Posts tagged ‘housing reform’

Treasury Releases its Post-GSE Blueprint and Why it Matters

Yesterday, the Treasury Department unveiled its long-awaited vision of a post-GSE housing market. Here are my initial takeaways:

  • RIP to “the Patch.” As I explained in previous blogs, Dodd Frank authorized mortgages eligible for sale to Fannie or Freddie to be classified as “Qualified Mortgages.” This is an important designation, as it provides mortgage holders a presumption that the borrower had the ability to repay a mortgage loan should it have to be foreclosed on. To the surprise of no one, the report recommends that this important exception for the GSE expire. The CFPB is already preparing for a post-Patch world. The Patch is set to die in July 2021.
  • Fannie and Freddie would become recapitalized entities, no longer having a government charter with the implicit backing of the U.S. Treasury. In addition, the Treasury recommends that Congress encourage the creation of competitors to the GSEs. To ease the barrier of entry into the industry, it suggests that Fannie and Freddie would have to make some of their proprietary information available to the public. This idea intrigues me as I think it’s an approach that should be used in many other big data contexts, but that’s a blog for another day.
  • One of the primary concerns of credit unions and community banks is that a world without Fannie or Freddie would be a world in which they could not cost-effectively and competitively sell mortgages. The big guys with their volume will always be able to undercut smaller institutions. To address this issue, the Treasury recommends that the new GSE-like institutions be required to purchase mortgages for cash and give the seller the option of whether or not to sell their servicing rights. The buyers would also be prohibited from offering volume discounts.

What does all of this mean? Realistically, there is no way that serious housing reform will be undertaken before the November 2020 election. That being said, the demise of the Patch gives whoever is in power real leverage to get Congress talking following the election. Translation: expect housing reform to be the top issue following the next election and at least some of these ideas to gain traction.

On that note, enjoy your first weekend of football. Let’s hope for real lousy weather on Sunday so that those of us committed to forgoing any physical movement or interaction with the family for approximately the next 22 Sundays don’t have to feel too guilty.

September 6, 2019 at 8:54 am Leave a comment

Dividend Payouts, Housing Reform and Taxi Lending Highlight CU News You Can Use

Show Me More Money

I figured I’d start with some good news this morning. NCUA announced that it will be paying out dividends totaling $160.1 million. This means that NCUA has been able to issue close to $900 million in equity distributions over the past year. Right now the NCUA has a Share Insurance Fund equity ratio of %1.39 to aggregate credit union assets. Under the law, any money in excess of the ratio must be returned to credit unions. The money is available as a result of NCUA’s decision to end the temporary Credit Union Stabilization Fund which was set up in the aftermath of the corporate crash.

GSE Capital Requirements Emerge As Key Issue In Housing Reform Debate

A key fault-line in the debate over how to reform the GSE’s spilled out into the public yesterday. In a speech before the Mortgage Banker’s Association laying out his view of what the housing industry should look like the future, FHA Director Mark Calabria argued that Fannie and Freddie should exit conservatorship but only after huge capital infusions. He explained that, “I can’t tell you what exactly the new model will look like. But, as a regulator, what I do know is that the future role and structure of Fannie and Freddie will be determined by the amount of private capital they’re able to build up.”

In the meantime, Dan Layton, the CEO of Freddie told lawmakers, albeit in bureaucratic speak, that the capital plans being drawn up by the Trump Administration are crazy. He called plans to have the GSE’s raise $125 billion in capital “unprecedented” and predicted that it would take at least 5 years to raise up to $50 billion. Five years is the length of Calabria’s term at the FHFA and he made it clear yesterday that when he leaves his post he intends the housing market to be a different place than it is today.

Taxi Lending Investigations Keep Piling Up

Now for some bad news. The investigations into taxi medallion lending practice are piling up quicker than presidential tweets. Yesterday evening the Times tweeted out that New York Senator and Minority Leader Chuck Schumer is requesting “a review of the regulation of credit unions in a taxi industry.” A good place to start would be the review of the regulation of credit unions in the taxi industry already conducted and released by NCUA’s Inspector General. New York City Mayor DeBlasio, Assembly Banking Chair Zembrowski and New York Attorney General James have already called for hearings and/or started investigations. As these investigations go forward let’s not forget about two companies called Uber and Lyft.

May 22, 2019 at 9:04 am Leave a comment

Housing Reform Is Finally Here!

