What is conspicuously missing from the over 1500 page financial reform bill passed by the Senate last month (SB 3217) or any of its more than 100 pages of amendments, is a clear strategy to exit Fannie Mae and Freddie Mac from their conservatorship and either dissolve or re-privatize these two entities. Traditionally Fannie Mae (The Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) were public/private hybrids which meant that the U.S. government owned a minority interest in the two congressionally chartered, mostly private entities. In September of 2008, the U.S. government took both Fannie Mae and Freddie Mac into conservatorship in response to their huge losses, and since that time tax dollars have provided over $126 billion dollars to keep both entities open. Late last year, the Obama administration promised that it would cover unlimited losses through 2012 for both entities. (The pledged covered losses had been capped at $400 billion dollars prior to this.) Fannie and Freddie own or guarantee about $5.5 trillion dollars worth of U.S. residential mortgages or about 31 million mortgages, and in spite of recent credit and underwriting changes, they remain key players in the housing industry.
Both entities have been blamed in part for the financial meltdown and the problems with the mortgage crisis. Sharp criticism rose early this year when regulators announced that the CEO's of both Fannie Mae and Freddie Mac could be paid as much as $6,000,000 for 2009--a year when they were under conservatorship.
Many lawmakers agree that it is time to stop the bleeding on these two entities, which still provide an estimated 50-70% of mortgage loans in the United States. An amendment was offered to Senate bill 3217 which would have forced lawmakers to begin exiting Fannie and Freddie from conservatorship. This amendment was voted down. The one which passed, proposed by Harry Reid (D. NV) for Chris Dodd (D. CT) and Blanche Lincoln (D AR) calls instead for a Department of Treasury Study on "ending the conservatorship of Fannie Mae, Freddie Mac and Reforming the Housing System." The study is to include such options as "the gradual wind-down and liquidation of such entities; the privatization of such entities; the incorporation of the functions of such entities into a Federal Agency; the dissolution of Fannie Mae and Freddie Mac into smaller companies, or any other measures the Secretary (of the Treasury] deems appropriate." Other matters that this study is to consider include ways to restructure housing finance in the US to ensure that consumers will be able to access "30 year fixed rate prepayable mortgages and other mortgage products that have simple terms that can be easily understood; the role of the Federal Housing Adminstration and the Department of Veterans Affairs in a future housing system; the impact of reforms of the housing finance system on the financing of rental housing; the role of standardization in the housing finance system, and the options for transition to a reformed housing finance system." The study is to be completed no later than January 31, 2011 and it is to be delivered to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services.
It is interesting that a bill which spends hundreds of pages creating and detailing the role of a new Bureau of Consumer Financial Protection, which has not previously existed, could not find space to do more than call for a study of two entities that are currently bleeding U.S. tax dollars. Although the amendment is laconic in its treatment of Fannie and Freddie, statements made by Treasury Secretary Tim Geithner and Congressman Barney Frank (D MA), who has been a major proponent of financial reform, suggest that actually the government does have plans for Fannie and Freddie--they just aren't telling us what those plans are yet.
For instance, the January 22, 2010 issue of the Wall Street Journal quotes Frank as saying that "The remedy here is...as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance." In March, Frank went further and was quoted in the Washington Post warning investors that "People who own Fannie and Freddie debt are not in the same legal position as Treasury bonds, and I don't want them to be." According to the article, Frank says that he wants investors to understand that the Fannie and Freddie are not as safe as the U.S. government. The statement was unnerving to market analysts who feared that international investors would shy away from purchasing the debt. But Frank's comments are interesting in light of the current debate over whether the mortgage giants (or their replacements) should be privatized or owned completely by the government. One point on which everyone seems to agree is that a public/private hybrid, which the entities were before conservatorship, does not work. Frank has publicly expressed his dislike of public/private hybrids and Treasury Secretary Tim Geithner echoed his comments via Politico on April 9, 2010 when he called the hybrid concept "unworkable."
