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Question to Fannie Mae former CFO, Tim Howard, What are your thoughts regarding Moody’s claims?
Tim Howard responses:
Many opponents of Fannie and Freddie have been saying for the past few years that it’s not possible for Fannie and Freddie to be brought out of conservatorship without their having to hold so much capital they would not be able to function effectively. It looks like the author of the Moody’s study found a few of those people.
When Fannie was forced into conservatorship in September 2008, it had a $3.1 trillion book of business and $47 billion in capital. Even with all the toxic mortgages it talked itself into buying in a foolish attempt to win share back from the private-label securities market–including loans like interest-only ARMs and no-doc mortgages that can no longer be made today–it still did not lose money on an operating basis between 2008 and 2011. Technically, its meager $47 billion in capital would have been enough for the risks it took. Today, Fannie’s book of business is still $3.1 trillion (unrounded, it’s 2.3 percent larger than it was pre-conservatorship), and the credit quality of its loans is much higher than it was then. In addition, its mortgage portfolio today is one-third the size. So–where does this need for “hundreds of billions of dollars” in capital come from, per the Moody’s report?
The people who don’t want Fannie and Freddie to exit conservatorship can and do come up with all sorts of invented obstacles that seemingly make it impossible. But let’s turn it around and say, “we’ve determined that the Fannie and Freddie business model is the best alternative for the U.S. secondary mortgage market going forward; so, how do we reform them, bring them out of conservatorship, and recapitalize them?” I believe that’s a question that will be asked in the negotiations between the Mnuchin Treasury and the plaintiffs in the lawsuits, and I believe they’ll come up with a much more workable alternative than the author of the Moody’s report did. I’ll give my own thoughts on this topic in my next post, which I intend to put up on Monday.
What do you think of this new ridiculous bill on GSE risk sharing from Rep Ed Royce today: http://www.housingwire.com/ext/resources/files/Editorial/Documents/royce_moore_credit_risk_transfer_gse_bill.pdf
Tim Howard responses:
This bill is a great reminder of why it’s such a good thing that Treasury Secretary-designate Mnuchin has promised to “get Fannie and Freddie out of government ownership…reasonably fast.” The only way he can do that is administratively, and that means moving responsibility for mortgage reform away from the legislature in Washington DC–where, as the Royce bill so clearly illustrates, people have no idea what they’re doing– up to the financial professionals in New York, where they do.
Royce wants to make credit risk sharing mandatory for Fannie and Freddie, whether it is economically sensible or not. His bill has no provisions for measuring the effectiveness, or the equity capital equivalency, of the risk sharing he wants to force the companies to do; apparently it’s not important if Fannie and Freddie’s risk-sharing securities actually transfer any credit risk away from the companies, as long as they have the appearance of doing so. (And while we’re giving money away, let’s get the private mortgage insurance industry in on this as well.)
I’d love to be asked to testify about this bill, if it ever gets that far.
See below links for more information:
In Closing, We believe President Elect Trump and Nominated Treasury Secretary, Mnuchin will correct the wrong caused by the Obama’s Administration. Bob Corker, Ed Royce and others better get on board with the Trump’s program.