View
220
Download
0
Category
Preview:
Citation preview
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
1/35
A S H O R T P R I M E R O N T H E F U T U R E O F H O U S I N GF I N A N C E
M I L K E N I N S T I T U T E C E N T E R F O R F I N A N C I A L M A R K E T S
N A T I O N A L P R E S S F O U N D A T I O N
T U E S D A Y , D E C E M B E R 1 7 , 2 0 1 3
Mechanics of Finance: Housing Finance
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
2/35
Overview2
Background 3
GSEs 7
Key Insights 12
Future Design 18 Transition 27
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
3/35
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
'96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Housing Wealth Effect
Residential Investment
Total
From Headwind to Tailwind
Source: Moodys Analytics
Contribution to real GDP growth, %
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
4/35
Old Housing Finance System
1: Bundle conforming mortgages into MBS and provide a guarantee- Socially valuable, but put taxpayers at risk from underpriced insurance.
2: Purchase those guaranteed MBS for the firms own portfolios.- Firms borrowed at low rates to invest in higher-yielding MBS. Essentially a hedge fund made possible by the implicit
government guarantee.
3: Affordable housing goals
4
Government
Banks &Other Lenders
Fannie Mae
+ Portfolio
Freddie Mac
+ Portfolio
MBS Investors
Debt Investors
Agency MBS
Conforming
Mortgages
Implicit
Guarantee
Agency Debt
4
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
5/35
Background on Fannie & Freddie5
1: Bundle mortgages into MBS w/guarantee
2: Buy MBS for own portfolio investment
Enormous - $5.5 trillion in MBS & guarantees
Insolvent - losses ate up thin capital Under Federal conservatorship since Sept 2008
Now very profitable - $20 billion/year
Government owns 79.9 percent, has $187.5 billion senior preferredshares, and has received $55.2 billion in dividends.
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
6/35
Mortgage Losses in Crisis6
Table 2: Residential Mortgage Loan Realized LossesBillions $
Total Debt Outstanding Losses as a %
2006 2007 2008 2009 2010 2011 2012 2006-2012 Year-end 2007 of Debt
Total 17.1 38.5 136.5 216.1 190.0 161.8 159.9 919.9 11,207 8.2
Government Backed 7.1 7.7 17.9 31.8 51.4 46.3 44.2 206.4
Fannie Mae & Freddie Mac 0.8 1.8 10.3 21.3 37.3 31.4 26.0 128.9 4,820 3.7
Fannie Mae 0.6 1.3 6.5 13.4 23.1 18.3 14.4 77.6
Freddie Mac 0.2 0.5 3.8 7.9 14.2 13.1 11.6 51.3
Federal Housing Administration 6.3 5.9 7.6 10.5 14.1 14.9 18.2 77.5 449 17.3
Privately Backed 10.0 30.8 118.6 184.3 138.6 115.5 115.7 713.5
Mortgage insurers 1.5 6.9 10.8 9.6 6.6 6.0 6.0 47.4
Depository Institutions 2.7 7.3 35.0 54.9 48.2 35.3 33.3 216.7 3,729 5.8
Private Label Mortgage Securiti 5.8 16.6 72.8 119.8 83.8 74.2 76.4 449.4 2,209 20.3
Subprime 5.6 15.5 55.9 71.6 39.0 34.7 35.5 257.8
Alt-A 0.2 0.9 11.3 28.0 24.0 20.5 20.1 105.0
Option ARMs 0.0 0.2 5.2 17.9 17.4 14.8 16.5 71.9
Jumbo 0.0 0.0 0.4 2.3 3.4 4.1 4.3 14.6
Note: Securitized HELOC 0.2 1.5 5.1 5.1 3.4 2.1 1.6 18.9
Sources: Fannie Mae, Freddie Mac, HUD, FDIC, Federal Reserve Board, Moody's Analytics
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
7/35
Crisis Impact on Mortgage Market
Source: John Krainer, Recent Developments in Mortgage Finance, FRBSF Economic Letter, Oct 26, 2009
7
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
8/35
Overview8
Background 3
GSEs 7
Key Insights 12
Future Design 18 Transition 27
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
9/35
Benefits of the GSEs9
Borrowers benefit from lower interest rates
Liquidity in secondary markets
Implicit (now explicit) subsidies from federal guarantee kept interest rates abit lower
Backed by federal guarantee, GSEs continued to finance mortgages indepths of financial crisis
GSE securities provide a mechanism for the Fed to implement
extraordinary monetary policy and subsidize mortgage interest rates
Some affordable housing subsidies (even if not well targeted)
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
10/35
Value of Government Backing10
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
11/35
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
12/35
Principles for GSE reform12
1. Support liquidity in secondary market
2. Avoid systemic risks
3. Protect taxpayers
4. Help homeowners
5. Encourage beneficial innovation
6. Promote transparency
7. Recognize relative strengths of government agencies andthe private sector
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
13/35
Overview13
Background 3
GSEs 7
Key Insights 12
Future Design 18 Transition 27
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
14/35
Key Insights14
Agreement on many aspects of housing finance reform
Private capital at risk ahead of a secondary government guarantee
Government share shrinks as private sector takes on housing risk
No GSE portfolios or affordable housing goals; instead explicitsupport for affordable housing (owner and rental)
Foster competition in mortgage origination and guaranty
Certainty on housing finance system will help housingtoday.
