Josh Okay. Thank you. Scott Olson.
Scott Thanks, Josh and everyone else. I’m Scott Olson. I work for the
Community Home Lenders Association, which is the only national
association that exclusively represents non-bank mortgage bankers,
predominately small and mid-sized lenders.
I don’t think it’s an accident that all these groups here are on this call
together. They represent, I think, sort of common concerns and
viewpoints of a strong coalition of consumer groups, important consumer
groups, and all the groups that represent small lenders. It comes down to
December 15, 2015/9:30 a.m. EST Page 13
access and affordability. At the end of the day, we need a wide range of
choices in terms of mortgage originators, and we need a strong access to
the secondary markets, and that drives, I think, our goals and it drives or
policy prescription.
So from our perspective, where are we? GSE reform is extremely
complicated, and no two people see the things the same way. While we’re
waiting for—I think one of the touchstones of where CHLA is coming
from is while we’re waiting for Congress to act, which could be a very
long time, we need to take constructive steps forward. I think the
members here, the groups here have talked about these.
One, we need to build up the capital of the GSEs. I mean all our small
lender groups here are concerned about having a cash window. I’d like to
remind people that in Johnson-Crapo, the promised that they would set
aside profits, current profits of the GSEs to capitalize the cash window.
That’s not happening. We need to make those profits available to build up
capital and to make sure we can maintain a cash window.
We need to move towards figuring out how we can have a recapitalization
plan that makes sense, and most importantly, while no one is looking, all
this risk sharing is going to revamp the way markets are done, and we
December 15, 2015/9:30 a.m. EST Page 14
need to pay attention to risk sharing to make sure we get it right and so
that it’s not dominated by these big veritably integrated bank securities
firms, and their risk sharing provides a chokehold to control mortgage
origination.
In closing, I think, Josh, touched on this at the beginning. I just want to
reiterate that this idea that anyone is talking about going back to the way it
was before in 2008 is just a strawman argument. There’s always a
significant number of reforms in place. The GSEs were taken down by a
big extent by no doc loans. Those are now basically not allowed under
QM.
We now have a sound regulator, which we didn’t have before. We now
have FHFA. We’re doing risk sharing to transfer government, taxpayer
risk to other sectors. We’re now charging G fees that go to the
government to cover the government guarantee. I mean these are all
reforms that are already in place, and then we just need to go forward and
do a couple of final ones, which include capitalizing the GSEs and
providing explicit guarantee and making sure we have the right kinds of
qualified loans.
December 15, 2015/9:30 a.m. EST Page 15
So, that’s our perspective of how we should go forward and like many
other groups here, we’re very concerned about what we’re seeing about
potential provisions in Jumpstart that we think could undermine that.
Josh Thank you very much. So, we’re going to go just a quick round on what
you’d like to see in mortgage market and housing finance reform, and then
I will go through some of the key points of my paper, which was released
this morning. The views in it are my own, and I think it’s a sensible—of
course, I think it’s a sensible approach to GSE reform. But before I do,
since I know that there may be differing views, let’s go a quick round on
how various parties on the call think GSE reform and housing finance
reform should look. Mike.
Mike I’ll start quickly and just add to the Jumpstart discussion. I think all of us
see the Jumpstart as an attempt to put a heavy thumb on the scale of
pushing housing finance reform in a direction which Congress has not
debated on the open floor. It has not gone through the Senate in regular
order. That is a primary concern for us.
In terms of where Center for Responsible Lending would like to see
housing finance reform, we have for some time had a white paper
available on our website. We believe that the GSEs have played an
December 15, 2015/9:30 a.m. EST Page 16
important role, that there are significant further reforms needed. We think
that they should be structured in a mutual type ownership that would
address concerns that have been raised by some about the incentives, and
it also provides a mechanism to ensure that smaller institutions have a full
voice.
We’ve seen models of this, for example, in the federal home loan banks,
which came through the crisis in good shape. But again, it has to be a
system that has a duty to serve the entire market. Otherwise, the entire
market will suffer, and it really undercuts the justification for the
government’s involvement in housing finance. Let me stop there and let
others add on.
Josh Okay, and as I said, we’re not going to all agree on a specific point. So,
Ron, what would you like to see going forward, and what are your
thoughts on the mutual approach?
Ron Well, I think for starters, I mean we have said all along through this whole
process, and we were very much involved in the debate with the Corker-
Warner and Johnson-Crapo bills, that our position has always been we
support a well-capitalized, strongly regulated secondary market that
December 15, 2015/9:30 a.m. EST Page 17
allows for equal and competitive access for all lenders on a single loan
basis.
