Regulatory Arbitrage Infinity! Law Limiting CEO Pay To $600,000 At Fannie and Freddie Easily Skirted Since Presidents Are Not Subject To Law

US Senator Elizabeth Warren probably thinks that the T-Rexs and Raptors in Jurassic Park can be regulated or contained. Just like she thinks that G-SIBS can be regulated without causing harm to the economy. But life finds a way.

Quicken Loans (and Rocket Mortgage) are examples of financial institutions that escape  regulation by remaining a privatley-held corporations. But there are zads of ways to avoid regulations imposed on  financial institutions.

Massachusetts Sen. Elizabeth Warren wants to make sure top executives at mortgage giants Fannie Mae and Freddie Mac are not being paid more than a congressionally-mandated salary cap allows.

An example of bypassing the regulatory swamp? Regulations prohibit Fannie Mae and Freddie Mac CEOs from making more than $600,000 per year. 

In a recently unveiled proposal – called the Respect the Caps Act – Warren is looking to close a loophole both agencies are said to be taking advantage of in order to pay their top executives millions.

Warren’s legislation was developed in response to a watchdog report from the Federal Housing Finance Agency’s (FHFA) Inspector General. According to the report, the FHFA – which oversees Fannie and Freddie – approved plans that circumvented the congressionally-mandated salary cap at the two agencies, which is set at $600,000. This was said to be done by separating the CEO and president roles, transferring tasks from the CEO to the president, and raising the president’s pay. Presidents are not subject to the pay cap.

As a result, two executives at Fannie were said to be paid $4.2 million to perform the same tasks a CEO has performed for $600,000. At Freddie, the figure was $3.85 million.

“Following the financial crisis, Congress passed my bipartisan bill to cap pay raises for executives at Fannie Mae and Freddie Mac. Instead of enforcing the law, the FHFA has allowed executive compensation at Fannie to increase by $3.6 million and at Freddie, by $3.25 million,” Warren said in a press release.

If the director of the Federal Housing Finance Agency – a post that Mark Calabria was just confirmed to – were to approve salaries that exceeded the $600,000 cap, he could be removed according to the terms of the bill.

The cap was put in place in 2015 after the former FHFA director sought to allow executives to receive a hefty, multimillion dollar pay package.

The former FHFA diector was … Mel Watt/

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US 1-Unit Housing Starts Fall 17% In February (Apartment Starts Rise 23.5%) As Lenders Tighten Credit

Yes, I know it was February.  But 1-unit housing starts falling 17% is not a good sign. At least apartment (5+ unit) starts are booming (+23.5%).

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While lenders tightening credit is no where near where it was in the past, it is still important to look at.

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On a year-over-year basis, 1-unit starts fell 10.6%.

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Federal Reserve board nominee Stephen Moore (great public speaker!) was touting the wage growth under President Trump. Turns out the his tout was true! The yellow line is wage growth YoY, compared to the cooling Case-Shiller (my auto correct tried to spell it Case-Swiller) house price index.

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In terms of house price growth (as of January), Washington DC loses its crown as the slowest growth top 20 metro area. San Diego and San Francisco are now the slowest growing (sub 2%). Los Angeles is growing slower than DC. The fastest is Las Vegas at 10.5% YoY.

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Chasing Mavericks! Fannie Mae And Freddie Mac Are Chasing The Fed’s Asset Bubble (And Other Market Distortions) With Weaker Credit Standards

US home prices have escalated rapidly since The Federal Reserve began their zero-interest rate policies and asset purchases back in 2008.

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In order to serve their US homebuyers, both Fannie Mae and Freddie Mac have had to “soften” their standards for purchasing loans from lenders. Particularly since wage growth is slower than home price growth. And has been since 2012.

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For example, the mean Loan-to-Value ratio for Fannie and Freddie are higher than during the peak of the housing bubble … which blew up.

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In terms of Combined Loan-to-Value Ratio (CLTV),  Fannie Mae purchased loans have a higher CLTV than during the peak of the housing bubble.ffcltv

In terms of average credit score, both Fannie and Freddie tighted their loan purchase standards after the financial crisis, but has been gradually lowering them since 2012.

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In terms of debt-to-income ratios (DTI), both Fannie and Freddie now have average DTI at 2005 levels. We can call that “peak crisis” in terms of the house price bubble peak.

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Like Mavericks at Half Moon Bay in California, Fannie and Freddie are chasing Mavericksv (large waves) to serve the homebuying community.

To be fair, much of the elevated home prices are in coastal California where the tech industry has flourished and buildable sites are constrainted by zoning and other regulations.

*I want to thank my GMU finance students taking my Python for finance class. And downloading the Fannie and Freddie data and analysis in Python. These ambitious students include Fabiola Gonzalez, Fabiola Maldonado, Brandon Wynes, Nathan Handy, Eleri Burnett, Jessica Giron, Lisbeth Figuroa, Ulises Areas, Sarah Madi,
James Pesquera, Belinda Chambika, Alex Dilorenzo, Alexandria White, Steve Bergquist, Dudley Hinote, Amir Sayyad, Claudia Aguilar, Sabrina Hannan, Wael Ronnie Zaineldeen, and Peter Rogers. Thanks to Stuart Sanders and Hakin Azoor!