Sunday, November 24, 2019

Craig Philips did pro-GSE folks a big favor; he deserves thanks

Why I liked and like Craig Phillips but never met him…

Before he came from Wall Street to Washington to work for Treasury Secretary Steven Mnuchin, word on the street was that Craig Philips was a “Good Dude,” smart, not an ideologue and knew the GSE business. Nice package!
He turned out to be all those things, as well as efficient. Phillips quickly put together for the Admin and the Secretary a viable plan to end the Conservatorship and quickly establish Fannie and Freddie as viable active mortgage market players consistent with their last several years under tight Federal Housing Finance Agency (FHFA) control.

These were the things Secretary Mnuchin had been predicting and promising and Philips provided the means for him to deliver.
But nothing in DC is easy when it comes to the GSEs.
A few months ago, Philips was asked to leave Treasury, not because he did bad work or sabotaged Mnuchin. It was because Craig Phillips --at some point in his professional life, before coming to the nation’s capital--generated some campaign funds for D presidential candidate Hilary Clinton.

I raise this about Craig Phillips—as a predicate—to posting an excellent background and informative article about Phillips, his plan, and perspective, written by Dennis Hollier of Inside Mortgage Finance, one of the best mortgage industry information sources.

Former Treasury Official Stands Up for GSE Shareholders

November 21, 2019
Dennis Hollier

Craig Phillips, the former Treasury official who served as Secretary Steven Mnuchin’s point man on housing issues until departing for the private sector in June, has come out in defense of Fannie Mae and Freddie Mac investors.

Speaking midweek at a conference in Washington, the man widely credited as the author of the Treasury’s plan for housing-finance reform said the recap and release of the GSEs should “really respect the rights of the current shareholders.”

Phillips’ comments were couched in a how-we-got-here description of “the role of capital markets and the pesky nature of the existing shareholders.”

“When a company fails,” he said, “the capital structure is typically eliminated and there are no shares left. But when these companies were put into conservatorship, for a variety of reasons, the interests of the common stockholders and the preferred stockholders were not eliminated. So those shares continued to exist. They trade freely. It wasn’t a bailout or a sweetheart deal that got them there.”

The result, Phillips said, is an unusual circumstance where there are both historic shareholders who suffered catastrophic losses when the companies failed, and opportunistic investors who purchased the stocks at pennies on the dollar in the hopes of a windfall when the companies emerge from conservatorship.

The other oddity about the GSEs is that in conservatorship both the shareholders and the company leadership are essentially powerless. That leaves Fannie and Freddie under the control of the director of the Federal Housing Finance Agency, as conservator, and the secretary of the Treasury, through the terms of its preferred stock purchase agreements.

Phillips said legally there are two paths forward for the GSEs. If FHFA Director Mark Calabria decides the two entities cannot be saved, he can put them in receivership and liquidate them. “The other option,” Phillips said, “is simply to have them exit conservatorship, which is an act that the Treasury secretary and the FHFA director can decide to do when they want under the PSPAs.”

Calling receivership impractical, he said, “The companies should leave conservatorship, and these shareholders would continue to have their rights.”

The former Treasury official then sketched out what he called “the math of the situation.”

Noting that Fannie and Freddie are strong earners with reasonable returns on equity, he said, “I truly believe they can be fully recapitalized in four to five years, between retained earnings and raising shares from the public.”

That new capital could come in the form of an initial public offering or, more precisely, what Phillips called a “re-IPO,” a capital raise by a company that, like Fannie and Freddie, has been dormant for some time.

Phillips also reminded the audience that Treasury owns warrants to buy 80% of the common stock of the companies. That too, he said, will have to be accounted for in any recapitalization plan for the GSEs.

This complex mix — historic shareholders and speculators; common, junior preferred and senior preferred stocks; Treasury’s ownership of senior preferred stocks and warrants on the commons; and finally, multiple litigants fighting it out in court —makes any recap and release of Fannie and Freddie daunting.

Phillips suggested one way to proceed: Treasury should write down its senior preferred stocks.