I think Scott and Glen mentioned that earlier, that like their members, our
members do not securitize loans for the most part. It’s they sell one loan
at a time, or a couple of loans at a time, and they retain the servicing on
those loans. And so, that’s a critical part for them. It helps them sustain
their franchises as opposed to turning over their customers to the largest
lenders out there.
But, I think the other too that’s important is that it’s not just the smallest
lenders. I think you get away from the top five large financial institutions,
even regional banks, etc. and especially non-banks. They depend on the
secondary market. They depend on the GSEs for that access and their
ability to be able to provide mortgage financing. And so, it’s a much
broader argument than has been portrayed.
What we’d like to see; we want to see the system—number one, we want
to see the system return to a safe and strong condition. There’s a law in
place that was voted on, that was signed by the President. It was a
bipartisan bill. It’s called HERA and quite honestly, for the most part,
most of it’s been ignored through this crisis.
December 15, 2015/9:30 a.m. EST Page 18
So, we certainly would like to see the system capitalize. There needs to be
a plan forward that the regulator prescribes some way forward, a plan to
develop capital for the GSEs to prevent another draw. I don’t know of any
financial regulator out there that would say, “Transfer all your risk, all
your credit risk on your business, and you don’t have to operate with any
capital.” That’s completely absurd.
And so, that more than anything else needs to happen. Then I think from
there, if you have a well-capitalized system, I think we can look at other
types of improvements that would certainly sure up the system, improve
the system, fix what’s wrong. If you talk to lenders that use the system,
they’ll probably from an overwhelmingly perspective say, “Fix the
problems as opposed to reinventing the wheel.” So, I think that’s sort of
where we are.
Josh Okay. Gerron.
Gerron Yes, I think really in terms of housing financing reform; first of all, I
would refer all the audience to a white paper we put out last month on
protecting the duties to serve and responsible next steps in the secondary
mortgage market. Listen, we’re in this discussion really for one reason,
December 15, 2015/9:30 a.m. EST Page 19
and it’s about low and moderate income borrowers and communities. The
affordable housing goals that Fannie and Freddie administer have been
critical to ensuring credit flows to those borrowers of traditionally
underserved markets, and we’re really committed to protecting the
affordable housing goals and the affirmative obligations that Fannie and
Freddie have.
In that paper that we put out, we say, look here, it’s really what many folks
on the call have said. The Housing and Economic Recovery Act, HERA,
in 2008, which was about a decade in the making really, really enacted a
number of critical reforms to Fannie and Freddie in terms of their
regulator, in terms of capital standards, in terms of their investment
portfolio, in terms of prudential management. So, many of the reforms
have been put in place. We simply need to build on those reforms.
I think looking at the corporate governance structure, looking at the
guarantee structure, those are common themes and common concerns, and
we believe those can be addressed. But, the real Jumpstart is with
recapitalization and ending the conservatorship. We think our system can
be fixed and reformed, but any system going forward really has to have an
affirmative obligation and the affordable housing goals as a part of it.
December 15, 2015/9:30 a.m. EST Page 20
Josh Terrific. Just in the interest of time, if we could keep [indiscernible].
Glen, would you speak about what you think reform should look like?
Glen Sure. So actually, I’m going to echo just what Gerron said. Our members
believe that Fannie and Freddie should be fixed and released from
conservatorship. By “fixed” I mean two things. Number one,
recapitalized to very strong levels and number two, have their business
confined to plain vanilla mortgage product and to carefully designed
products that are designed to meet affordability needs and affordability
goals.
We don’t see any reason for winding them down, tearing up, creating a
new system. There’s just no reason for it. America’s housing mortgage
finance needs have been met for the most part since the crisis, and they’ve
been met in large part by Fannie and Freddie’s work.
There’s still a lot of issues to be addressed on the affordability side, but we
haven’t had a massive breakdown. We haven’t had—we’ve kept
mortgage credit flowing. So, why not take this system, fix what we know
were the flaws in the pre-2008 model, and then move forward. That’s our
position.
December 15, 2015/9:30 a.m. EST Page 21
Josh Terrific. Thank you. Scott.
Scott Yes, hello. I’ve already talked about what our plans is. You can see it on
our website. We released it in late-September.
Let me just sort of close by going back to the Jumpstart. We, I think,
question not just the concept, but actually the name. Jumpstart implies
you’re moving forward, but it seems like the provisions, particularly the
preferred stock provision, is more of a handcuff. It’s a restriction. So, I’m
not really clear why it’s called Jumpstart.
But, we just don’t see the point in handcuffing the FHFA and Treasury at
this time. They should go forward and take constructive actions like
changing the sweep agreement to help them build up reserves and capital,
and moving towards doing more risk sharing constructively and so on.
