Larry Parks, SVP Federal Home Loan Bank of San Francisco

shawlaskewvilleUrban and Civil

Nov 29, 2013 (5 years and 4 months ago)


Larry Parks, SVP

Federal Home Loan Bank

of San Francisco


Housing Finance
Reform and the Future of Fannie
Mae & Freddie Mac

New Orleans April 4



Starting Where We Finished in 2011


GSE’s did not cause the crisis.

GSEs are the market currently.

guarantee and fees and

to get the
PLMBS market or covered bond market going is not pro

Change the Structure

4. Homeownership
is critical to wealth accumulation for lower,
moderate and middle income families.

5. Change the structure of Fannie/Freddie
into cooperative
ownership and strengthen.

6. Put
public interest directors on Fannie/Freddie boards.

7. Allow
regulated depository institutions of all sizes to use
FHLBanks, Fannie & Freddie going forward

Basel III

8. Maintain
the implied

guarantee so as to
facilitate low cost mortgage credit and not crowd out
appropriated dollars for direct subsidies for affordable


Progress made on changing the


The number 1 issue with GSEs was to change the


This is beginning to happen because of market

forces, the actions of the GSEs and advocates

championing a role for GSEs in housing finance


Fannie Mae earned $9.6billion in 3

quarter of 2012

Freddie Mac earned net income of $11billion for the full
year 2012

Fannie Mae paid $28.5billion to Treasury in dividends on
$116.1billion in preferred shares owned by Treasury

Freddie Mac has paid $21.9billion in dividends to Treasury
on $71.3 billion in preferred stock

Pending question of Fannie Mae’s $61.7 billion reversal of
down of deferred tax assets

The substantial sums paid by Fannie and Freddie to
Treasury plus the lack of need for Treasury assistance has
significantly affected the commonplace argument that the
entities are wards of the State


State of Play in GSE Reform

Warner Bill

S.563 the “Jumpstart GSE Reform Act” was introduced on
March 14, 2013 in a bipartisan effort by Sen. Corker (R
with Senators Warner (D
VA), Vitter (R
LA) and Warren (D
MA) as original co

The bill:

Prohibits government use of increases in guarantee fee to
offset an increase in government spending or a reduction in
government revenues for any purpose other than of
Fannie/Freddie business purposes and

Prohibits Treasury sale or transfer of Fannie and Freddie
senior preferred stock until Congress permits it.


State of Play in GSE Reform

FHFA Actions

On March 4,

announced as a 2013 goal for Fannie
and Freddie the development of a Common Securitization
Platform (CSP) to issue Fannie and Freddie MBS.


said the objective of CSP is “for the platform to be
able to function like a market utility, as opposed to rebuilding
the proprietary infrastructures” of Fannie and Freddie and
that the “overarching goal is to create something of value that
could either be sold or used by policy makers as a
foundational element of the mortgage market of the future.”

CSP is one of a series of moves

has taken to push
Fannie and Freddie toward extinction

e.g., increased
guarantee fees and shrinking their retained portfolios.

Senators from both parties concerned that these factors
could lead to the end of Fannie/Freddie without Congress
developing a plan for a new housing finance system.


State of Play in GSE Reform

During the consideration of the Senate Budget Plan on
March 22, 2013, Senators Johnson (D
SD) and Crapo (R
offered an amendment to prevent Fannie/Freddie G
from financing unrelated government spending. The
amendment was passed unanimously.

The Senate Budget Committee’s report on its Budget
Resolution further expressed views on Fannie/ Freddie.
The report endorsed a slow, deliberate approach to
changes for Fannie/Freddie.

It listed as priorities:

Stability in the still fragile housing market and

GSE Reform not coming at the expense of economic
growth and upward mobility for hard working families
who need access to mortgage credit.


State of Play in GSE Reform

Ranking Member Waters (D
CA) is likely to focus on:

Access to credit issues for middle and lower economic class
of Americans (looking at how derivatives and complex
financial issues impact average working families)

Mortgage finance (access to affordable mortgages)

Continued government support of homeownership


State of Play in GSE Reform

During the past few years, Rep.

has been very vocal about
eliminating Fannie and Freddie.