“The government did put $190 billion into these companies,” he said. “But they’ve now received dividends in excess of $300 billion. That’s a pretty good private equity deal. Now, we just have to turn the page on how we got here.”

Phillips then offered a plan to move the net worth of Fannie and Freddie from negative to positive.

“I think the only way to square the circle and give shareholders appropriate treatment is to really respect the rights of the current shareholders,” he said. That means selling new shares without completely wiping out current common shareholders.

“The common shares would be substantially diluted by the exercise of the Treasury warrants options, but they would still exist,” Phillips said. “I think that a sensible path forward would also include an exchange of the junior preferred shares and the common shares to align their interests in the exercise.”

But these moves wouldn’t be sufficient to put Fannie and Freddie in the black again, Phillips acknowledged.

“We want a positive net worth,” he said. “Right now, we still have a negative net worth because of the bailout. But if the Treasury … writes down the senior preferred, that’s a big part of getting to zero.”

New GSE Mortgage Ceilings, accepted or limited?  Watch and wait?

FHFA has finished its annual loan survey of the size mortgages, which determines any changes, up or down, made to eligible loans the GSEs can fund in the coming year.
That percentage increase, derived from querying 1500 diverse lenders in size, location, and charter, historically, but not always, show larger loans financed than the previous year. Those new figures are made available to lenders for mortgages originated in the last three months of 2019 for GSE securitization and delivery on Jan. 1, 2020 (unless the agency has changed its process).

By indexing future GSE securitizations in this manner, the idea is to keep Fannie and Freddie serving the same percentage American mortgagors as they always have.

I mention this otherwise somnolent yearly review, to allow you to see if--this year--FHFA and Director Calabria will permit Fannie and Freddie to naturally increase their applicable mortgage ceilings, since FHFA has the discretion NOT to allow the ceilings to grow?

If Calabria is serious about his goal to “reduce the GSE footprint,” he may not let those loan values go up in 2020, meaning next year the GSEs will serve a smaller share of the mortgagors—despite the increase called for in the FHFA mechanism (put in place long before the current Director arrived).

His actions on that score will give a hint about how much he plans to impose himself and interfere with their business order.

Of course, that would be another negative sign to the very investors FHFA needs to capitalize future Fannie and Freddie activities.

Maloni, 11-25-2019

Sunday, November 17, 2019

Somebody's ringin' the bell; do me a favour, open the door and let 'em in, (Paul McCartney and "Wings")

The FHFA Director isn’t listening so I’ll try again

I wonder if it has occurred to Mark Calabria, the Federal Housing Finance Agency’s titular safety and soundness regulator, as well as the GSE Conservator, he’s the only one chattering, publicly, about the GSEs, Conservatorship, dates and deadlines, capital requirements, and “consent decrees,” drawing attention to matters for which he has no solid answers, just suggestions of possible relief and/or more turmoil.
Is Rome burning while Calabria fiddles or is he just channeling Dean Smith basketball (see below)????
Despite, solid earnings and tiny credit losses, common and preferred shares of both Fannie and Freddie seem to be drifting amid conjecture over what in Hades Calabria may be thinking/scheming since continuing to threaten prompt GSE relief (now saying Conservatorship for three or more years; excessive capital requirements; possible product limitations; caps on what they can pay their chosen talent).
These conflicting themes imbedded in his too frequent external remarks ain’t going to bring in a lot of new investors who--for the most part--only care about making money. They’ll just see more regulatory intrusion.
On the flip side, MC hasn’t even tried to discuss how his alterations will make our national mortgage finance system, which relies on the GSEs, fairer and more efficient and welcoming to all who qualify and can afford a mortgage.
See the House Banking Committee’s large racial minority membership and think about what are their priorities?
We now know the steps that need to be taken to get F and F out of conservatorship: (a) publish a final capital standard, (b) end the net worth sweep and eliminate Treasury's liquidation preference, and (c) negotiate a consent decree between FHFA and the companies which governs their operations between the time they are released from conservatorship and are able to fully meet their new capital standard (when they will become "free" companies, subject to FHFA regulation but not control). 
In part, all of the bureaucratic intrusions and action thresholds Calabria regularly discusses seem to be relative, leaning toward more GSE burdens not freedom, and solely in his/FHFA’s hands. 
Those include when he and his team (with or without chosen outside consultants) will produced the GSE capital standards crucial to ending Conservatorship. What the interim steps to earning that money and achieving those capital levels will entail, and who/what decides if F&F’s progress is sufficient????
Sensing the Director may find himself between a rock and a hard place, he’s now talking about “Fannie and Freddie and the FHFA establishing consent decrees,” by which FHFA/Calabria will determine what types of business the GSEs can do until they achieve capital Valhalla, a relative and judgmental phantom number solely decided by Calabria and his FHFA posse, who he clearly doesn’t consider up to the task.
"There will be a level of capital where we think it sufficient to let them out of conservatorship but are not adequately capitalized. During that, they will operate under a consent decree." 
FHFA's Mark Calabria

