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Joshua Rosner
646/652-6207
jrosner@graham-fisher.com
Twitter: @joshrosner
The MBAs Plan for GSE Reform Unsolved Problems & a Dangerous Recipe
The MBAs plan, like many other proposals, fails to address the question: What
is the problem we should be seeking to solve. Any changes to the system should seek to
create a stable, cyclically neutral or countercyclical, system for the provisioning of
mortgage credit in economically adverse environments during which banks and market
participants are unwilling to make or hold new mortgage loans. Such is the reason for the
social contract that led to the creation of the GSEs in the first place. The recognition of
the provisioning of societally necessary goods and services is the reason that we charter
electric, water, gas and other utilities. Without the ability to ensure the provisioning of
these goods and services, regardless of economic environments, lights and water would
either fail in economic downturns or become economically inaccessible to all but the few
and wealthiest consumers.
While the MBAs acknowledgement of the value of a utility model is a step in the
right direction, but what they propose is not a utility model at all. In exchange for
governmentally conferred powers, the utilities chartering body regulates their rates of
return, ensures adequate scale and requires they are overcapitalized and counter-cyclical
entities that compete not on price but efficiencies and service. For reference, see our
paper and PowerPoint GSE Reform: Something Old, Something New, and Something
Borrowed (available at https://tinyurl.com/lfoxkye & https://tinyurl.com/kbctr5n )
The real costs of acquiring the necessary scale and infrastructure (efficient costs
of capital), combined with regulated rates of return would make it impossible for new
entrants to survive without the distortive subsidization of some players to the
disadvantage of others which is precisely what the MBA proposes.
Importantly, even without addressing the issues we should be trying to solve for, other
key elements of their proposal are unresolvable and problematic.
o Articulates the idea that the MIF would ensure liquidity in the event of a
full-blown systemic crisis, but this liquidity falls on the shoulders of the
government without a clear ability for repayment post-crisis. Costs of
failed institutions that have no capital reserves for put-backs on loans that
are found to have defects in reps and warranties will cause these exposures
to compete with depositors in FDIC resolutions. This, like the existing
priority of FHLB loans, would take priority over depositors in bank
resolutions. The GSEs sued surviving banks for such put-backs after the
banks had received TARP monies and had begun to recapitalize.
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The Spew April 2017
o The MIF concept creates undue risk if there were another economic
downturn before the fund was adequately capitalized. This would leave
taxpayers exposed with no workable recourse for recovering losses.
o The plan does not address the economic cost or risk associated with a
transfer [of] legacy GSE assets and liabilities to new entities.
o Does not address property rights associated with the GSEs. Implementing
the MBAs proposal before resolving those issues would only lead to
further risk and uncertainty.
o Does not address the governments warrants for 79.9% of each company.
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The Spew April 2017
o The complexity of the various parts (e.g., guarantors, CSP, risk sharing,
single security) will make the Federal Housing Finance Agency the most
complex financial safety and soundness regulator with the broadest
regulatory mandate a recipe for failure.
o Proposes the creation and use of new, untested, and complex financial
instruments, instead of Tier 1 capital (i.e., capital on the entity balance
sheet) as a means to move, transfer, and hide risk not dissimilarly from
CDOs during the financial crisis. Guarantor developed back-end
structures such as reinsurance and capital markets transactions will lead
to new and complex structures where the guarantors will be incentivized
to innovate around the regulators.
o Like regulatory failures to oversee MBS & CDOs, this type of risky
development will disadvantage regulators who will either not be able to
keep up with proper oversight, or will be exposed to political pressure and
capture.
o The rationale behind the CSP was to allow guarantors to fail but keep the
securitization platform working in crisis. In actuality, the CSP is just back
office support (e.g., disclosure and fund administration) and doesnt have
the infrastructure to issue securities in good or bad times. The platform
will not be able to support the market in crisis without acquiring all of the
tools to issue securities.
Too Big to Fail banks would control yet another segment of the economy.
o Allowing primary market players to gain control over any aspect of the
secondary market creates the same type of blurring of the lines between
primary and secondary market that created GSE pro-cyclicality and led to
the 2008 economic crisis.
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The Spew April 2017
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