{"id":2630,"date":"2008-04-02T13:52:36","date_gmt":"2008-04-02T21:52:36","guid":{"rendered":"http:\/\/lukeford.net\/blog\/?p=2630"},"modified":"2008-04-02T13:53:42","modified_gmt":"2008-04-02T21:53:42","slug":"mortgage-crisis-means-no-tighter-regulation-of-government-sponsored-enterprises-gses","status":"publish","type":"post","link":"https:\/\/lukeford.net\/blog\/?p=2630","title":{"rendered":"Mortgage Crisis Means No Tighter Regulation Of “government sponsored enterprises” (GSEs)"},"content":{"rendered":"

I cover the refinance industry here<\/a>.<\/p>\n

David Smith writes<\/a>:<\/p>\n

Roughly ten days ago, the Administration officially flew the white flag in attempting any further regulation<\/a> of the GSEs. <\/span><\/p>\n


\n\"White_flag\"<\/o:p><\/span><\/p>\n

Legislation not pending?<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

As reported by <\/span>The Wall Street Journal<\/a>, with its usual Burma-Shave sub-headlines:<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

U.S.<\/span><\/st1:country-region><\/st1:place> Puts Faith in Fannie, Freddie<\/o:p><\/span><\/p>\n

Firms, Once Hemmed In,
\nAre Freed for Bigger Role
\nIn Aiding Mortgage Market<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

\"Trapped_in_the_ice\"<\/o:p><\/span><\/p>\n

We’re constrained as to our market movements<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Federal regulators, in an effort to contain financial turmoil, are handing government-sponsored companies an even bigger role in propping up the mortgage market.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Officials affirmed yesterday that government-sponsored mortgage investors Fannie Mae and Freddie Mac will enjoy loosened capital requirements<\/strong>, allowing them to pile more mortgage securities onto their balance sheets.<\/strong> <\/o:p><\/span><\/p>\n

<\/o:p><\/span> <\/p>\n

\"Torching\"<\/o:p><\/span><\/p>\n

We’re working on the executive summary right now<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Two years ago in the ongoing Fannie Mae story<\/a>, when the blistering OFHEO report<\/a> came out, I posted at length about the multi-billion-dollar risks to taxpayers<\/a> of GSEs turbocharging their balance sheets<\/a>.  <\/span><\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Fannie and Freddie could purchase an additional $200 billion of mortgage securities, equivalent to about 10% of expected U.S.<\/st1:place><\/st1:country-region> home-mortgage lending this year. The two also plan to raise new capital.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

I believe, as do many others, that this was an explicit quid pro quo negotiated by Secretary Paulson, with the GSEs being given the latitude to make a lot more money by boosting their balance sheets, but at the price of raising more equity capital.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Regulators in the past few years have required Fannie and Freddie to hold 30% more capital than their usual minimum while they fixed problems with their accounting and risk controls, a process now viewed as virtually complete. That capital surcharge is now falling to 20%.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Under the lower surcharge, Fannie and Freddie must hold capital equivalent to 3% of the mortgages they own, down from 3.25%. That, plus additional adjustments on the capital required for loans guaranteed by the companies, frees up about $6 billion in capital<\/strong> that can support $200 billion in additional mortgage holdings.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Meanwhile, the companies have indicated they intend to raise similar amounts in new capital, probably by selling preferred shares. Details haven’t been determined.<\/strong><\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

That last fragment is a clue about who promised what to whom.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

\"Promises\"<\/o:p><\/span><\/p>\n

Promises?  <\/span>Who makes promises?<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

As I posted in Banking on value<\/a><\/em>, the Administration’s domestic policy makers — Fed chair Bernanke, Treasury secretary Paulson, and their counterparts – have been comprehensively adding liquidity to the system, by opening all the financing valves they can reach:<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

\"Mechanic_opening_valve\"<\/p>\n

Get those secondary loan markets moving!<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

The Feds aren’t just opening the bank petcocks, they’re turning on all the liquidity taps:

\n

\n<\/o:p><\/span><\/p>\n

 <\/p>\n

\"Water_tap_on\"<\/span><\/p>\n

More liquidity where that came from<\/span>
\n <\/o:p><\/span><\/p>\n

The government will also accept mortgage-backed securities issued by government-sponsored companies like Fannie Mae<\/a> and Freddie Mac<\/a>.

\n

\n<\/o:p><\/span><\/p>\n

We’ve previously seen that the GSEs enjoy awfully big advantages<\/a>, which lets them rapidly grow or even turbocharge<\/a> their balance sheets<\/a>.  <\/span>That brings a lot of risk<\/a>, but it also brings benefits, one of which is on display here: the GSEs can be open 24\/7 if the Fed lets them. <\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

Macro-economically, as I said last Monday, it’s the right thing to do:<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

The moves could help keep interest rates low for home buyers.  <\/span>Rates on mortgages rise when investors in securities backed by such loans demand a premium to compensate for what they see as growing risks.  <\/span>Aggravating that problem, some financial institutions that hold mortgage securities have been dumping them to raise cash.<\/o:p><\/span><\/p>\n

 <\/o:p><\/span><\/p>\n

That mortgages are sold has created a truly paradoxical consequence: because they could be sold, they were being sold, simply to raise cash to cover less liquid objects.  <\/span>With all the banks facing the same problem, the rush of sellers of perfectly good products<\/em> was depressing their price.

\n<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

I cover the refinance industry here. David Smith writes: Roughly ten days ago, the Administration officially flew the white flag in attempting any further regulation of the GSEs. Legislation not pending?   As reported by The Wall Street Journal, with … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[162,3647,24],"tags":[3659,3643,3656,3663,3653,3640,3648,3650,3660,3641,3658,3649,3654,3651,3661,3662,1681,3652,3655,3657],"class_list":["post-2630","post","type-post","status-publish","format-standard","hentry","category-economics","category-mortgages","category-politics","tag-balance-sheets","tag-david-smith","tag-equity-capital","tag-executive-summary","tag-fannie-freddie","tag-fannie-mae","tag-fannie-mae-and-freddie-mac","tag-financial-turmoil","tag-freddie-mac","tag-government-sponsored-enterprises","tag-home-mortgage","tag-mortgage-investors","tag-mortgage-market","tag-mortgage-securities","tag-paulson","tag-regulators","tag-surcharge","tag-u-s-home","tag-wall-street-journal","tag-white-flag"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t