Is the Common Securitization Platform Legal?
January 10, 2017 at 10:22 am,
3 comments
As regulator and as conservator, FHFA has one job, to support the financial health of the GSEs, so that they may liquefy the mortgage markets. Period. It has no statutory authority to do anything else. It has no authority to accommodate the Department of Treasury's desire to reform housing finance. It has no authority to use GSE money to build up an infrastructure designed to replace the GSEs, which is what it set about to do in 2012 when it set about building up a common securitization platform.
How did FHFA divine this new authority? It cited a white paper and some legislative proposals mulling around Congress. FHFA explains in its 2012 strategic plan:
One critical point: The steps envisioned in this strategic plan are consistent with each of the housing finance reform frameworks set forth in the white paper produced last year by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development as well as with the leading congressional proposals introduced to-date. This plan envisions actions by the Enterprises that will help establish a new secondary mortgage market, while leaving open all options for Congress and the Administration regarding the resolution of the conservatorships and the degree of government involvement in supporting the secondary mortgage market in the future.
FHFA's one critical point is trumped by two much more critical points:
1. Legally, that white paper and the proposals in Congress mean nothing. They confer no rights or privileges to FHFA or anyone else.
2. The while paper prepared by Treasury and HUD is highly misleading. It was drafted pursuant to Section 1074 of Dodd-Frank, which directed Treasury to provide Congress with a study to analyze different options for, “Ending the Conservatorship of Fannie Mae, Freddie Mac, and Reforming the Housing Finance System.” The options specified by statute included winding-down and liquidating the companies, privatizing of the companies, incorporating the GSEs’ functions into a Federal agency, and breaking up Fannie and Freddie into smaller companies. Treasury Secretary Timothy Geithner curtailed the scope of the study to exclude any discussion of an outcome under the law as it is currently written.
Four weeks before the final document's due date, 11 senior Treasury officials signed off on an internal memo, which was to be used as a template for the report to Congress, aka the white paper, which discussed three possible “end state options.” Of those three, only one, privatizing them—which in this context meant recapitalizing the companies and returning them to private control— was authorized by law. The privatization end state was, "essentially the path laid out under HERA [the Housing and Economic Recovery Act of 2008] and the Paulson Treasury when the GSEs were put into conservatorship in September 2008.” The advisable scenario would be as follows:
After becoming adequately capitalized during the Transition, the GSEs would exit conservatorship as private companies. Treasury converting its preferred into common equity [would] be sold to the public over time (under legal review); the GSE's existing common shareholders being substantially diluted. The companies continue to guarantee a large share of mortgages, with PMI [private mortgage insurance] companies and homeowners taking the first loss risk as they have done traditionally.
…[Furthermore], Dodd-Frank strengthens [the recapitalization] option through the ability to designate the GSEs as SIFIs [Systemically Important Financial Institutions], and thereby subject them to more rigorous prudential standards and Fed supervision. GSEs/successor entities would maintain higher capital requirements and investment restrictions as envisioned in Transition. The other two end state options, which involved downsizing or revoking the GSEs’ corporate charters, required new legislation, because the two companies operated under Congressional charters.
Geithner overruled 11 senior officials and excluded from the report, and from every public discussion involving Treasury officials, any mention of an outcome under the law as it is currently written. In so doing, he made it seem less obvious that FHFA's actions exceeded its legal powers.
3 comments - Is the Common Securitization Platform Legal?
Soto - January 10, 2017 at 9:00 pm
Also, why is the public/private partnership with the "implicit" Government guarantee a bad structure? If the whole bailout of Fannie and Freddie of 2008 was not needed in the first place, then why do they need to be reformed? It seems to me that they always have been the best structure for housing. The more I read about these entities the more I come to realize that the "privatized gains and socialized losses" thesis that is tossed around in so many articles is malarky. They should be returned back to the way that were with one notable exception: they should be protected from the hands of the FHFA/Treasury overseers that tried to kill these companies for no good reason other than greed.
Robert - January 10, 2017 at 9:34 pm
Of course they have no authority and its illegal. They have duty to conserve and restore. Not create new business lines. This has been said repeatedly by a poster at TH717 that its clearly out of scope.
FHFA thinks under HERA it can make laws that even courts can not review.
FHFA reads HERA as something that authorizes FHFA to do whatever it wants like ignores laws and courts, use contract agreements in place congressional laws, provide immunity to any third parties through contract agreements.
It is perfect collusion between all the branches of Gov to ignore Constitution and Bill of rights. Otherwise why would one wants to bar review by courts. Review by courts is the rock foundation of the Constitution, without which where is the need for any laws..