I wonder how much each day the HFHA Director worries about his largely inflated capital concerns (“more is always better”) balanced by how much he worries if the GSEs can attract enough new capital to have them perform their core function of providing sufficient financial support to meet the homeownership needs imbedded in the housing aspirations of those needing and wanting shelter and, importantly, are able to afford same?
I am certain the Director would say he hopes to achieve both. But, when will he wake up to the fact that in trying to shine for future employers, he simultaneously is slighting one of those propositions over the other??
If he demands too much capital and puts too many operational/regulatory hurdles on the GSEs, Calabria injures affordability and low-income housing production, plus he risks failure.
My near term advice to the Director is for him to take a long holiday away from the worries of work, maybe through New Year’s Eve, say nothing to anybody, and try and unscramble the confusion he’s created in seeking to please his several audiences.
Trying to ride too many horses will kill you professionally.
Speaking of future employers, Calabria is making the big banks happy, the more time he takes in his deliberations, the more time the GSE antagonists have for lightning and other bad things to strike Fannie Mae and Freddie Mac.
Still threatening for him—now with a request for SCOTUS consideration pending—are some tantalizing pesky GSE cases any of which supporting the plaintiffs could further upset Calabria’s “four corners”* stall/delay game. (For non-sports fans, see North Carolina’s legendary basketball coach Dean Smith, and before him West Virginia Tech’s Neal Baisi.)
Former Treasury executive, Craig Philips—before he was forced from his job (reportedly because the GOP discovered he once raised money for presidential candidate Hillary Clinton)—left Secretary Mnuchin and Calabria a GSE end-Conservatorship capital plug and play plan.
Again, I would suggest congressional Democrats seek a copy, if they don’t have one already—to see what such an “end to Conservatorship” model looks like. 

Good Government!!??

Until now, for most in the GSE world, the name “Judge Lamberth” has meant bad news, even though a major reason he issued such a flawed initial legal decision--which suggested that Fannie and Freddie were guilty of anything the government said—was because his honor and his court--were fed a steady diet of false and incomplete records by government attorneys.

Last week, Lambert struck back and ordered the Admin/Treasury to give to plaintiffs’ counsel reams of requested but previously withheld government documents which should strengthen plaintiffs’ ongoing cases against the government.
(Opinion linked below.)

Yay--for now—Judge Lamberth!