And so, I’m not sure we understand the premise of why we would want to
handcuff the strong authority that already exists to move forward on
reform.
Josh Terrific. Thank you. So, I released a paper this morning, which is
available. If you don’t have the link, feel free to ask for it, and I’ll run
through quickly some of my views.
December 15, 2015/9:30 a.m. EST Page 22
Again, these are my views. They don’t necessarily represent anyone else
on the call, though given what has been said so far, I think that any
disagreements are more in slight shape than colors.
So, let’s run through a little bit of my points in the paper. First of all, the
GSEs operated well until 1992 when we created GSE reform legislation as
a result of the savings and loan crisis. The only time that either GSE
ended up in trouble prior to that was specifically because of their
portfolios, and that really was Fannie Mae.
Freddie Mac had a different business model. They really originated to
distribute. They never really built portfolios. Fannie ended up in late-
‘70s/early-‘80s because of their portfolio.
So, when Congress set about to reregulate the GSEs in ’89, amazingly
then Treasury Secretary, Nicholas Brady, put forward his
recommendations for what GSE reform should look like. If you go back
and read them, they are almost identical to what ended up in HERA and
had been ignored in the first time.
December 15, 2015/9:30 a.m. EST Page 23
But, if you think about the GSEs and some of their benefits, they created
standards in a market where the largest firms have continued to fight
against standards. The historic reasons for their trouble are all clear: One,
the portfolios; two, a lack of capital; three, the underpricing and
mispricing of credit and G fees, giving large volume discounts to the
largest players, and if you were to think about the fourth, which is mission
creep.
Fannie and Freddie, largely through their portfolios, crept into the primary
market, and the secondary market and the primary market should never
meet. The secondary market is supposed to be counter cyclical. The
primary market definitionally is pro-cyclical.
So, the reform proposals we’ve seen thus far are recreating the system that
failed. When you comingle the primary market with the secondary
market, you lead to pro-cyclicality, to expect that allowing the primary
market players, the largest primary market players to take over the
secondary markets is going to result in a different outcome is the
definition of insanity.
If you were to then look at specifically the proposals that we’ve seen in
legislation, and I’m really talking specifically about Corker-Warner and
December 15, 2015/9:30 a.m. EST Page 24
Crapo-Johnson, they remind me of an incident that happened to me about
a year and a half ago where I was driving and I pulled up to a stoplight in
front of Grand Center and a car hit me from the back. It turned out the
driver was texting.
I got out of the car and looked, and it was really just a minor accident,
fender bender, paint, etc. I had three options that were rational economic
options. The first, get his insurance information, file an insurance claim,
and move on with it. That is the most rational economic answer.
The second would have been don’t bother repairing the car because I don’t
want to pay the deductible now, but understand that the car may depreciate
a bit when I got to sell it because it’s unrepaired and may actually fall into
further disrepair. Less of an economically intelligent decision, but
nonetheless, a decision that one could justify.
The third is just take the car to a junkyard and junk the car. That
obviously would an uneconomic and silly option. First of all, it would
take me time to save money to buy a new car. Second, I’d be throwing out
all the residual value in my car.
December 15, 2015/9:30 a.m. EST Page 25
The current proposal, or the recent proposals, Corker-Warner, Crapo-
Johnson, seem to have come up with a fourth option, which is to build an
entire new auto assembly plant to build me a new car. That’s really where
we are. It doesn’t make any sense. It’s uneconomic. It risks all sorts of
problems in the creation and manufacturing, and it stands the existing
asset. So, that’s the first.
Second [indiscernible] problems. Both of these options are pro-cyclical.
As I said, they comingle. They contract credit. They undermine Dodd-
Frank Act by reintroducing new avenues for interconnectedness and the
systemic risk of our largest financial institution. That’s especially with
some of the proposals that have been pushed on the Hill and pushed by
those institutions.
Deep MI. We all know that the private mortgage insurance industry, it
remains undercapitalized. They have a total of about $10 billion of capital
today. Certainly, not enough to support the top 20%, let alone top 50% of
the mortgage market.
Second, the common securitization platform, which creates unequal access
for the big firms over the small firms. It will functionally turn the small
December 15, 2015/9:30 a.m. EST Page 26
firms into third party aggregators for the big firms just like many of the
independent lenders were before the crisis.
The third is the notion of upfront risk sharing, which if one were to go
through the proposals, they’d realize that the upfront risk sharing
proposals really are pro-cyclical. The first whiff of weakness in the
economy, that private capital would disappear. So, existing transactions
would in fact be fine, but you’d have a shrinking of credit at exactly the
time that you want it.
