FHFA’s Enterprise Regulatory Capital Framework (FHA Or Wells Fargo?)

Mark Calabria and the Federal Housing Finance Agency was released their Enterprise Regulatory Capital Framework for comment.

Is their model the US government agency FHA or a commercial bank like Wells Fargo? FHA or a commercial bank, what’s it going to be?

Let’s take a look at the FHFA’s proposed rule.

Overview of the Proposed Rule

A. Regulatory Capital Requirements

In response to the comments and feedback on the 2018 proposal and in furtherance of FHFA’s stated objectives, the regulatory capital framework contemplated by the proposed rule would require each Enterprise to maintain the following risk-based capital:

• Total capital not less than 8.0 percent of risk-weighted assets, determined as described below;• Adjusted total capital not less than 8.0 percent of risk-weighted assets;

• Tier 1 capital not less than 6.0 percent of risk-weighted assets; and

• Common equity tier 1 (CET1) capital not less than 4.5 percent of risk-weighted assets.

Each Enterprise also would be required to satisfy the following leverage ratios:

• Core capital not less than 2.5 percent of adjusted total assets; and

• Tier 1 capital not less than 2.5 percent of adjusted total assets.

Adjusted total assets would be defined as total assets under generally accepted accounting principles (GAAP), with adjustments to include certain off-balance sheet exposures. Total capital and core capital would have the meaning given in the Safety and Soundness Act. Adjusted total capital, tier 1 capital, and CET1 capital would be defined based on the definitions of total capital, tier 1 capital, and CET1 capital set forth in the regulatory capital framework (the Basel framework) developed by the Basel Committee on Bank Supervision (BCBS) that is the basis for the United States banking regulators’ regulatory capital framework (U.S. banking framework). These supplemental regulatory 11 capital definitions would fill certain gaps in the statutory definitions of core capital and total capital by making customary deductions and other adjustments for certain deferred tax assets (DTAs), goodwill, intangibles, and other assets that tend to have less loss-absorbing capacity during a financial stress.

To calculate its risk-based capital requirements, an Enterprise would determine its risk-weighted assets under two approaches—a standardized approach and an advanced approach—with the greater of the two used to determine its risk-based capital requirements. Under both approaches, an Enterprise’s risk-weighted assets would equal the sum of its credit risk-weighted assets, market risk-weighted assets, and operational risk-weighted assets.

Of course, neither Fannie Mae or Freddie Mac currently have any regulatory capital (intended).

But US commercial banks have CET1 (Basel III Estimated Tier 1 Common Ratio) of 11% in 2019.

So, FHFA wants Fannie Mae and Freddie Mac to have commercial banks capital ratios despite the fact that GSEs are NOT depository institutions. And Bloomberg is saying Fannie and Freddie will need $200 billion in capital buffers.

There are other rules in the FHFA’s proposal, but I would ask FHFA is they want Fannie and Freddie regulated like a commercial bank (with The Fed regulating them) or like the FHA that maintains a fund required by Congress to maintain at least a 2% ratio in reserves.

So, commercial banks or the FHA? What’s it going to be?

Here is a video of FHFA’s Mark Calabria trying to regulate Fannie Mae and Freddie Mac.

Big Bubbles? NASDAQ Internet Index Looks Like A Fed-blown Bubble

Hawaiian crooner Don Ho almost had it right. But instead of “Tiny Bubbles,” The Federal Reserve has blown BIG BUBBLES.

Momentum investing has shifted away from value investing, for the moment, and the NASDAQ Internet index (e.g., Grubhub, Chewys, Alibaba, etc.) has been rising rapidly.

With the help of The Federal Reserve, the NASDAQ Internet Index Forward P/E has skyrocketed.

And the QNET index is currently is at a P/E ratio of … 168.8.

The Fed’s new motto: “Don’t Think Twice, It’s Alright.”

Running On Empty? EPS Forecast Is Dismal Amid Covid-19 Epidemic (Bubble Trouble??)

Well, whether the Covid-19 crisis is a real threat leading states to shutdown their economies or just plain old hysteria remains to be seen. But the next 4 quarters Median Earnings Per Share (EPS) estimates (yellow line) are decidedly declining. In fact, median EPS resembles an arc-tangent function from MBS prepayment models. However, the S&P 500 index remains elevated.

Want to talk asset bubbles? A basket of 90 internet stocks now trading at 160x earnings!

Of course, The Federal Reserve keeps easing in the face of Covid-19.

The bubble monster (aka, The Federal Reserve) keeps creating asset bubbles.

US House Prices to Drop 6.6% by May 2021, First Annual Decline since Jan. 2012 (Remake 2012 With John Cusack?)