But the chances for privatization are not looking good. Former Fannie Mae CEO Daniel Mudd testified before the Financial Crisis Inquiry Commission in April of 2010 regarding the financial collapse of Fannie Mae. During his testimony Mudd was asked whether the government should be involved in the residential mortgage business. Citing the U.S. government's involvement in 90% of mortgage loans, Mudd's response was that "the notion that you could go back to a fully private structure cannot be accomplished within our lifetime." A study by Standard and Poor's released in January reaches a similar conclusion--it would be nearly impossible to attract enough capital to replace Fannie Mae and Freddie Mac with self-sustaining private companies which would offer affordable 30 year fixed rate mortgages.
That just leaves the government. This makes the parameters of the study particularly interesting, especially in light of Barney Frank's comments that we need to abolish Fannie and Freddie and come up with "a whole new system of housing finance."
What would such a system look like? No one is saying. But in a January interview with the Wall Street Journal Tim Geithner said that the process would not begin this year. "It's just a complicated thing to get right... But we are completely supportive and agree completely with the need to take a cold, hard look at what the future of those institutions should be in our country."
The Landrieu/Isakson Amendment and Risk Retention
When House Bill 4173 and Senate Bill 3217 (the two financial reform bills) are reconciled in committee starting next week, one extremely important consideration for the mortgage industry and all of the smaller players including small to midsize banks and certainly mortgage brokers is going to be risk retention. If you recall, risk retention by originators was one of the policy recommendations made by consumer advocacy groups. Based on the theory that originators will tend to originate better loans if they have to hold on to a percentage of that loan for life, risk retention assumes that by forcing all players to maintain a stake in the game, originators will screen their applicants more carefully.
The problem with risk retention mandates is that, as with so many other aspects of the financial reform bill, it favors large players over small and midsized ones. HR 4173 requires 5% risk retention for all mortgage loans. On a $200,000 loan, an originator would have to be able to retain $10,000. In order to originate 10 loans at $200,000 each, he would have to be able to retain $100,000.00. Not only would the small, cash-strapped broker not be able to this, but the better capitalized small bank would also struggle because essentially they would have to retain servicing on every loan they originate. (Can you imagine receiving a letter from your mortgage company reading: "We have transferred your loan, so you will henceforth make all payments to company XYZ, except for the payments on $10,000 you owe us.")
Risk retention mandates deny the necessity of the secondary market by forcing originators to tie up cash and resources in loans, which will ultimately restrict access to capital.
When the Senate Bill was being debated, the Landrieu/Isakson amendment was approved which provides exemptions for certains loans from the 5% risk retention requirement. Senators Mary Landrieu (D. LA) and Johnny Isakson (R. GA) introduced the amendment to counter some of the problems inherent in risk retention. SA 3956 creates the following safe harbor for mortgages which will not fall under the 5% risk retention guidelines:
"The Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Agency shall jointly define the term 'qualified residential mortgage' for purposes of this subsection, taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default, such as--
'documentation and verification of the financial resources relied on to qualify the mortgagor;
standards with respect to--the residual income of the mortgagor after all monthly obligations; the ratio of the housing payments of the mortgagor to the monthly income of the mortgagor; the ratio of the total monthly installment payments of the mortgagor to the income of the mortgagor; mitigating the potential for payment shock on adjustable rate mortgages through product features and underwriting standards; mortgage guarantee insurance obtained at the the time of origination for loans with combined loan to value ratios of greater than 80% and prohibiting or restricting the use of balloon payments, negative amortization, prepayment penalties, interest only payments, and other features that have been demonstrated to exhibit a higher risk of borrower default."
What does that mean exactly? For example, the amendment calls for mortgage guarantee insurance on loans with combined loan to values over 80%. Right now, all conventional loans over 80% utilize mortgage insurance unless the loan has a first and a second lien (which would then be a combined loan to value). Would the new rules require a consumer to purchase mortgage insurance even with the presence of a second lien? Do the Senators who drafted this amendment know what mortgage insurance is?