And so, you’re just creating a system, again, where you have private
profits and public losses. The oversight complexity is something that you
never hear anything about, but if you were to go through with Crapo-
Johnson, Corker-Warner, you would create the most complex regulatory
oversight structure of any market. Again, it would be an avenue for
capture by the largest financial institutions with no ability to hold them to
any responsibilities to support a level playing field, or support affordable
housing given the fact that they would have the ability to play off the
regulators against each other.
The other major problem is it broadens the government guarantee, and this
is something that they’re all pushing for. It broadens the government
December 15, 2015/9:30 a.m. EST Page 27
guarantee to all mortgage-backed securities rather than seeking to make
the guarantee as narrow as possible, which is not in the public interest.
So, let’s go through some of the false myths. The first is private capital
can replace the GSEs. As we’ve already mentioned, as I’ve already
mentioned, there’s no enough private capital in either the private mortgage
insurers, or in the public markets to take on the risk that Fannie and
Freddie have been called on to take on. You’ve about $11 trillion in total,
mutual fund and other managed assets in the United States. So, if you
think about the percentage of that that would be required to take the top
20% you realize that it’s both uneconomic; it’s counterproductive to
function in capital markets, and capital formation in other sectors of the
economy. Again, it’s pro-cyclical. That capital will flee precisely when
you need it to be stable.
The second false myth is we need more competition. This is really one of
the ones that we hear everyone sort of commonly accept. It makes no
sense either.
If you were to think about part of the reason that we even are moving to a
common security with Fannie and Freddie is because Fannie, the more
volume it got, the better its execution price. The better its execution price,
December 15, 2015/9:30 a.m. EST Page 28
the less volume Freddie got. The less volume Freddie got, the higher their
execution costs. You ended up with this downward spiral where Freddie
was less and less able to compete, and had to go further and further down
the credit curve and underpricing of risk to even be able to function.
You have to recognize that there are industries that are natural
monopolies. The secondary mortgage market as distinct from the primary
lending markets is a natural utility. To add more than two players make
absolutely no sense.
If you think about how many water, gas, sewer or electric utilities you
have in your locale, it’s probably one. When you go home at the end of
the day and you turn on your lights, or you turn on your water, they work
regardless, by the way, of the economic cycle.
The third false myth is any guarantee has to be on the securities and not
the issuer. This makes absolutely no sense. If the issuer is terrifically
capitalized, passes through the exposures, the credit risk exposures either
through securitization, or securitization and back-end risk sharing, you
really have the ability to have it on the issuer. This false beam is really
being put forward by those same largest sell side institutions and frankly,
December 15, 2015/9:30 a.m. EST Page 29
some of the larger buy side institutions who are really looking for high
credit, high quality, guaranteed assets to hold.
So, contrary to the proponents of Corker-Warner, no one is—Corker-
Warner and this morning’s New York Times editorial, no one is pushing
for the status quo antic. HERA authorizes FHFA to be independent. It
creates strict rules that would have prevented the GSEs’ troubles,
including by the way winding down the portfolios, giving the regulatory
authority over capital, ensuring that GPs are properly priced.
The GSEs have been doing back-end risk transfers like they do on the
multifamily side. In the multifamily side, they transfer up to about 90% of
that risk. On the single family side, it’s very reasonable to expect that they
can get to 50% back-end risk transfer in the next few years. Real credit
pricing, the regulator has already done a good job of managing.
So, what do we need? We need a government guarantee, but that can be
very, very limited. That can be behind 4% capital in our paper, and real
risk transfer by companies that have essentially not portfolios. It will be
paid for an on an annual basis through the FSOC. They would determine
the assessment of the commitment fee, which would be tied to market
pricing. So, it would have actually funded catastrophic risk insurance
December 15, 2015/9:30 a.m. EST Page 30
product, and it would really just be there to be a market signal that there is
some support for the to be announced market.
So, furthermore in our minds, the GSEs should be available for smaller
firms that don’t have the ability to execute in capital markets; in other
words, to do securitizations, throughout the cycle. In good times, those
firms that have capital market execution capability, the largest firms, there
really is no reason that they should get a credit wrap on their issuance. If
they capital market execution and the GSEs are properly pricing credit, the
execution costs between a wrapped and unwrapped should be fairly
negligible. And so, we should create disincentives from the largest firms
being able to use the enterprise’s wrap in good times, and ensure that in
good and bad times there’s credit through the GSEs for everyone. That
would support the counter cyclicality that we need to see and didn’t see
before.
