If the Financial Stability Oversight Council gets its way, GSE capital standards will be tighter than what many in the industry want. Is that a problem? Opinions vary.
Housing-finance watchers are gearing up for December when the Supreme Court will hear oral arguments challenging the government’s net worth sweep of Fannie Mae and Freddie Mac profits.
After a mixed decision in the Fifth Circuit, it’s not clear how the SCOTUS will rule — especially with the death of Justice Ruth Bader Ginsburg last week. Oral arguments are scheduled for Dec. 9.
The Structured Finance Association said it is concerned FHFA believes that, if the GSEs have capital levels similar to banks, the need for an explicit guarantee will be eliminated.
MBA President Bob Broeksmit argues that the new LLPA “flies in the face of the administration’s recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners.”
Since the financial crisis, Fannie’s single-family book of business has posted a loss rate of 31.5 basis points. In contrast, residential loans at commercial banks averaged a loss rate of 86 bps, 5.7 times higher.
Most of the concerns about the new regulation hinge on how much profit the GSEs can make under the bumped-up capital levels. Most industry observers appear to be on the side of “not enough.”
Taking a close look at the much more stringent capital norms for the GSEs, Matthew Howlett, an equities analyst at Nomura, reiterated his buy rating for Fannie Mae. The hitch? He assumes a ROE of 11.4% by 2024.
According to former Fannie Mae CFO Tim Howard, the re-proposed capital requirements are almost 40 times the average of that indicated by stress tests conducted on the GSEs last year.
The GSEs’ showing in the first quarter only reflects one full month of the impact of the coronavirus crisis. As potentially millions more homeowners stop paying their mortgages, the enterprises face the prospect of an even more challenging second quarter. (Includes data chart.)