Okay, I’m exaggerating a little to get your attention. To be totally truthful, the housing reform debate that is finally here.

I know inside baseball puts many normal people to sleep but now that the Senate has confirmed Mark Calabria to head the Federal Housing Finance Agency, all the pieces are in place for there to be a high-profile debate on how the housing market should be structured in this country. It’s a debate worth having and one that presents both dangers and opportunities for credit unions.

The FHFA was created following the conservatorship of Fannie and Freddie to oversee the GSE’s as well as the Federal Home Loan Bank system. As a result, its director has a direct impact on the terms and conditions under which mortgages will be purchased by Fannie and Freddie. I would argue that whoever heads the FHFA is the single most important person in housing. By handing the keys to Calabria, the Trump Administration has chosen a housing expert with a long track record of advocating for GSE reform. After all, before working for Vice President Pence, he worked for the Libertarian Cato Institute where he wasn’t afraid to argue for privatization of the housing market.

For example, in this testimony I pulled up this morning he argued that Fannie and Freddie and its shareholders should have to absorb more of the losses caused by their bankruptcy. He also noted in passing that he was “comfortable with believing that the remainder of the financial services industry could quickly assume the functions of Fannie Mae and Freddie Mac.”

The confirmation of Calabria comes shortly after President Trump issued a memo directing the Treasury Secretary and other officials to begin to take legislative and regulatory steps to reform the housing market. In the memorandum the President notes that the GSE’s are still the dominant force in the housing market and calls for officials to  come up with proposals and regulations for allowing more free market competition.

As followers of this issue know, the overwriting concern of credit unions is that all financial institutions, regardless of size, must continue to have cost-effective access to the secondary market. Many small to medium-sized credit unions don’t have the size or risk tolerance to hold a large number of mortgages in their portfolios. If housing reform goes wrong, regulators need to know consumers across the country will have less choices when shopping for a mortgage.

So I understand where the industry is coming from completely but there is also part of me that is curious about steps we could take to bring more of the free market into the housing industry. It just makes no sense to me that a country which has thrived on capitalism has a quasi-socialist housing market.

Does this mean that fewer people should own a home? No politician would ever say this but the answer is yes. The reality is as long as we have a system which subsidizes homeownership to the extent that ours does, we are going to end up with a housing system that is always at risk of another mortgage crisis. On that curmudgeonly note, enjoy your weekend.


April 5, 2019 at 9:33 am Leave a comment

One small step towards housing reform

Yesterday the FHFA, which has oversight over Fannie Mae and Freddie Mac took another tentative step in what passes for housing reform in politically paralyzed Washington. It announced a Request for Comment on a proposal to begin offering a mortgage-backed security issued jointly by Fannie and Freddie Mac. This is both more important than you might think and less impressive than it sounds here is why.

Credit unions need a secondary market –somewhere they can sell their mortgages to. It makes their loans cheaper, it manages risk and it ultimately allows our smaller industry to provide more mortgages to our members. Since Fannie and Freddie imploded credit unions have had a huge stake in insuring that whatever mechanism replaces them provides a cost effectively venue to sell their mortgages. Some people argue that the government is too involved in the mortgage market and shouldn’t be in the business of buying selling and guaranteeing mortgages. Others concede that Fannie and Freddie need to be reined in but wouldn’t mind seeing most of the current system kept intact.

With Washington in the grips of political paralysis increasingly it appears that the advocates of more moderate reform may win by default. Fannie and Freddie are back making gobs of money buying your mortgages and packaging them into Mortgage backed securities and the Senate was unable to reach a consensus on housing reform legislation meaning that the only entity that can really bring about any changes is the FHFA which is the conservator of the GSEs.

Currently Fannie Mae and Freddie operate independently of each other. They buy mortgages, bundle them together and sell them (Freddie Mac technically sells participation certificates instead of securities but they work in much the same way as MBS’s). With yesterday’s announcement the FHFA is putting more meat on the bones of its plans to combine the operations of the two GSEs.

It is proposing to offer a security with standard characteristics. As envisioned by the FHFA, there would still be no commingling of Fannie and Freddie mortgages in these pools and either Fannie of Freddie-but not both-would guarantee the securities. What you would have is a security with standard characteristic such as general loan requirements such as first lien position, good title, and non-delinquent status and a  payment delay of 55 days.