He has not included FHLBs in his


Congressional website contains the following on
Fannie and Freddie

“The financial crisis was caused by failed federal
policies that strong
armed, incented, and cajoled financial institutions
into loaning money to people to buy homes that they couldn’t afford to

At the epicenter of this were Fannie Mae and Freddie Mac.

most disturbing aspect of the Dodd
Frank permanent bailout bill was
the fact that it did nothing to reform Fannie and Freddie.

You can’t
address systemic risk while ignoring these two GSEs.

I am the only
Member of Congress to have introduced comprehensive reform
legislation for Fannie and Freddie since the start of the credit crisis,
lauded in the media as “a concrete plan for fixing Fannie and

The Challenge

The Future Structure of
the GSEs

At a House Financial Services Committee oversight hearing on March
22, 2013 on FHFA, Rep.

said that there has been little
meaningful progress to bring the Fannie and Freddie
conservatorships to an end and that he is “determined that this
hearing will be the last time that Director

… will testify before
this Committee before we finally and belatedly mark
up true GSE
reform legislation.”

Staffers have said that

will likely reintroduce the bill that
phases Fannie and Freddie out over 3 to 5 years.

The Challenge

The Future Structure of
the GSEs

Partisan Housing Commission

Report released February 25, 2013

Proposal favors private sector housing finance system

Limited catastrophic government guarantee on qualified

The guarantee would be explicit, paid for by premiums

Congress decides loan sizes for the eligible guarantee. A
range of $250,000 to $275,000 is being recommended.

The proposal received a favorable audience in the Senate
Banking Committee hearing on March 19, 2013.

Major concern is that it explicitly abandons the implied
government guarantee for Fannie and Freddie; thus further
isolating the implied government guarantee for the FHLBs


The Challenge

The Future of the GSEs

Key Outstanding Questions

on Federal Role in Housing Finance


Homeownership as a
goal & policy

for working and middle
income families?

Lenders for Homeownership
(large banks, community banks,
hedge funds?



under consideration

Fannie & Freddie
structure going forward

Coop model?

Public interest director on
the boards?

Implied Govt. guarantee

Key Outstanding Questions

on Federal Role in Housing Finance

I. Homeownership as a Goal/policy for working &
middle income families

Bipartisan Housing Commission Report & push for
multifamily over single family for some population

Why not a both and instead of an either or?

Investor class purchasing single family homes as
“solution” to foreclosure crisis

Is this a solution?

Advocacy Community Fracturing over
homeownership policies vs. rental assistance

FHA undercapitalization

Key Outstanding Questions

on Federal Role in Housing Finance

II. Lenders Vs. Homeownership

Weigh in on Basel III liquidity rules that are under

As drafted the Basel III liquidity standards would discourage banks from taking down
FHLB advances because they would not fully count for liquidity purposes. Europeans
have successfully lobbied to have covered bonds fully count. The impact on non
QRM mortgage lending from depository institutions could be significant.

Be aware of regulatory actions that discourage
community banks from taking down FHLB advances

Discourages community lending

Reduces AHP funding

Look at policies to see how they impact mortgage
lending such as: Stress test on mortgage affiliates of
large banks

Increase cost, discourage separate mortgage affiliates

Key Outstanding Questions

on Federal Role in Housing Finance

III. Fannie & Freddie Structure

Define the problem as shareholder driven and
providing alternative model

Explain how public interest directors provide
necessary tension in board room to assist mission

Ensuring independent public interest director on Fannie/Freddie Boards

Allow GSEs to pay back their loan from Treasury
(Preferred Stock)

Encourage sufficient capitalization of GSEs

Key Outstanding Questions

on Federal Role in Housing Finance

IV. Implied Government Guarantee

If GSEs are explicitly guaranteed by the government
they will likely be on budget. The GSEs would then
compete with other federal housing programs in the
budget process, most likely FHA. This could be a
way to ensure a permanently shrunken housing

The implied guarantee has worked. When the GSEs
had trouble there was government intervention,
restructuring and a payback of any funds provided.


Fix what is broken with the current

Ensure continued access to low cost,
universal credit;

Push for housing finance to have transparent
open regulatory structure that balances
consumer needs, risk mitigation and broad
credit access.

Starting Where We Finished in 2011