It seems to me that after all of these changes were put in place there’d
really be a very limited need for legislation. In our view, the GSEs are
like gas, water, sewer, electric and other natural monopolies. They should
be regulated as countercyclical utilities.
December 15, 2015/9:30 a.m. EST Page 31
So, you can regulate them with the Public Utility Commission, rate of
return caps, and those rate of return caps would ensure that the GSEs do
not creep into the primary market, do not seek to lend into markets that
they shouldn’t be lending into without at least properly pricing the credit,
and clear missions. Regardless of the economy, again, you turn on your
faucet and the water flows, and that’s not just in the homes of the rich.
You create, as utilities, potentially the old notion of a granny stock, which
is a strong capital base with a rate of return cap. It would reduce the risk
of creep into the primary market. It would reduce the lobbying power of
the GSEs and frankly, it’s a fairly simple, straightforward approach that
eludes Washington solely because Washington follows the money, not
common sense.
Anyone want to make a quick comment on that of the group, of the
speakers, or should we turn it over to Q&A?
M I’m fine with Q&A.
M Yes, let’s go with Q&A.
Josh Okay. I would ask, operator, that we really reserve Q&A for members of
the media. Obviously, there are a lot of folks from Washington, from the
December 15, 2015/9:30 a.m. EST Page 32
Hill, probably from the investment community, but we’d really like to
open it up to the media. Thank you.
Moderator We’ll go to the line of Lorraine Woellert with Redfin.
Lorraine Hello, guys. Thanks so much and Josh, I’m sorry. I haven’t yet read your
paper this morning, but 60,000-foot question. So, help me explain the
difference between the status quo guarantee on the bonds, and what it
would look like under recap and release under your proposal. Then
second, can you all talk about the access to credit issue? I mean we
currently don’t have many loans going to people of color. How would you
deal with that?
Mike This is Mike with Center for Responsible Lending, and I’ll make a couple
of quick comments and others can join in.
I think all who are on the event today have supported an explicit paid for
government guarantee. If there are any who disagreement, they can make
that known. So, that would be an explicit change from the guarantee
structure today. Then I think your question about access to loans, we have
pointed out that the GSEs, while they did well in the ‘90s, that particularly
in recent years lending has been low. Less than 3% of their loans, for
December 15, 2015/9:30 a.m. EST Page 33
example, have gone to African American homeowners for first time
purchase loans out of their first time purchase loan portfolio.
Some of that reflects that after the crisis they understandably and correctly
focused entirely on the coming sustainable/profitably again. They have
announced a number of initiatives to increase lending responsibly to these
borrowers, and we expect and we will continue to monitor and push them
to make sure that those programs do in fact provide fair access to all
families.
Scott This is Scott Olson. I would add that the perverse nature of the current
sweep agreement, which is heads we tie, tails we lose, I think is
contributing to this because they don’t keep any of the profits and they
don’t have any capital. But, if they have any losses, they lose that; they
lose some of their precious reserves/; I think creates incentives for them to
be more conservative and that’s one of the reasons we’re calling for
building up their capital.
Gerron Josh, we have John Taylor here, President and CEO here at NCRC and he
wanted to share a couple of comments on that question.
December 15, 2015/9:30 a.m. EST Page 34
John Thank you, guys and gals. I’m sorry for interrupting. I’ve actually been
listening to the conversation from almost the beginning. And so, I just
wanted to add a couple of things.
One is I wish the press would get accurate the phrase “recap and release.”
It’s really—no one’s suggesting that we recapitalize and then just release
them. As Josh and others have said, anybody who puts forward the idea
that we’re going back to the old system really isn’t paying attention. None
of us want that. We really want reform.
And so, this is really recapitalization and reform is a more accurate phrase
to use in this space. You’ve heard many of the reforms, which NRCR
does indeed identify with.
I do want to address the issue of the failure of Freddie in particular. But
also, even though Fannie passed the—the failure for Freddie to do enough
lending to pass the affordable housing goals, and Fannie just did so, really
has less to do with the actual GSEs and more to do with FHFA, which
really controls products fees, G fees, the kind of business that they’re
willing to allow the GSEs to do.
December 15, 2015/9:30 a.m. EST Page 35
In fact, if you look at the performance of the GSEs in terms of what they
have done to securitize loans for LMI as well as people of color, clearly
outside of conservatorship they did a much more rigorous and effective
job with higher goals. It is within conservatorship, under government
control that they’ve hit their lowest ebb in recent history in serving
underserved populations.
I agree with the comment about—I think it was Scott Olson talking about
the profits, the incentive of Treasury to continue the current system. I
actually think Treasury is addicted to the profits and that that’s really
hampering the ability of the GSEs to actually build capitalization that
would allow them to come out and compete in the market.