Done the road the FHFA envisions it being easy to swap these mortgages with existing GSE securities.   Remember FHFA wants to create a single GSE marketplace and that’s kind of hard to do when there are $4.2 trillion in Fannie and Freddie securities outstanding. So another goal FHFA is working towards is to create a unique standard GSE security s not so unique that can be traded with existing GSE securities.

Housing reform is one of the great pieces of unfinished business for Washington and the country. The FHFA is doing what it can to make changes around the edges but the country needs the type of big debate and big changes that only Washington can bring about. In the meantime this request for comment is worth keeping an eye on. Here is a link

August 13, 2014 at 9:07 am Leave a comment

Does Congress Give One Iolta About Credit Unions?

Former Staten Island Congressman turned lobbyist Vito Fosella gave a great presentation to our Governmental Affairs Conference a couple weeks ago about how, when trying to get things done in the Legislature and Congress, it is important to recognize the value of singles and doubles. Translated into non-sports speak this means that when dealing with Congress or legislatures no one gets everything they want; it’s important to take smaller victories when they are there for the  taking while continuing to push for your top priorities.

Why am I waxing philosophical this morning? Because our national trades hit a double the other day when the House of Representatives approved reforms that would allow credit unions to open Interest on Lawyer Trust Accounts. This is not as big a deal as announcing agreement on MBL or secondary capital, but as anyone who has dealt with compliance knows, there isn’t a credit union out there that has not been asked by a local attorney to set up one of these accounts and almost always has to turn them down. Keep in mind that only the House of Representatives has passed this bill, meaning we are a long way from opening these accounts. But even without further action this year, getting the House of Representatives on the record supporting this proposal is a big step in the right direction.

By the way, low-income credit unions can already open these accounts, providing yet another reason why your credit union is nuts not to get a low-income credit union designation is it qualifies.  Generally speaking, IOLTA accounts are established by lawyers to hold client payments for expenses related to legal services. As explained in this 2008 opinion letter by NCUA, client funds are insured in IOLTA accounts only to the extent that the clients are members of the credit union where the account has been opened. In other words, simply because an attorney has been a member of your credit union for years doesn’t mean he can open up one of these accounts in your credit union. The bill passed by the House would change all that by clarifying that “IOLTAs and other similar escrow accounts are considered member accounts …, if the attorney administering the IOLTA or the escrow agent administering the escrow account is a member of the insured credit union in which the funds are held.”

For New Yorkers, there is more good news. Section 497 of the Judiciary Law already permits credit unions to accept IOLTA funds so we can avoid the trap New York credit unions find themselves in with municipal deposits, which are authorized on the federal level for credit unions, but State law prohibits municipalities from depositing their funds with us.


Now back to reality. If the Wall Street Journal is correct “talks between top lawmakers on the Senate banking committee and the group of Democrats seen as its key swing votes to advance the bipartisan overhaul of {Fannie Mae and Freddie Mac} broke down on Thursday,” making it highly unlikely that the Senate will pass housing reform legislation this year. I am beginning to think that housing reform is just too big an issue given our current political divide and that the GSE’s will remain wards of the state for years to come, even as the amount of money they generate for the U.S. Treasury starts to decrease.



May 9, 2014 at 8:57 am Leave a comment

Burning Down The House

Call me wacky, but I don’t think a convicted arsonist should be able to collect insurance for burning down his house. 

If you agree, you’ll understand why I am a little uneasy about an announcement last evening of a settlement of more than $9 billion between Bank of America (BoA) and the Federal Housing Finance Administration (FHFA).  This puts to bed claims that Countrywide and Merrill Lynch duped Fannie Mae and Freddie Mac into purchasing mortgage-backed securities that crashed, causing billions of dollars in losses and contributing to the eventual bankruptcy of the GSE’s. 

I’m a bit more impressed, however, by a related announcement.  New York’s Attorney General Eric Schneiderman was able to get former BoA CEO Ken Lewis to contribute $10 million to a settlement of claims that BoA deceived shareholders as part of the bank’s efforts to acquire the aforementioned Merrill Lynch and Countrywide. The AG’s settlement represents the first that I am aware of in which a CEO is taking personal responsibility for his actions during the mortgage crisis.  What a concept!  Lewis also accepted a three-year ban from serving as an officer or director of any public company.

