GSEs Will Be Here For Years To Come

October 20, 2015 at 10:16 am Leave a comment

Show Me The Money!

The NCUA chalked up two more settlements in its lawsuits against investment banks involved in the sale and underwriting of the mortgage-backed securities purchased by the failed corporates. NCUA announced that it reached settlements with Barclays Capital ($325 million) and Wachovia ($53 million) to settle claims about their underwriting activity.  NCUA says it has now obtained over $3 billon in settlements.

Housing Reform is Dead

The Obama administration virtually assured yesterday that housing reform is going to be the next President’s problem.  For credit unions, this is a good thing, at least in the short to medium term.  It also speaks volumes about just how messed up – dysfunctional is too kind at this point – our political system has become.

Since it’s been a while since I talked about housing reform, let me get you up to speed. When Fannie and Freddie were taken over in 2008, causing the first tremor of the mortgage meltdown, they were placed in conservatorship under the supervision of the newly created Federal Housing Finance Administration.  They were nationalized.  The government brought slightly less than 80 percent  of their common shares.

Seven years ago, it was unthinkable that Congress would not act to restructure a housing system that had to be bailed out by the American taxpayer, but some funny things have happened since then:

(1)  Housing reform requires compromise of the type proposed by a group of level-headed Senators who actually want to get things done in Washington.  But posturing is so much easier than legislating these days and a lot more fun.  Their legislation couldn’t make it to the floor.(

(2)  The GSEs started making sizeable profits and the government claimed the profits.

(3)  The American public is as dependent on the secondary market provided by the GSEs than ever before.  Estimates vary, but approximately half of the new mortgages entered into in this country are brought by these behemoths which package them into mortgage-backed securities.  Credit unions and smaller banks are concerned that a world without virtually guaranteed secondary market access would drive up the cost of their mortgages and force them to provide fewer mortgages to their members and consumers. That is why it’s a good thing that the status quo will be in place, at least for now.

Recently there have been whispers about a possible Whitehouse plan to recapitalize the GSEs and put them back in private hands. Earlier this week Bloomberg news reported that “Fannie Mae and Freddie Mac shares both jumped more than 8 percent Oct. 6 after a Washington political intelligence firm published a report that said the White House was in the ‘very early stages’ of weighing its options to end federal control, known as conservatorship.”

Yesterday’s White house statements slammed the door on this speculation. In an Opinion piece, Antonio Weis, an aid to Treasury Secretary Jacob J. Lew, argued that “ Recap and release could raise the cost of mortgages for Americans, and potentially expose taxpayers to another painful bailout.”  And in a speech before the Mortgage Bankers, Michael Stegman, a top adviser to President Barack Obama on housing, warned against what he called  the increasingly noisy chorus of the advocates of recap and release, many of whom have placed big bets against reform so they can make a profit, and are doing everything they can to make sure that those bets pay off.”

What’s next? There is a slim chance that things will change whether Washington wants them to or not.  A lawsuit has been brought in Federal District Court in Iowa in which GSE shareholders are contending that since 2012 the Treasury has illegally claimed GSE profits that belong to the remaining private shareholders.

A second thing to keep in mind is that under Dodd-Frank any mortgage purchased by a GSE is a Qualified Mortgage. This is important because the GSE’s have less stringent underwriting requirements than does the CFPB.  But this “GSE eligible flexibility” ends in 2021.


Entry filed under: Legal Watch, Mortgage Lending, Regulatory. Tags: , .

Next Up on the Regulatory Hit List: Supplemental Capital NY moves to Strengthen Anti-Discrimination Laws

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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