Proposed FHFA Director Calabria Plans To Release Fannie Mae And Freddie Mac From Conservatorship With Adequate Capital To Avoid Another 2008 Debacle

The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie were placed into conservatorship with their regulator back in 2008 after housing prices declined and mortgage defaults spiked.

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But since the catastrophic year of 2008,  Fannie Mae (as an example) generated substantial net revenue after 2008. [This brings into question the wisdom of placing Fannie and Freddie into conservatorship.]

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Fannie and Freddie are not depository financial institutions, of course. And as a consequence, do not have risk-weighted capital requirements. However, once they emerge from conservatorship, they should be required to hold about $200 in risk-weighted capital. But the problem facing Mark Calabria if he is approved as FHFA Director is … WHERE will Fannie and Freddie get the $200 billion in capital.

WASHINGTON — Despite recent speculation that the White House and Federal Housing Finance Agency were planning a dramatic shake-up of Fannie Mae and Freddie Mac, observers say the nominee poised to run the FHFA will have a more targeted agenda on the job.

Some experts expect Mark Calabria, an administration official who could be confirmed as early as this month, to prioritize a plan for letting the government-sponsored enterprises retain more capital once he takes the helm of the agency.

Greater capital retention would most likely be achieved by the Treasury Department and FHFA renegotiating the agreement requiring Fannie and Freddie to hand over profits to pay for their bailouts — to allow the GSEs to retain more of their earnings.

“I support the concept of having significantly more capital at the GSEs,” Mark Calabria said at his FHFA nomination hearing last month.
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“Our expectation would be that there would be capital retention, but that that’s not a day one action and there is probably something collective that will be proposed by the administration, of which capital retention is going to be part of that,” said Bose George, a managing director at Keefe, Bruyette & Woods.

Calabria, currently a top aide to Vice President Mike Pence, is also expected to continue policy initiatives already in process. This includes completing the rollout of an integrated mortgage security for Fannie and Freddie as well as a common securitization platform, and finalizing a rulemaking imposing risk-based capital requirements on the two mortgage companies for whenever they re-enter the private sector.

It is clear that some investors are already anticipating a.freeing of Fannie and Freddie from conservatorship with the FHFA.

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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!