Larry Parks, SVP Federal Home Loan Bank of San Francisco NALHFA – Housing Finance Reform and the Future of Fannie Mae & Freddie Mac New Orleans April 4th 2013

Starting Where We Finished in 2011 Change the Narrative GSE’s did not cause the crisis. GSEs are the market currently. Raising guarantee and fees and downpayments to get the PLMBS market or covered bond market going is not pro consumer. Change the Structure 4. Homeownership is critical to wealth accumulation for lower, moderate and middle income families. 5. Change the structure of Fannie/Freddie into cooperative ownership and strengthen. 6. Put public interest directors on Fannie/Freddie boards. 7. Allow regulated depository institutions of all sizes to use FHLBanks, Fannie & Freddie going forward. Basel III 8. Maintain the implied –government guarantee so as to facilitate low cost mortgage credit and not crowd out appropriated dollars for direct subsidies for affordable housing.

Progress made on changing the narrative The number 1 issue with GSEs was to change the narrative This is beginning to happen because of market forces, the actions of the GSEs and advocates championing a role for GSEs in housing finance

State of Play in GSE Reform Influences Fannie Mae earned $9.6billion in 3rd quarter of 2012 Freddie Mac earned net income of $11billion for the full year 2012 Fannie Mae paid $28.5billion to Treasury in dividends on $116.1billion in preferred shares owned by Treasury Freddie Mac has paid $21.9billion in dividends to Treasury on $71.3 billion in preferred stock Pending question of Fannie Mae’s $61.7 billion reversal of write-down of deferred tax assets The substantial sums paid by Fannie and Freddie to Treasury plus the lack of need for Treasury assistance has significantly affected the commonplace argument that the entities are wards of the State

State of Play in GSE Reform Warner Bill S.563 the “Jumpstart GSE Reform Act” was introduced on March 14, 2013 in a bipartisan effort by Sen. Corker (R-TN, with Senators Warner (D-VA), Vitter (R-LA) and Warren (D-MA) as original co-sponsors. The bill: Prohibits government use of increases in guarantee fee to offset an increase in government spending or a reduction in government revenues for any purpose other than of Fannie/Freddie business purposes and Prohibits Treasury sale or transfer of Fannie and Freddie senior preferred stock until Congress permits it.

State of Play in GSE Reform FHFA Actions On March 4, DeMarco announced as a 2013 goal for Fannie and Freddie the development of a Common Securitization Platform (CSP) to issue Fannie and Freddie MBS. DeMarco said the objective of CSP is “for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures” of Fannie and Freddie and that the “overarching goal is to create something of value that could either be sold or used by policy makers as a foundational element of the mortgage market of the future.” CSP is one of a series of moves DeMarco has taken to push Fannie and Freddie toward extinction – e.g., increased guarantee fees and shrinking their retained portfolios. Senators from both parties concerned that these factors could lead to the end of Fannie/Freddie without Congress developing a plan for a new housing finance system.

State of Play in GSE Reform During the consideration of the Senate Budget Plan on March 22, 2013, Senators Johnson (D-SD) and Crapo (R-ID) offered an amendment to prevent Fannie/Freddie G-fees from financing unrelated government spending. The amendment was passed unanimously. The Senate Budget Committee’s report on its Budget Resolution further expressed views on Fannie/ Freddie. The report endorsed a slow, deliberate approach to changes for Fannie/Freddie. It listed as priorities: Stability in the still fragile housing market and GSE Reform not coming at the expense of economic growth and upward mobility for hard working families who need access to mortgage credit.

