University of Maryland & NYU Conference
"The GSEs, Housing & the Economy―
James B. Lockhart III
Vice Chairman, WL Ross & Co.
Washington, DC
January 24, 2011
Federal Spending Reached Highs in 2010
Federal Outlays as a % of GDP
26.0
24.0
% of GDP
22.0
20.0
18.0
16.0
14.0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
est.
Year
Source: Office of Management and Budget (OMB)
2
Federal Debt Held by Public Projected to Reach Danger Zone
Projected Debt Held by the Public, 2010-2084
120
Percent of GDP
100
Red
77 - 90 Danger Zone
80
Yellow
60
40
20
Debt Held by the Public
2080
2070
2060
2050
2040
2030
2020
2010
0
Medicare, Medicaid, and Social Security
Source: Congressional Budget Office
3
Social Security Benefits Will be Cut Without Changes
Social Security Long-Range Estimates
% of Taxable Payroll
20
Historical
Intermediate
18
Outlays w/ Scheduled Benefits
16
14
Outlays w/ Payable Benefits
12
10
2080
2070
2060
2050
2040
2030
2020
2014
2012
2010
2008
2004
2000
1990
8
Calendar Year
Income Rate
Cost Rate
Source: Social Security Administration, 2010 OASDI Trustees Report.
4
Almost 12% of Banks Classified as Problem Institutions
325 Banks closed by
FDIC since 12/07
Number of
Institutions
114 136 116
80
52
50
76
252 702 775 829 860
Source: FDIC as of Sep 30, 2010
5
US Residential Mortgage Market is Massive
As of September 30, 2010
Single Family
(in billions)
Multifamily
(in billions)
All Other
$876
8%
ABS Issuers
All Other
$163
19%
$1,325
13%
Agency
Banks
$5,777
54%
Agency
$317
37%
ABS Issuers
$104
12%
Banks
$2,634
25%
$264
31%
$10.6 Trillion
$847 Billion
Total of $11.4 Trillion
Source: Federal Reserve; FDIC
6
Residential Market Dominated by Government
80%
75.9%
$4.0
70%
Originations (Billions)
$3.5
60%
$3.0
50%
$2.5
40%
$2.0
30%
$1.5
24.1%
$1.0
20%
10%
$0.5
$0.0
Fannie/Freddie and FHA/VA Share of Total Originations
$4.5
0%
1997
1998
1999
2000
Fannie/ Freddie New Business
2001
2002
2003
FHA/VA
2004
Other
2005
2006
2007
2008
Fannie/Freddie Share
2009
3M
2010
FHA/VA Share
Sources: Inside Mortgage Finance, Enterprise Monthly Volume Summaries
7
FHLBank Advances Peaked in 3rd Quarter 2008
($ in millions)
Source: Federal Home Loan Banks, Office of Finance
April 2010
8
Are Serious Delinquencies Starting to Fall?
Sources: Mortgage Bankers Association, Fannie Mae, Freddie Mac.
9
Underwater Mortgages – A Big Problem
As of September 30, 2010
Source: CoreLogic
10
House Prices Bubbled and Burst in Many Countries
Ireland
UK
S&P/C-S 10-City
Fall From Peak
Ireland (to 12/31/10)
UK (to 12/31/10)
US (to 9/30/10)
-38.3%
-17.8%
-29.7%
Sources: Economic and Social Research Institute, Ireland; S&P as of 9/30/10; Lloyds Banking Group
11
Fannie Mae & Freddie Mac — What Went Wrong?
•
Housing bubble fed by private label MBS, GSEs, investors,
mortgage originators, borrowers, rating agencies and slow
regulatory response
•
Capital Requirements too low
•
Affordable Housing Goals pushed too high
•
OFHEO’s Regulatory powers too weak
•
No debt market discipline to offset equity investor pressure
•
Massive portfolios increased credit and interest rate risk
•
Fannie & Freddie had too much political power, which delayed
reform legislation
12
What should be the role of the Secondary Mortgage Market?
• Provide market for banks to offload mortgages to reduce risks and better
match loans to deposits ratio to support the $11 trillion Mortgage Market
• Ensure consumer protection, choice and transparency
• Considerations include the role of:
•
Private Label vs. government guaranteed MBS
•
30 year Mortgage
•
“TBA” Market - hedging
•
Affordable Housing Especially Multi-Family
•
Mortgage Insurance
•
Originator Concentration
•
Role of Mortgage Servicer
•
Qualified Residential Mortgage / Skin-in-the-Game
13
Challenges for Restarting Private RMBS
• Financial Regulatory Reform Uncertainty
• Future of Fannie Mae and Freddie Mac
• Skin in the Game
• Stigma
• Housing Market Stability
• Transparency
14
Principles for the Future of the Enterprises
•
Well-defined and consistent mission with safe, affordable housing
•
Clear demarcation of private and public sector roles to protect the
taxpayer
•
Regulatory and governance structure to ensure prudent risk
taking based on strong insurance principles, market discipline and
strong capital positions
•
Systemically prudent supervision that incorporates
countercyclicality to limit booms and busts
15
Why We Need Countercyclical Policies
•
Curb asset price bubbles and dampen credit cycles
•
Improve the odds that financial institutions will survive a crisis
•
Reduce the occurrence of fire sales and credit crunches that hurt
the broader economy and individuals
•
Countercyclical policies could include increasing capital
requirements with housing prices, pricing catastrophic insurance
and/or contingent equity
16
Options for the Future of the Enterprises
• Nationalize or merge Enterprises with FHA or Ginnie Mae
•
Moral hazards of government insurance programs
• Improved GSE model with small portfolios
•
Public utility model
•
Government MBS insurance
•
Cooperative ownership
•
Countercyclical Capital
• Establish private-sector firms to supply liquidity to mortgage
markets
•
Covered Bonds or Private Label MBS
•
Government catastrophic insurance
•
Investor “Skin in the Game”
17
Proposal
• Split GSEs into Newco & Oldco
•
Oldco supported by Treasury preferred stock commitment
•
Allow other financial companies to become Newco’s
• Potential split of multifamily
• No government support for “Newcos” debt or portfolios
• Develop 5-year plan to return major portion of secondary market to private
sector
•
FHA continues to support affordable housing & first time homebuyers
• Strengthen regulator, include mortgage insurers and require “living wills”
• Rethink freely prepayable 30-year mortgage
• Create stronger, risk-based, counter-cyclical capital structure
• Create interim MBS with paid for risk related government support
18
GSE Reform – Mortgage Guarantor Model
Funded by Treasury Senior Preferred
Existing GSEs
New Entities (?)
“NewCo”
“OldCo” split
Old Co’s – holds
existing MBS,
portfolios and debt
New Co’s - new
guarantee business
issues MBS with gov’t
reinsurance (?) &
small portfolios
Funded by new equity investors
(public/private/mutual) and contingent capital
19
New Residential MBS is Needed
•
Common payment and other terms
•
Clearer rules for mortgage servicers and trustees
•
Greater information/transparency on underlying mortgages – ASF restart
•
20% downpayment mortgages or 10% downpayment with 20% mortgage
insurance
•
Originator skin-in-the-game for riskier mortgages
•
Slowly reduce conforming low limit
•
Government paid for, risk-related catastrophic insurance only after
downpayments, mortgage insurance, originator skin-in-the-game and
investor “deductibles”
•
Possible structures for investor deductibles to create market discipline
•
10%-20% unguaranteed “B” tranche
•
Investors holding over $250,000 would take a 5% loss before catastrophic
insurance kicks in
20