CoreLogic forecasts that prices of single-family houses, including distressed sales, would begin dropping on a month-to-month basis with the June reading – it just released its May reading, which was up 4.8% year-over-year – and that prices, as tracked by the national Home Price Index (HPI), would be down 6.6% year-over-year by May 2021.

“2021 will mark the first year home prices are expected to decline in more than nine years,” CoreLogic said. The last year-over-year decline in the HPI was booked in January 2012.

“Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market,” the report said.

The last time unemployment surged in the US (red box) was associated with a rapid decline in home prices. Based on the current jump in unemployment (pink box) due to the Covid-19-related economic shutdown, CoreLogic is predicting a -6.6% YoY decline by May.

Perhaps John Cusack can play the lead in 2021.

Rebound! Mortgage Purchase Applications Rise 5.34% In Latest Report As Rocket Mortgage Files To Go Public

The latest report from the Mortgage Bankers Association released this morning shows that mortgage purchase applications rose 5.34% from the preceding week on a seasonally adjusted basis.

You can see that mortgage purchase applications rebounded from the Covid-19 dip as housing prices continue to rise. What makes this post-financial crisis rise in mortgage purchase applications interesting is the decline in the level of sub-660 FICO score originations.

Of particular note in the mortgage industry is the announcement that Quicken Loans (aka, Rocket Mortgage) will be going public.

(Bloomberg) — Rocket Companies Inc., the parent company of the mortgage giant founded by billionaire Dan Gilbert, filed for an initial public offering, disclosing an annual profit for the past three years.

Here is Dan Gilbert in happier times with forward LeBron James and an aging point guard Warren Buffett.

Eureka! Taleb and Asness feud on Twitter over tail-risk hedging (or Fed hedging)

Market Watch — There’s nothing like a very public spat between two titans of the financial world.

In the one corner, “Black Swan” author Nassim Nicholas Taleb; in the other, Cliff Asness, the founder of AQR Capital Management. The two took to Twitter with each using unprintable words about whether it’s worth the cost to insure against extreme events, or what’s called tail-risk hedging.

Taleb criticized AQR’s performance, which Asness acknowledges but says is due to the market’s current punishment of value stocks.

The coronavirus pandemic has proved to be a terrific time for tail-risk hedging — the CBOE Eurekahedge Tail Risk Volatility Hedge Fund Index has returned 51.47% through the end of April. The S&P 500 value index SP500V, +0.96% has dropped 19% this year, compared to the 8% fall for the broader S&P 500 SPX, +1.58% .

You can follow the verbal harpoon war on Twitter @cliffordasness @nntaleb

You can see the large drop in the S&P 500 index starting in late February and crashing through the lower P/E band in March only to rally by June.

Here is the CBOE Eurekahedge Tail Risk Index showing the payoff in 2020 as the Covid-19 struck markets. But notice that The Federal Reserve started expanding its balance sheet (SOMA) in Q4 2019, so the Eurekahedge tail risk index may be Fed/Powell risk index.

Tiny (Asset) Bubbles? Or HUGE Asset Bubbles? Is Charlie Kelly The REAL Fed Chair?

The Federal Reserve has been pumping liquidity (aka, air) since late 2008. And the stock market and commercial real estate prices have soared.

These are not tiny bubbles, but HUGE bubbles.

Is Charlie Kelly’s uncle Jack the real Fed Reserve Chair?

US Payrolls Rise 4.8 MILLION In June, Dow Jumps 1% (Taylor Rule Rises To -7.07% On Improving Unemployment Rate To 11.1%)

The markets were waiting for some goods news during the Covid-19 pandemic (although I am certain that Dr. Fauci (nee Strangelove) will produce some dire forecast about new swine viruses to rattle confidence). The good news is … Non Farm payrolls jumped +4.8 million in June.

And the number of working Americans rose for the second straight month and the unemployment rate dropped to 11.1% in June.

As a result of the decrease in the unemployment rate, the Taylor Rule (Rudebusch variation) now calls for a Fed Funds rate of -7.07%.

Dr. Fauci speaking today.

My Fed! FOMC Minutes Suggest Fed Will Keep Buying Bonds “For Many Years” As Fed Officials Unconvinced on Need for Yield-Curve Control

There is nothing in the world that can change The Fed.

Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.

“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.

Here is today’s Treasury yield curve versus the yield curve on December 1, 2005. Looks more like wholesale panic to me.

Furthermore, Powell and The Fed have signaled in the minutes that more long-term debt will have be issued … and purchased by The Fed.

The Fed dots plot from the recent meeting shows low interest rates until after 2022.

To infiniti … and beyond!!