State of Play in GSE Reform Ranking Member Waters (D-CA) is likely to focus on: Access to credit issues for middle and lower economic class of Americans (looking at how derivatives and complex financial issues impact average working families) Mortgage finance (access to affordable mortgages) Continued government support of homeownership

The Challenge – The Future Structure of the GSEs During the past few years, Rep. Hensarling has been very vocal about eliminating Fannie and Freddie.  He has not included FHLBs in his comments. Mr. Hensarling’s Congressional website contains the following on Fannie and Freddie -- “The financial crisis was caused by failed federal policies that strong-armed, incented, and cajoled financial institutions into loaning money to people to buy homes that they couldn’t afford to keep.  At the epicenter of this were Fannie Mae and Freddie Mac.  The most disturbing aspect of the Dodd-Frank permanent bailout bill was the fact that it did nothing to reform Fannie and Freddie.  You can’t address systemic risk while ignoring these two GSEs.  I am the only Member of Congress to have introduced comprehensive reform legislation for Fannie and Freddie since the start of the credit crisis, lauded in the media as “a concrete plan for fixing Fannie and Freddie.”      

The Challenge – The Future Structure of the GSEs At a House Financial Services Committee oversight hearing on March 22, 2013 on FHFA, Rep. Hensarling said that there has been little meaningful progress to bring the Fannie and Freddie conservatorships to an end and that he is “determined that this hearing will be the last time that Director DeMarco … will testify before this Committee before we finally and belatedly mark-up true GSE reform legislation.”    Staffers have said that Hensarling will likely reintroduce the bill that phases Fannie and Freddie out over 3 to 5 years.

The Challenge – The Future of the GSEs Bi-Partisan Housing Commission Report released February 25, 2013 Proposal favors private sector housing finance system Limited catastrophic government guarantee on qualified MBS The guarantee would be explicit, paid for by premiums collected. Congress decides loan sizes for the eligible guarantee. A range of $250,000 to $275,000 is being recommended. The proposal received a favorable audience in the Senate Banking Committee hearing on March 19, 2013. Major concern is that it explicitly abandons the implied government guarantee for Fannie and Freddie; thus further isolating the implied government guarantee for the FHLBs

Key Outstanding Questions on Federal Role in Housing Finance Implied Govt. guarantee Fannie & Freddie structure going forward Coop model? Public interest director on the boards? Homeownership as a goal & policy for working and middle income families? Lenders for Homeownership (large banks, community banks, hedge funds? Regulatory impediments under consideration

Key Outstanding Questions on Federal Role in Housing Finance I. Homeownership as a Goal/policy for working & middle income families Bipartisan Housing Commission Report & push for multifamily over single family for some population Why not a both and instead of an either or? Investor class purchasing single family homes as “solution” to foreclosure crisis Is this a solution? Advocacy Community Fracturing over homeownership policies vs. rental assistance FHA undercapitalization

Key Outstanding Questions on Federal Role in Housing Finance II. Lenders Vs. Homeownership Weigh in on Basel III liquidity rules that are under consideration As drafted the Basel III liquidity standards would discourage banks from taking down FHLB advances because they would not fully count for liquidity purposes. Europeans have successfully lobbied to have covered bonds fully count. The impact on non-QRM mortgage lending from depository institutions could be significant. Be aware of regulatory actions that discourage community banks from taking down FHLB advances Discourages community lending Reduces AHP funding Look at policies to see how they impact mortgage lending such as: Stress test on mortgage affiliates of large banks Increase cost, discourage separate mortgage affiliates

Key Outstanding Questions on Federal Role in Housing Finance III. Fannie & Freddie Structure Define the problem as shareholder driven and providing alternative model Explain how public interest directors provide necessary tension in board room to assist mission compliance Ensuring independent public interest director on Fannie/Freddie Boards Allow GSEs to pay back their loan from Treasury (Preferred Stock) Encourage sufficient capitalization of GSEs

Key Outstanding Questions on Federal Role in Housing Finance IV. Implied Government Guarantee If GSEs are explicitly guaranteed by the government they will likely be on budget. The GSEs would then compete with other federal housing programs in the budget process, most likely FHA. This could be a way to ensure a permanently shrunken housing market. The implied guarantee has worked. When the GSEs had trouble there was government intervention, restructuring and a payback of any funds provided.

Starting Where We Finished in 2011 Fix what is broken with the current intermediaries; Ensure continued access to low cost, universal credit; Push for housing finance to have transparent open regulatory structure that balances consumer needs, risk mitigation and broad credit access.