I do want to say on that that I think there are, as Scott Olson and others
have pointed out, there’s a lot of protections in place now that didn’t exist
before. So right there alone, there’s a tremendous amount of reform that
has occurred, whether it’s through Dodd-Frank, QM, a number of other
initiatives that essentially cleaned up the market, and there are other things
that we can do right under FHFA, within their jurisdiction to be able to
create more transparency, require capital reserves, do things that make the
system even stronger.
December 15, 2015/9:30 a.m. EST Page 36
The idea that anybody is proposing that we go back to the old system—the
only part we want for the old system is that there was—for most of their
history, Fannie and Freddie, for most of their history created the
opportunity for more than half the population in this country to be able to
get into homeownership. They did it with prime loans. They did it
responsibly. The fight back then a few decades ago was to make sure that
they paid attention to minorities and to working poor people. That was
fixed with HERA and with the affordable housing goals.
So, there’s been a lot of changes. What we would be doing—I love the
analogy from Rosner about what happens when he gets into a car accident.
I think it’s accurate, that we seem to be building a whole new system
when what we had was a system that worked pretty well through most of
its history, that needs to be fixed, that needs to be capitalized, that needs to
do more risk sharing. I think we have that capability.
I shudder to think what will happen if we begin to reinvent the whole
system of securitization in this country, what the reaction is going to be
from all the lenders, from Wall Street, and what a mess it will be trying to
build a new securitization system. So, I’ll stop with those comments.
December 15, 2015/9:30 a.m. EST Page 37
Josh I’d like to add—this is Josh. In answer to your question, the difference
between the guarantee that I’m proposing and the guarantee that currently
exists. There is no real guarantee today. And so, that’s actually one of the
false beams that also needs to be dispelled.
If you go back and you look at an e-mail from Hayley Boesky when she
was the New York Fed in the heart of the crisis, September of 2008, she
points out that the one stumbling block is Treasury included an “Explicit
disclaimer of guarantee in their backstop with the GSEs. This states
clearly that the Treasury’s commitment “shall not be deemed to constitute
a guarantee” by the United States of payment to performance of any debt
security of the GSEs.” “It would seem to be difficult to justify treating
GSE debt exactly the same as government debt from a regulatory capital
perspective on this basis.” Those are her words, and I think that those are
accurate words.
So right now, we’ve got an extension of an implied government guarantee
that’s taken as a contingent liability. What I’m talking about is a very
narrow—you can turn the existing size of those guarantees into an explicit
guarantee that the GSEs pay for an annual basis, that stands behind 4%
capital, that stands behind first loss risk transfer, and therefore would
December 15, 2015/9:30 a.m. EST Page 38
never be called upon, and the GSEs would be paying for it. That’s a very,
very different system.
Second, again, if you were to structure them as a utility with even a duty
to serve, the rate of return caps and the requirement that they properly
price credit, you would end up with a system that would takeaway most of
the problems that existed before the crisis in terms of taking on credit risk
that reduces their viability in an economic downturn.
And so, the answers here, as I said, are really simple. We’re not talking
rocket science. We’re just watching the simple answers having been
distorted by special interests that really want to capture the market for
their own interests.
Moderator Currently, we have no questions in queue.
Josh Interesting. Okay. Should we open it up, folks? Any thoughts? Outside
of the media?
M Sure.
M Sure. Yes, let’s go ahead.
December 15, 2015/9:30 a.m. EST Page 39
Josh Okay.
Moderator Okay, and I do have a follow-up. We can go back to the line of Lorraine
Woellert with Redfin. Please go ahead.
Lorraine Great. Thanks, guys. So, Jumpstart, I mean is it really happening, or can
you help me put this in political context? I mean I know you’re worried,
but how serious is this?
Josh I’m going to defer to others on that.
M You mean if it’s adopted.
Lorraine I’m talking about the likelihood of it being adopted. It seems unlikely,
right?
M I don’t that it seems unlikely.
M It is very much [indiscernible]. I think all information is it’s very much in
play. It’s been in some of the drafts that are currently being debated
among the leaders of the House and Senate. There’s a very strong push by
December 15, 2015/9:30 a.m. EST Page 40
some supporters of Jumpstart to have it included. So, it’s very much a
toss-up whether it will end up in the final omnibus.
Gerron Yes, I mean that’s our read of our—this is Gerron Levi with NCRC.
That’s our read as well. I mean there’s a very strong push here to include
it in the omnibus. It may not be—there are various versions of it as well
that are being considered. So, we’ve heard everything from a two year
sunset to some version that would allow the enterprises to rebuild capital,
or mandate it. So, I think the threat is very real, but it may look different
from the original version of the bill.