Transition steps are the same for all plans beingconsidered.
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
15/35
1. Investment portfolios? No.15
Portfolios expose taxpayers to large risks (in essence,government backstops a hedge fund)
Portfolios provide only limited benefits to borrowers (undernormal conditions)
Portfolios are an invitation to non-transparent policy creep
(pressure from legislators)
Transition: Need to manage or sell the existing $1.5 trillionportfolio
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
16/35
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
17/35
3. Affordable housing mission? No.17
Past efforts had limited success, lack of oversight, andcontributed to GSE collapse
FHA is better suited to this mission
Spending or tax programs would be more transparent
Policymakers could levy an explicit fee on GSE activities tofund affordable housing programs
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
18/35
4. Backstop mortgage market? Yes.18
Likely inevitable. Guarantee is latent.
Fed & Treasury intervened in 2008 Money Markets
GSE/government guarantee has boosted liquidity in thesecondary mortgage market
Government has unique ability to insure against
macroeconomic shocks such as a nationwide decline inhome prices
Key question: What design?
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
19/35
Overview19
Current State of Public Finance 3
Municipal Bond Market Principles 8
Key Insights 12
Future Design 18 Transition 27
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
20/35
Treasurys Potential Options20
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
21/35
Design Options21
Government-sponsored enterprises
Explicit government guarantee & associated fee
Are two enough?
Government agencies (like FHA / GNMA ) Agencies guarantee and securitize MBS
Other GSE activities privatized
Mixed model
Government agency sells MBS guarantees Private firms, including GSE successors, securitize mortgages
and purchase guarantees
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
22/35
Summary of the Plan22
Fully private. Former GSEs have no special status.
No portfolios. Existing portfolios wind down.
Explicit guarantee. Government guarantees MBS of conforming mortgages againstdefault. The guarantee kicks in after shareholders are wiped out.
Higher insurance premiums. The former GSEs pay a premium that covers expectedcosts. But government still underprices insurance, so
Entry & competition. Other firms can purchase the guarantee and securitize
confirming MBS. Competition reduces risk and increases benefits for borrowers.
No affordable housing requirements. Affordable housing is pursued through othermeans (e.g., FHA). A tax on conforming MBS activities finances these subsidies.
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
23/35
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
24/35
Future Mortgage Finance System24
"A Pragmatic Plan For Housing Finance Reform," by Ellen Seidman, Phillip Swagel, Sarah Wartell and Mark Zandi.Prepared by Moody's Analytics, the Urban Institute and the Milken Institute, June 19, 2013. Available at http://www.milkeninstitute.org
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
25/35
Private Capital25
Private MBS guarantors are not backed, explicitly or implicitly, by the government.
Guarantors purchase catastrophic reinsurance from the government for the benefit of MBSinvestors, paying a g-fee to the government for this insurance.
Several sources of private capital bears the bulk of the credit risk in housing, taking losses
ahead of the government and protecting taxpayers.
At the level of individual mortgages, private capital sources include homeowners downpayments and the capital of any private mortgage insurers.
At the level of the mortgage-backed security, capital sources would include, but not be limitedto the capital of the MBS insurer and the capital put at risk by global investors who take onhousing risk from MBS insurers.
Entry of new sources of private capital is essential to provide for competition in the newhousing finance system.
FMIC ensures that institutions of all sizes have access to the housing finance system.
"A Pragmatic Plan For Housing Finance Reform," by Ellen Seidman, Phillip Swagel, Sarah Wartell and Mark Zandi.Prepared by Moody's Analytics, the Urban Institute and the Milken Institute, June 19, 2013. Available at http://www.milkeninstitute.org
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
26/35
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
27/35
Market Access Fund27
R&D Fund to support research, development and testing of innovation in products,underwriting, and servicing. Examples include mortgages with reserve accounts; equitysharing; and new housing counseling models.