Let’s take a trip down memory lane.  As late as 2008, Fannie and Freddie were private corporations that specialized in buying mortgages and packaging them as mortgage-backed securities.  Many of our largest private banks, including Countrywide and Merrill Lynch, also purchased mortgages from banks and credit unions and packaged them as so-called private label securities for sale in the secondary market. 

One of the great myths is that Fannie and Freddie caused the mortgage meltdown.  They didn’t.  Banks like Countrywide bought and sold poorly underwritten mortgages because they were making gobs of money.  If Fannie and Freddie didn’t exist, they still would have made the same loans and bundled the same securities, they would have simply made more money.  That being said, government policies promulgated under the Clinton Administration to expand home ownership combined with Fannie and Freddie’s desire to maximize their own profits made the GSE’s willing co-conspirators in the mortgage mess and it was the insolvency of these two institutions that triggered the cascade of events leading the Great Recession. 

Remember that when the crisis hit, the government was scrambling to save as many institutions as it could.  That’s why it strongly encouraged a few healthy banks, including BoA to purchase Merrill Lynch and Countrywide in the first place,  This brings us back to yesterday’s settlement.  The idea that somehow Fannie and Freddie, institutions that specialized in bundling mortgages into securities, were fooled into buying securities of poorly underwritten mortgages is a convenient legal myth.  There were no institutions in the world better positioned to do their own due diligence, nor any institutions more cognizant of the state of the housing market. So when the history of the last seven years is written, let’s not let the government off the hook.

Why should credit unions care?  Because there are no lenders that need a well-functioning secondary market more than credit unions.  Just as home buyers should be held accountable for the terms of their mortgage, institutions that sell to the secondary market should sell these mortgages secure in the knowledge that they are no longer responsible for them.  unfortunately, the secondary market has developed as a system of “seller beware.”  The more liability that companies face for mortgages that they sell, the more expensive it will be to sell mortgages to the secondary market.  Ultimately, your members will pay for yesterday’s settlement.  As part of housing reform, the laws have to be strengthened to limit the ability of any secondary-market participant to hold others responsible for arm-length purchases.

March 27, 2014 at 8:31 am 1 comment

How Senate’s Housing Reforms Would Impact Credit Unions

This one goes in the will miracles never cease category. 

The moribund debate about the future of the U.S. housing market was jolted to life yesterday when the U.S. Senate Banking committee announced agreement on bi-partisan legislation to reconstruct the housing industry.  There is no issue pending on the legislative horizon that could have a more direct impact on credit unions. 

First, a refresher on where we stand with housing reform.  Historically, Fannie and Freddie have performed two major functions for credit unions.  They ensure that there is a market for selling their mortgages and, since Fannie and Freddie bundle these mortgages into securities, they help keep these mortgages competitively priced   Ironically, since the mortgage meltdown, to which Fannie and Freddie contributed, the housing market has become more not less dependent on these GSEs.  For example, under Dodd-Frank, a qualified mortgage includes any mortgage that these entities are willing to purchase.  This is a huge help for credit unions since Fannie and Freddie are willing to purchase mortgages that exceed the debt-to-income cap otherwise required for qualified mortgages.  However, this QM exemption lasts only as long as do Fannie and Freddie.

In yesterday’s announcement, the Senators said that the bi-partisan effort will be based on legislation previously introduced, S.1217.  As outlined in the press release, the Senate’s proposal scraps Fannie and Freddie and replaces them with a privately funded securitization platform,  In addition, the agreement announced yesterday would create “a mutual cooperative jointly owned by small lenders to ensure that lenders of all sizes have direct access to the secondary market so community banks and credit unions are not at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved.”

It’s an extremely encouraging sign and a credit to our lobbyist in D.C. that the concerns of credit unions are mentioned so prominently in the press release, but the devil is always in the details so we will have to see how this translates into legislation.

And, let’s keep in mind. even if the Senate passes housing reform this year, there’s a better chance that Russia will withdraw from Crimea than there is that the House of Representatives will go along with housing reform in an election year.  The issue is extremely easy to demagogue and there are plenty of ideological purists who want to hold our for getting the federal government out of the housing market completely. This, of course, will never happen but reality doesn’t seem to matter much in Washington. 

In the meantime, the cynic in me wonders if the huge amount of money being generated by Fannie and Freddie for the federal government will make it more difficult for policy-makers to scrap the existing system and implement the needed reforms.  Stay tuned.

March 12, 2014 at 9:06 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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