Moderator We’ll go to the line of Andrew Heckel with Merrill Lynch.
Andrew Yes, hello. Good morning. Thank you for hosting the call. My question
is this; do you anticipate, or do you suspect that the current Administration
is allowing the legal situation to playout, to be the catalyst to move
forward? Thank you.
Josh So, I’m going to start with that because to me, there’s a couple of different
issues here, right? If you were to read HERA, it makes it very, very clear
that only FHFA has the authority to make determinations because it’s got
an affirmative duty to either decide that the companies cannot be
December 15, 2015/9:30 a.m. EST Page 41
adequately capitalized, in which case it’s supposed to put them in
receivership, or can, in which case it’s supposed to force them to rebuild
capital.
The Treasury agreement, which created the sweep, which was signed by
FHFA and Treasury and the enterprises, doesn’t seem to have any legal
basis in trumping the statutory requirements of HERA. That’s a clear
priority of the law.
So, the fact that we’re even having a conversation about the administration
leading on the legal outcome is, again, sort of a false beam. It accepts that
the Administration has the authority to make that decision over an
independent agency, which is statutorily required to make those decisions.
Beyond that, on the policy side of things, I do think that to some degree
that plays out. But, I don’t really think that it should be playing out that
way. The legal action is going to go the way the legal action is going to
go. You don’t put the public at risk and public policy at risk just because
of that.
So, I think there is a piece of that that’s driving it. But honestly, I think
the larger piece is that the folks who have been the most aggressive
December 15, 2015/9:30 a.m. EST Page 42
lobbying are and have been lobbying for Corker-Warner, Crapo-Johnson,
which looks a lot like, almost identical to the initial position that the
Geithner Treasury put forth. And so, I think to some degree, they’re
wedded to a position that they may not even believe in any more. I’m not
saying they do or they don’t, but it’s unclear.
Scott This is Scott Olson. The other thing I would point out is that the theory
behind Jumpstart seems to be if we can handcuff the FHFA, then that will
impel Congress to act. But, I think if you took a survey of people that
follow this, no one believes there’s going to be GSE legislation next year,
and Congress has found an increasingly difficult to pass any legislation.
So, the question, again, is why would you hamstring the regulatory
process, particularly since under the preferred stock agreement or the
amendments, they’re going to have their capital taken away from them
systematically over the next two years. It’s only a matter of time if we
don’t change the sweep agreement that they’re going to need a Treasury
advance. And so, it just seems like the wrong prescription to basically
handcuff everything.
Josh Operator, I think that we have another reporter in the queue.
December 15, 2015/9:30 a.m. EST Page 43
Moderator Okay. Our next question will come from Michelle Celarier with New York
Post.
Michelle Yes, Michelle Celarier. Yes, I have a question about what’s going on in
the omnibus bill as well.
First of all, is whatever comes out of that bill—are we stuck with it? I
mean is that the way this process works, that once the bill comes out,
everybody’s already agreed to it? That’s one question.
The other thing is at least one of the drafts that I saw seemed to say that
whatever this legislation is would not take precedence over any judicial
ruling. So, would that mean that if there is some sort of a settlement on
some of these lawsuits that leads to some sort of recapitalization and
release, or something like that, that this legislation wouldn’t even matter?
Josh Again, I’m going to defer to the people more in the legislative side.
Gerron I mean first of all, as a matter of course, just generally, once it is
committed to language and filed, it is tremendously—it’s far more
difficult to change it at that point. So once it’s in, it’s very, very difficult
December 15, 2015/9:30 a.m. EST Page 44
to get various language out, or change. It does happen, but it’s far more
difficult.
I mean we’ve all heard of the possibility of the settlement language.
Without knowing what the language will actually be, I think it’s just hard
to speculate on how it will affect the outcomes of the enterprises.
Moderator Our next question will come from Scott Wilber, The Range. Please go
ahead.
Scott Hello, yes. Good morning. Gee, I didn’t think I’d come up that quickly. I
have a couple of questions. I’m sorry. Go to the next caller.
Moderator Currently, no questions in queue.
Josh Okay. Well, I’d like to thank all of the participants for giving their time so
generously. Hopefully you’ll read my paper. I think it’s fairly clear and
will layout clearly that not only am I not suggesting a return to the status
quo ante, but that many of the fixes are already in place and that many of
the arguments in favor of alternative proposals that we’ve seen are based
on a significantly flawed thesis.
December 15, 2015/9:30 a.m. EST Page 45
If you have any questions, obviously feel free to call me. I would suspect
the same would be true of everyone else. With that, unless any of the
speakers have any more comments, I think that’s the call.
