Looking Closer at the President’s Budget and The GSEs

An Opinion Piece by David Stevens

There will be two hearings this week on the topic of the GSEs, with a focus on Senate Banking Committee Chairman Crapo’s outline on Housing Finance reform.

The witness list is impressive. It includes key trade group leadership as well as academics who will all testify on this subject and provide technical views and opinions, on both the relative importance of legislative reform, and steps forward.

Mortgage Media will cover these hearings in detail, commenting real-time on social media, and with subsequent post-hearing wrap-ups. These hearings are important, as they are the first of their kind in the new congress and this administration.


Full Committee Hearing: “Chairman’s Housing Reform Outline: Part 1.”

Witnesses: Ms. Sue Ansel, President and CEO, Gables Residential, on behalf of The National Multifamily Housing Council; Mr. Edward J. DeMarco, President, Housing Policy Council; Mr. Greg Ugalde, Chairman of the Board, National Association of Home Builders; Mr. Mark M. Zandi, Chief Economist, Moody’s Analytics; Mr. Hilary O. Shelton, Washington Bureau Director and Senior Vice President for Advocacy and Policy, NAACP; and Mr. Adam Levitin, Professor of Law, Georgetown University Law Center.

Time and Location: 10 am in room 538 of the Dirksen Senate Office Building.


Full Committee Hearing: “Chairman’s Housing Reform Outline: Part 2.”

Witnesses: Mr. Michael Bright, President and CEO, The Structured Finance Industry Group; Mr. Robert D. Broeksmit, President and CEO, Mortgage Bankers Association; Ms. Lindsey Johnson, President, U.S. Mortgage Insurers; Mr. Vince Malta, President Elect, National Association of Realtors; Ms. Carrie Hunt, Executive Vice President of Government Affairs and General Counsel, National Association of Federally-Insured Credit Unions; and Mr. Michael D. Calhoun, President, Center for Responsible Lending.

Time and Location: 10 am in room 538 of the Dirksen Senate Office Building.

The debate on the viability of the Crapo outline – and what may happen next – has many diverse opinions. I recently co-authored a piece on the subject with Moody’s Analytics Economist Mark Zandi and former National Economic Council member and current Falling Creek Partners CEO Jim Parrott. In the process of studying the outline, we sought to look at how the outline might work, not to debate whether we supported the concept or not. We focused on the functionality of the model and what questions remained unanswered.

In this renewed environment of GSE debate, there has been speculation as to what may happen through administrative reform. And likewise, what if anything might be done through legislation. At its core are questions around continuity, the depth of the government backstop, political will, and legal limitations.

As part of this journey, I asked the team at Moody’s Analytics to help me rationalize the Presidents Proposed 2020 budget, as there were key revenue and asset assumptions in it tied to the GSEs. This is a complex discussion, but in an effort to simplify, here is what I asked:

1)   How does the Administration’s proposal to increase g-fees to 20 bps, match with the last line of Table S-6 on page 125 of the budget

2)   How does the $184.7 billion in dividends reconcile with the $113 billion in Table 4-3 on page 33 of the analytical perspectives

Moodys Analytics responded with answers based on responses from a former CBO analyst:

Re #1: The line on p.282 suggests the $83.6bn is counting everything since 2012 – not just the proposed increase: “With this proposal, combined with the existing authority under the Temporary Pay-roll Tax Cut Continuation Act, the Budget estimates resulting deficit reductions of $83.6 billion from 2012 through 2029”. That would be consistent with them showing lower amount in Table S-6. The amount shown in Table S-6 is based on the assumption of approximately $600 billion (today’s $) in GSE originations.

Re #2: From this line on p.33 “Government-sponsored enterprise (GSE) preferred stock is measured at market value.” The $113 billion must be the similar to or the same as the financial statement number. The financial statement equivalent is estimated at fair value, so probably a present value.

The interesting aspect to this budget is that the White House budget assumes both revenues, and an asset value, to their holdings in conservatorship from these two companies that will extend through the end of fiscal year (FY) 2029.

Some have questioned what can be done administratively in the absence of legislation. Retention of some or more capital, modification of some of the extent of the footprint of the GSEs in today’s housing economy, and even some more forceful act related to a pathway to release, are all in the circles of debate.

These are important questions for the industry. At its core, a recap and release without resolving for the structure of the government guaranty through legislation could diminish the value of the MBS – especially if the implicit guaranty as provided by the charters were viewed by global investors as less secure than the current structure, with a PSPA and a line of credit backing these entities securities.

For many, the proposals in the presidents budget to eliminate funding to the affordable housing trust fund, and other curtailments related to federal housing programs focused on affordability and access, raise concerns about a process forward that might disrupt the flow of capital to the housing market. That would make it more difficult for lenders and housing professionals to support the market the way they do today.

What is clear is that any discussion of an end to the conservatorship leaves many questions unanswered, and most importantly does not synch with the proposed budget, which anticipates revenue from these two companies for years to come.

Finally, there is this thought: Under federal statute § 401.613 entitled Compromise of Claims, the law limits the conditions, authorities, and amounts that can be compromised to the loss of taxpayers. This law dates back centuries, but continues to be the basis of debate on any of this discussion. The law states under the “Amount of compromise” that HFCA requires that the amount to be recovered through a compromise of a claim must:

(1) Bear a reasonable relation to the amount of the claim; and

(2) Be recoverable through enforced collection procedures.

The question being asked is if DOJ would permit some sort of settlement, or step forward that would reduce or compromise the expected recovery to the taxpayer. There are options that allow for a compromise, and they are stated here:

It seems that either items 2 or 3 above would require the US Government to make precedent-setting admissions. What is clear is that any administrative action should not be assumed as one that would necessarily result in a system that provides the same liquidity as either the current or pre-conservatorship models did. Risks of an MBS haircut due to a perceived weakening of the US backstop, the risk of selective programmatic pullbacks, and compromise a claim are all things that are of keen interest in the consideration of administrative action. When you consider the accounting in a President’s budget, in addition to the items mentioned above, the collective list of risks would likely only be overcome if the President made this an administrative priority – one worthy of superseding an already formidable agenda.

I have long advocated for legislative reform. It has been my view that an explicit guarantee behind the MBS versus the entities, clear capital standards, deep credit risk transfer, level pricing for all based solely on transparent credit risk, limits to where the GSEs can operate in the market so as not to compete with private sector participants, and a clearly-established framework for addressing a sustainable commitment to access and affordability are some of the key elements required for a long term solution. I have also argued that returning to a model where shareholders win in good times and taxpayers lose in bad ones is not an acceptable outcome. This duopoly created decades ago that fell into conservatorship under the Bush Administration is one where stakeholders here will have this chance to get it right.

But regardless of the differing opinions as the best path forward, including mine, the focus this week in the Senate Banking Committee will be of interest. And I expect the majority of those testifying to call for legislative reform, sending a clear message to the committee that it is time for them to do their job and resolve this conservatorship once and for all.


Dave Stevens

David H. Stevens, CMB, is Senior Advisor at Mortgage Media, and former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association