Maloni, 11-18-9019

Friday, November 8, 2019

Straighten up and quit slow walking what you know needs to be done

Message to FHFA’s Mark Calabria

Sunstroke victims will stagger; fan lines--waiting to get into sporting events--will stagger; to insure productivity management will stagger employee vacations; inebriated drunks will stagger, and Mark Calabria continues to stagger on his way—so he claims—to ending GSE Conservatorship.
The other day in one of his many industry fireside chats—invariably with  “kill the GSEs” crowd as his audience—the FHFA Director suggested he could release the GSEs from Conservatorship in 2021. (That's a few years more than Treasury Secretary Steve Mnuchin promised the world it would happen and nearly as long as the plan to do so—shaped by Craig Philips, who was asked to leave Treasury by mysterious forces—has sat completed in Mnuchin’s office.)
Calabria may or may not issue new capital regs or new comments, since the FHFA did this before he came on board.
He may or he may not bring in an outside capital consulting firm to do (for him) what he can’t find any other agency in government—including an amalgam  of his own 600 or so troops—design a reasonable Conservatorship-exit capital plan.
That’s so weird; you understand that FHFA is the repository of the past 11 years’ worth of voluminous and detailed GSE business records—following the agency’s recreation by the 2008 Housing and Economic Recovery Act in 2008 (HERA)--possessing minute examples of every Fannie and Freddie business line’s performance, profit and credit losses, i.e. raw material in establishing capital requirements. One would think that data would give the GSE regulatory agency a leg up on the task it can’t seem to perform?
(Or, Director Calabria, just could ask Tim Howard for his assistance and I’m certain Tim could do it in less than a month, including presentations to both the Fannie and Freddie boards.)
Back to the staggering Mark.
An aside: Can any of you lawyers out there tell me if the Director, who also is the GSE “Conservator,” violated any of his fiduciary responsibilities—Regulator or Conservator--when he bragged to the House Banking Committee he didn’t care if any of his actions caused existing GSE shareholders to go broke on his watch? 
Then I read in Bloomberg:
"Calabria says he is also keeping in mind that to raise enough capital to exit conservatorship, Fannie and Freddie need to be attractive to new investors. He said he is working with the companies to ensure new rules don’t hurt their return on equity and is also looking at cutting costs to help make them more profitable." 
Excuse me, Mr. too talkative Director, do you really believe exposing yourself--telling the financial world how tough you are and you don’t care if current Fannie and Freddie investors go broke--will be a confidence builder for those future GSE investors that you are wizened or competent enough to oversee the companies in which you want them to invest a future $50 Billion or $100 Billion of their clients’ money?? 
It’s not like they live in another galaxy and don’t read newspapers or consume electronic media. Let me help you sir with your self-identified tasks, by putting together useful “one and one” advice (both mentioned in this blog), from which you quickly should get “two,” as your answer. 
Number one! Do more hard work and less public speaking, because you tend to get carried away, spout the company cant and go off script when you get into Q&A. No matter which host audience you are trying to please you’ll piss off somebody. 
Number two. Saving money? Look at how your staff failed you in its inability to construct capital and other tools for the GSEs to exit from Conservatorship. 
Here's a two-fer, fire as many of those duds as you can, especially those “oldies” who have been hiding in the agency woodwork for years. That alone will earn your kudos on the Hill and downtown since it's not an action most regulators initiate, even though they all have enough internal human kindle on staff to start California size fires. 
Save money and cut through the FHFA ranks cleaning out all of the deadwood and log rollers. Since the GSEs pay all of the agency’s expenses that will save them (and you) a ton of money so you can hire some true financial service-knowledge workers and allow Fannie and Freddie to build capital faster, which you claim as a goal, too. 
Avoid the industry rubber chicken circuit, speaking to all of the conservative groups for which you want to shine. 
You should be trying to build up the GSEs, not tear them down. 
Oh and stop referring to the “Treasury Task Force” report, which was DOA. Better people than you have failed to make the FHA and HUD work better and more responsibly. 
Every time you bring up the “Report” and its specious and unworkable recommendations, you undercut your credibility. 
Anything else I can help with, Mr. C???

Maloni, 11-8-2019

Late Friday News (from Peter Chapman):

Judge Lamberth released his opinion this afternoon and entered an order saying Treasury must produce the documents Fairholm's requested (or produce a privilege log identifying the documents it won't produce and the reasons why).  I suspect we get more documents showing Treasury/FHFA (pre-Calabria), and DOJ--in some part by each--lied to Lamberth and suggested the GSEs were in far worse financial condition than they actually were, facilitating the outrageous Treasury/FHFA treatment meted out to Fannie and Freddie.
Careful Director Calabria, if the Admin loses its fight over the constitutionality of FHFA and the CFPB, it ain't good for you, because now it's you saying that!!