John Josh, if you don’t mind; John Taylor. I just wanted to say I think that what
often is missed in the coverage on this debate is that what we and the folks
on this call are discussing are the practical solution to making sure that we
have a robust and effective system of housing finance. But, what’s really
driving things on Capitol Hill is a political discussion.
I think the Conservatives in Congress were very effective at vilifying
Fannie and Freddie to the extent where many people sort of blame them
for the crisis, even though they really followed the market. For many
years, they stayed out of it, but they followed the market into the subprime
predatory abyss and it was really the market that drove this whole
unsavory, unsustainable kind of lending that brought us the Great
Recession.
Certainly Fannie and Freddie when they got into it, got into it in a big way
because of their infrastructure. Even then, they had limits on the kinds of
things they were willing to securitize. But once the market fell, indeed,
because of what was in their portfolio, they fell with it.
December 15, 2015/9:30 a.m. EST Page 46
But, Congress and the Conservatives were so effective at vilifying Fannie
and Freddie and protecting those on Wall Street that the Democrats today
do not want to appear to be, and don’t want to be facing elections, whether
it’s a Presidential or the next Senate and House races, with people arguing
that the Democrats let Fannie and Freddie off the hook and let them back
out into the market when of course not only did they not lead the market,
and by the way, those very same people are not arguing for an end to this
Wall Street [indiscernible].
The fact is that Fannie and Freddie did a tremendous job through most of
their history. This is a political discussion going on in Capitol Hill. Why
a lot of it doesn’t make sense, and I really encourage you to read Josh’s
paper, as well as CRL’s and our paper at NRCR because if you really look
at the arguments as to what makes sense. IT doesn’t make sense to create
a whole new system of securitization, which will then be fraught with
uncertainties. When there are uncertainties, you can bet your bottom
dollar that the market will have a lot of problems.
Certainly, the whole reason for having GSEs, the primary reason, and that
is to help people become homeowners, to help the homeownership market;
would really be undermined, particularly for low and moderate income
December 15, 2015/9:30 a.m. EST Page 47
and people of color. The problem now is Democrats and Moderate
Republicans have to have the courage to say, “You know what? We can
recap and reform this system in a way that works, and has worked very
well for Americans, but we can have greater protections in there and not
against the kinds of actions that would get these GSEs into trouble.”
That is the most sensible, easiest solution. But, unfortunately, it isn’t the
easiest political solution because politics will, once again, come in and be
used in a way that hurts people in elections. I just wanted to add that
because I really hadn’t heard that in the discussion.
Josh John, you actually begged me to then make a point on my book that I co-
authored called Reckless Endangerment. I disagree slightly because I
think Fannie and Freddie between ’95 and the crisis seasoned the market
with the notion that homeownership is, in and of itself, a good and they
created standards that then the private market took and distorted for their
own use, leading us down. So, I would say they seasoned the market, and
then the private market drove us to the race to zero; Fannie and Freddie
jumping back in at the end of that.
But, if you look at their history, Fannie from 1939 until I would say 1995
and Freddie from ’71 until ’95, the GSEs served their traditional role
December 15, 2015/9:30 a.m. EST Page 48
without problem. And so, there is nothing inconsistent with my view of
the GSEs were integral in seasoning the market to crisis, that the private
market then drove us over the cliff in the crisis, and the suggestion that the
GSEs in their fundamental purpose, the purpose in which President
Roosevelt created the notion of the secondary mortgage market. There’s
nothing inconsistent in those perspectives.
Scott This is Scott. I mean a strong regulator, in fact, the current FHFA, had
they been in place in 2003, ’04 and ’05 could have, and probably would
have stepped in to stop them from doing no doc loans and stop them from
buying those MBS that they were buying off the shelf, and they would not
have gone into conservatorship.
Josh Had they had—
Scott Even under the old model if they had just had that kind of regulatory
diligence.
Josh And if they had significant capital, which is the irony here. We’ve starved
them of capital where capital, had they had the level of capital that banks
had, would have prevented them from getting in trouble.
December 15, 2015/9:30 a.m. EST Page 49
M Well, and if we had regulation of the independent mortgage companies
that prohibited them from knowingly making unsustainable loans, that
would have helped [indiscernible] as well.
Josh Absolutely.
M Regulation mattered.
Josh If there’s no further questions, operator, thank you, everyone for listening
to the call. I’d like to thank the participants, again, for joining the call.
Feel free to follow-up with any of us.
Moderator That does conclude the conference for today. Thanks for your participate,
and for using AT&T Executive Teleconference. You may now
disconnect.