Category Archives: GSEs

GSEs and role in housing finance

Videos

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These are videos from recent covered bond conferences and other events that relate to Canadian or U.S.$ covered bonds.


European Covered Bond Directive • Euromoney

Covered bonds and securitisations are easily confused • Euromoney

TCB Roadshow 2022 | The implications of growth: Canadian covered bonds in 2022 and beyond

Mayer Brown Webinar • 2020
Covered Bonds Update in the United States
Jerry Marlatt and Laura Drumm

US $ covered bonds – back again • Euromoney 2019

Equal treatment for non-EU covered bonds? What’s needed? • Euromoney 2018

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Concerns about the Covered Bond Directive.

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Outlook for the Canadian covered bond market and prospects for the U.S. market

Euromoney/ECBC Covered Bond Congress 2018, 13 September 2018 • Munich
Impact of MREL and TLAC on covered bond issuance.

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Keynote Address by Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Sandra Johnson, FHFA

Euromoney/ECBC North America Covered Bond Forum, 19 April 2018 • Vancouver
Interview with Jerry Marlatt on “What Hope for America”.

Congressman Jeb Hensarling On Covered Bonds • 2010

Congressman Scott Garrett On Covered Bonds • 2010

Garrett Introduces Covered Bonds Amendment • 2010




U.S. Legislation in 2020

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U.S. Legislation in 2020

Where are we with U.S. legislation for covered bonds starting 2020?

First, we are in a highly contentious and partisan presidential election year. A few days ago CNN reported that there was a tie for the most admired person in the United States: Donald Trump and Barak Obama. The division is deep and wide.

Second, the possibility for bi-partisan legislation is not high, but there has been some bi-partisan legislation, even during the impeachment hearings in the House. For example, the amended North America Free Trade Agreement was passed. So there is some possibility of passage of legislation, as there always is even in an election year.

Third, it is unlikely that covered bond legislation will be separated from GSE reform, because GSE reform will inevitably examine housing finance and the role of the government in housing finance. Until that is settled it probably makes little sense to initiate a new form of housing finance in the form of covered bonds.

It seems very unlikely that covered bonds would not be a viable form of housing finance in a post-GSE reform world, but why put the cart before the horse.

That leaves us with the question of the prospects for GSE reform in 2020. The GSEs have now been in conservatorship for more than 10 years. The current situation of the GSEs is obviously acceptable to many sectors. Nevertheless, there remains a desire to resolve the situation and clean up this unfinished business.

In June 2018, the President of the United States released a reform and reorganization plan entitled “Delivering Government Solutions in the 21st Century.” This plan includes a proposal to convert Fannie Mae and Freddie Mac into private sector entities, to provide an express government guarantee of mortgage loans to Fannie, Freddie and other qualifying entities, and to restructure financial support for low and moderate income family mortgage loans into the Department of Housing and Urban Development.

In March 2019, the President issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan to reform housing finance. In September 2019, the Department of the Treasury issued The Treasury Housing Reform Plan. While the Plan provides many specifics for the resolution of the conservatorship of Fannie Mae and Freddie Mac, much of the Plan is dependent on enabling legislation, the prospects for which appear rather bleak in this strained political environment. As part of the plan, the Federal Housing Finance Agency, as Conservator of Fannie and Freddie, exercised its administrative power in the fall of 2019 to permit the GSEs to retain their profits and begin rebuilding their capital as an initial step to resolving the conservatorships. This step increases the pressure on Democrats in Congress to agree to a resolution of Fannie and Freddie.

In 2020, we may see additional administrative action from FHFA that will increase pressure on the Democrats to come to the table on GSE reform. Democrats will be reluctant however to agree to any significantly undesirable changes to the GSEs while there exists a fair prospect for taking over the White House this year and taking more control of GSE reform. Accordingly, we are most likely waiting until 2021 to see any real movement in GSE reform.

U.S. Housing Overview

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U.S. Housing Overview

The continued conservatorship of Fannie Mae and Freddie Mac exposes taxpayers to continued risk. &nbsp The failure to address the GSEs and release them from the conservatorship evidences a significant failure of political will.

This chart from the latest monthly report from the Housing Finance Policy Center at the Urban Institute provides a fine summary of the government dominance of U.S. residential housing finance.   This imbalance with private sector financing is imposing significant risk on the GSEs and therefore on the government and taxpayers without analysis or justification.   There should be a fundamental analysis of the government’s housing policy and how much risk needs to be taken by the taxpayers in order to achieve the government’s goals.  

Why is CB legislation tied to GSE reform?

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Why is the adoption of covered bond legislation linked to housing finance reform? Housing finance reform is all about the role of the GSEs. While covered bonds certainly can be used to finance residential mortgage loans, they do not require any form of government support. The consideration of the proper role of the government in housing finance can occur independent of covered bonds. However, I hear from many sources that covered bond legislation would only be considered after GSE reform had been adopted or perhaps considered with GSE reform.

There is no apparent logic to this position. Covered bonds are a private sector financing technique that has proved very effective in other jurisdictions. There is nothing in GSE reform that would be a necessary predicate to the issuance of covered bonds by U.S. banks. Covered bond legislation would not touch the status of the GSEs. It is possible that covered bond issuance by U.S. banks could develop into an attractive alternative to financing through the GSE and thus reduce the tension in GSE reform, but that would be beneficial to GSE reform.

It seems as though both sides are determined to keep as much pressure on GSE reform as possible in order to achieve their objectives and not permit any private sector initiatives to sidetrack the discussion until the role of the government in housing finance has been solved. But this seems to put the cart before the horse. Shouldn’t the government intervene only where the private sector is not functioning properly? Wouldn’t it make sense to let private sector initiatives develop first before assigning the government a role? If we can agree that the answer to those two questions is yes, why not adopt covered bond legislation and see how the market develops while we debate how to wind down the GSEs and what would be the appropriate future structure for the government’s role in housing finance?

Certainly we can have a fulsome debate on how the government can support housing access for those who need assistance independent of how covered bond legislation is drafted. Certainly if covered bonds, RMBS and the federal home loan banks fail to provide adequate private sector funding for residential mortgage loans there may be a need to consider a larger government role.

It is not essential that covered bonds be enabled through legislation as it is possible to achieve covered bond issuance through securitization techniques, as has been done in other countries. See, e.g., Time for a US alternative. However, investors will have more confidence in a covered bond sector established through legislation and the market may be expected to develop quicker with legislation. Enacting legislation for covered bonds would be a low cost experiment that would have no harmful side effects. Covered bond legislation, therefor, should be enacted before GSE reform is attempted so that we have a better chance to assess what works in the private sector before designing the government’s role in housing finance.