Senator Isakson is quoted in Housing Wire on May 12, as saying, "What Senator Landrieu is saying is we're not going back when we make zero-down, interest only, reverse amortization loans anymore, but we are going to make the good old days loan, where there is a down payment, where there's skin in the game, where there's an income-to-debt ratio and where the borrower is qualified to borrow the money that they're borrowing....The only risk retention that will be required is when somebody is making a bad loan which means people will stop making bad loans which means that this bill and this amendment will address the measure that led to the failure in the housing market."
Zero down loans led to the failure of the housing market? Really? I wonder whether Senator Isakson knows that the U.S. government is still backing zero down loans through the VA and, if funds are ever reauthorized, through USDA. FHA requires a 3.5% down payment and an amendment which would have raised that down payment to 5% was defeated. Would these loans be subject to risk retention requirements? If these are "bad loans" that led to the housing meltdown, why is government still insuring them? The people with the highest level of risk retention in government insured loans is the American taxpayer.
Perhaps if the people writing these bills had even the vaguest notion of what they were talking about, the new laws coming out of Washington would make a lot more sense.
The text of the amendment actually does not say anything about down payment other than apparently requiring mortgage insurance on all loans despite the presence of a second lien. Maybe that will be worked out among HUD, the federal banking agencies and the Bureau of Consumer Financial Protection as they define what a "qualified residential mortgage" actually is. And as for the rest of us, maybe as Nancy Pelosi famously said of healthcare, we have to wait for them to pass the bill before we can find out what's in it.
The problem with risk retention mandates is that, as with so many other aspects of the financial reform bill, it favors large players over small and midsized ones. HR 4173 requires 5% risk retention for all mortgage loans. On a $200,000 loan, an originator would have to be able to retain $10,000. In order to originate 10 loans at $200,000 each, he would have to be able to retain $100,000.00. Not only would the small, cash-strapped broker not be able to this, but the better capitalized small bank would also struggle because essentially they would have to retain servicing on every loan they originate. (Can you imagine receiving a letter from your mortgage company reading: "We have transferred your loan, so you will henceforth make all payments to company XYZ, except for the payments on $10,000 you owe us.")
Risk retention mandates deny the necessity of the secondary market by forcing originators to tie up cash and resources in loans, which will ultimately restrict access to capital.
When the Senate Bill was being debated, the Landrieu/Isakson amendment was approved which provides exemptions for certains loans from the 5% risk retention requirement. Senators Mary Landrieu (D. LA) and Johnny Isakson (R. GA) introduced the amendment to counter some of the problems inherent in risk retention. SA 3956 creates the following safe harbor for mortgages which will not fall under the 5% risk retention guidelines:
"The Federal banking agencies, the Commission, the Secretary of Housing and Urban Development, and the Director of the Federal Housing Agency shall jointly define the term 'qualified residential mortgage' for purposes of this subsection, taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default, such as--
'documentation and verification of the financial resources relied on to qualify the mortgagor;
standards with respect to--the residual income of the mortgagor after all monthly obligations; the ratio of the housing payments of the mortgagor to the monthly income of the mortgagor; the ratio of the total monthly installment payments of the mortgagor to the income of the mortgagor; mitigating the potential for payment shock on adjustable rate mortgages through product features and underwriting standards; mortgage guarantee insurance obtained at the the time of origination for loans with combined loan to value ratios of greater than 80% and prohibiting or restricting the use of balloon payments, negative amortization, prepayment penalties, interest only payments, and other features that have been demonstrated to exhibit a higher risk of borrower default."
What does that mean exactly? For example, the amendment calls for mortgage guarantee insurance on loans with combined loan to values over 80%. Right now, all conventional loans over 80% utilize mortgage insurance unless the loan has a first and a second lien (which would then be a combined loan to value). Would the new rules require a consumer to purchase mortgage insurance even with the presence of a second lien? Do the Senators who drafted this amendment know what mortgage insurance is?