Credit Support Fund to provide capital ahead of the secondary guarantee for activities such as
bi-weekly payment mortgages; small rental properties; manufactured housing; assisted livinghousing; and more.
Capital Magnet Fund to support affordable housing for low-income families. Competitiveawards to CDFIs and non-profit housing developers, with at least $10 of outside funding forevery $1 granted.
National Housing Trust Fund to support the production, preservation, and rehabilitation ofrental housing for low income families.
"A Pragmatic Plan For Housing Finance Reform," by Ellen Seidman, Phillip Swagel, Sarah Wartell and Mark Zandi.Prepared by Moody's Analytics, the Urban Institute and the Milken Institute, June 19, 2013. Available at http://www.milkeninstitute.org
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
28/35
Criticisms28
Maintains government role
Hard to price this insurance
Anti-housing because mortgage rates go up (Another) sop to Wall Street lets them go into
securitization and they will engineer the governmentguarantee to cover the rest of their activities
Stress on definition of a conforming loan
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
29/35
0 25 50 75 100 125 150
Pre-housing crash
Current system
Nationalized, 5% capital
Corker-Warner, 10% capital
PATH privatized system
The Cost of Housing Finance Reform
Source: Moodys Analytics
Minimum cost, bps
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
30/35
Overview30
Current State of Public Finance 3
Municipal Bond Market Principles 8
Key Insights 12
Future Design 18 Transition 27
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
31/35
Transition31
Low-income housing subsidies
Multi-family activities
Setting appropriate premiums
Definition of conforming mortgage Future of private mortgage insurance
Future of the FHLBs
Wind down of existing portfolios How to bring in private capital
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
32/35
Policy Levers32
Higher guarantee fee
Reduce quantity of government insurance capacity
Require increased private capital
Narrow scope of guaranteed mortgages
QUESTION: Why were proponents of
reform called anti-housing in the past?
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
33/35
Policy Levers33
Policy Lever What policy would entail ImpactPrice for government insurance
on MBS (guarantee fee)
Charge a higher price for the
government guarantee on MBS.
Higher mortgage interest rates as
the increased g-fee is passed
on to home buyers
Amount of government
insurance capacity
Auction off a limited amount of
government insurance on MBS.
Offering to insure only a limited
amount of conforming mortgages
would increase the guarantee fee
(as set in an auction) and thus
interest rates.
Definition of conforming loans
that qualify for a guarantee
Lower the loan limit for
conforming loans or otherwise
narrow the scope of mortgages
that qualify for the guarantee.
Will foster a non-guaranteed
market by forcing some
mortgage loans outside the
conforming standard. These non-
guaranteed loans could face
higher interest rates (they will
not pay the insurance but will not
benefit from the guarantee).
Amount of private capital
required in front of the
guarantee
Require securitizing firms to
arrange for private capital to take
losses before taxpayers.
Limits government risk but
mortgage interest rates will rise,
reflecting the cost of the private
capital.
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
34/35
Housing Finance Reform Timeline34
Year 1 Year 2 Year 3
FMIC and MAF fundsoperational
FF portfoliossold off
MERSreforms
Securitization platformestablished
Establish MAFand set fee
MBS insurance
charters granted
FF assets soldto MBS insurers
FF gfees toFMIC fund
FF conservatorshipends
Private labelRMBS marketrestarts
FMIC setsG fees
Private labelRMBS marketfully operationalFMIC fund
established
FHFA reconstitutedas FMIC
QM, QRM, Basel IIIrules in place
FF securitizationmoved to new platform
Set MBS servicingstandards on platform
Requires Congressional Authorization
MBS insurancestandards set
"A Pragmatic Plan For Housing Finance Reform," by Ellen Seidman, Phillip Swagel, Sarah Wartell and Mark Zandi.Prepared by Moody's Analytics, the Urban Institute and the Milken Institute, June 19, 2013. Available at http://www.milkeninstitute.org
8/13/2019 Housing Finance for Journalists: Mark Zandi, Phil Swagel and the Milken Institute
35/35
Timing and Politics35
What will drive forward reform?
Fannie & Freddie are making $20 bn per year inprofits. What incentive does this give the
government? What are the reasons to move forward with reform?
Why not insist on a fully private system?
When do you expect reform to happen?
Recommended