Senator Isakson is quoted in Housing Wire on May 12, as saying, "What Senator Landrieu is saying is we're not going back when we make zero-down, interest only, reverse amortization loans anymore, but we are going to make the good old days loan, where there is a down payment, where there's skin in the game, where there's an income-to-debt ratio and where the borrower is qualified to borrow the money that they're borrowing....The only risk retention that will be required is when somebody is making a bad loan which means people will stop making bad loans which means that this bill and this amendment will address the measure that led to the failure in the housing market."
Zero down loans led to the failure of the housing market? Really? I wonder whether Senator Isakson knows that the U.S. government is still backing zero down loans through the VA and, if funds are ever reauthorized, through USDA. FHA requires a 3.5% down payment and an amendment which would have raised that down payment to 5% was defeated. Would these loans be subject to risk retention requirements? If these are "bad loans" that led to the housing meltdown, why is government still insuring them? The people with the highest level of risk retention in government insured loans is the American taxpayer.
Perhaps if the people writing these bills had even the vaguest notion of what they were talking about, the new laws coming out of Washington would make a lot more sense.
The text of the amendment actually does not say anything about down payment other than apparently requiring mortgage insurance on all loans despite the presence of a second lien. Maybe that will be worked out among HUD, the federal banking agencies and the Bureau of Consumer Financial Protection as they define what a "qualified residential mortgage" actually is. And as for the rest of us, maybe as Nancy Pelosi famously said of healthcare, we have to wait for them to pass the bill before we can find out what's in it.
Regulation of property factors on the horizon after centuries of imbalance in Scotland
The legislation will lead to the establishment of a code of conduct setting minimum standards of practice expected of registered property factors, and will afford greater protection for homeowners from rogue factors.
The publication of the Bill follows several years of campaigning by Mike Dailly, Principal Solicitor at the Govan Law Centre, who has worked alongside the Maryhill MSP pushing for legislation to clean-up property factoring in Scotland.
Commenting on the publication of the Bill Patricia Ferguson MSP said: "This is a milestone in the campaign to regulate property factors, and to protect homeowners from the unscrupulous practices of those factors that have brought the whole industry into disrepute".
"It is two and half years since I launched a consultation on my proposal to require the registration of factors, which showed overwhelming support for legislation. Hopes were raised when the Office of Fair Trading carried out a study into Scottish Property Factors, but then dashed when they only recommended a voluntary scheme despite concluding that the system is not working well".
"There was disappointment when the Scottish Government refused to legislate, favouring an industry-led voluntary accreditation scheme similar to that which has already failed homeowners. But the campaign was boosted when my proposal received the support of 45 MSPs from across the political divide to allow a Bill to be introduced, and when the whole Parliament supported a motion welcoming the progress towards legislation".
"The publication of my Bill is yet further progress towards legislation that will ensure better accountability of property managers for their standards and the services that they provide and I hope that it will continue to receive the support of my colleagues in the Scottish Parliament."
GLC's Mike Dailly said: "Property factors must be the only industry in Scotland who are virtually unlicensed and unregulated. When one third of your customers are unhappy with the service you provide it's time for a statutory solution. The Scottish Government are consulting on a voluntary accreditation scheme, but we've had self-regulation for centuries and it hasn't worked. The people of Scotland need a solution with legal teeth, and the Bill provides that solution in a fair and measured way".
"By introducing a formal requirement on all factors to be registered in a national register of property factors, the Bill would ensure that minimum standards of practice were adhered to across Scotland. Individual homeowners would be able to rely on those minimum standards in their day to day dealings with their property factor, and in an extreme case a bad factor could be de-registered to prevent them causing ongoing consumer detriment".
"Where a property factor failed to meet their contractual duty, or failed to reasonably adhere to the minimum standards, a homeowner would be entitled to take their dispute to a new tribunal called the 'homeowner housing committee'. There would be no need for a lawyer, and no legal expenses to worry about. The Bill gives the homeowner housing committee the power to ensure compliance with the contract and minimum standards, and where appropriate, require the factor to made a compensatory award or refund to the homeowner".
Full details of the Bill are available on the Scottish Parliament's website here.
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