Who’s afraid of the PSPA?


Stakeholders are divided over whether, in light of proposed changes to its capital rule, the Federal Housing Finance Agency should retool its agreement with the U.S. Treasury and remove policies some say never belonged there in the first place.

Even if the mortgage industry were in agreement, there is little they could do about it. Whether to open up that document — the Preferred Stock Purchase Agreement — is at the sole discretion of the two parties that negotiate it, the FHFA and the Treasury.

There are no restrictions on what the document can contain. It is not governed by the Administrative Procedure Act, as are the rules and regulations of federal agencies. Mortgage lobbyists who have sought insight into the negotiations between Treasury and FHFA say they have hit a brick wall.

In January, for the first time since the Treasury committed its financial support to the government-sponsored enterprises, the PSPA was amended to include policy changes which mandated changes in the government sponsored enterprise loan purchases.

The changes placed caps on loans secured by investor homes, loans deemed risky and the use of the cash window. The changes caused an uproar in the housing finance industry, and led to full-throated calls for their removal. FHFA suspended many of the most problematic elements, from the mortgage standpoint, in September.

Yet a remaining provision, according to the Mortgage Bankers Association, could hamper any future changes to the FHFA’s capital rule. Specifically, those the FHFA proposed in September.

Those proposed changes would make three specific amendments to the December 2020 capital rule. Two of them directly relate to credit risk transfers.

The amendments would replace the fixed prescribed leverage buffer amount — currently 1.5% of an enterprise’s adjusted total assets — with a dynamic buffer equal to 50% of its stability capital buffer. Instead of a prudential floor of 10% on the risk weight assigned to any retained CRT exposure, the prudential floor would be 5%. The requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures would be removed.

In its recent comment letter to the FHFA on proposed changes to the capital rule, the MBA criticized a provision in the January PSPA. According to the PSPA, it required the GSEs to comply with the regulatory capital framework finalized in December 2020, “disregarding any subsequent amendment or other modifications to that rule.” Any further changes to this arrangement, the agreement reads, “Will require agreement between the Treasury and FHFA…”

The MBA wrote that the provision was “directed at binding the hands of future FHFA leadership rather than promoting the sound operations of the Enterprises.”

The trade association, which represents a wide swath of the mortgage industry, was the only commenter that brought up the potential conflict.

“The concept of an agency tying its own hands and negating future changes to its own rule is bizarre,” said Dan Fichtler, associate vice president of housing finance policy at the MBA.

​​That’s a problem now, Fichtler argued, because it could impact the outcome of the FHFA’s newest proposed changes to the capital rule.

Those changes would make credit risk transfers more economical for the GSEs. Fannie Mae put the brakes on CRT deals in the early days of the COVID-19 pandemic, and only recently restarted them. According to one analyst, some investors were earning returns on equity leveraged against CRT assets in the high teens.

By contrast, a May 2021 report on CRTs found that the GSEs lose money on the transactions.

“While smaller retained portfolios and increased CRT volumes activities meet conservatorship objectives for the Enterprises, they also reduce revenue,” the FHFA noted in an accountability report last month.

Other observers, including former FHFA and Treasury officials, shrug their shoulders at the language in the PSPA.

The Treasury holds warrants to purchase 79.9% of the GSEs’ common stock, said David Dworkin, president of the National Housing Conference, so it’s not unreasonable that the agreement reflects the Treasury’s position as a more-than-equal partner.

One compelling reason the agreement is governed by the Treasury and the FHFA, and not the APA, is to allow the two entities to quickly respond to the market and make business decisions.

He said it’s also very unlikely that there would be disagreement between FHFA Director Sandra Thompson and Treasury Secretary Janet Yellen. Yet because the document can be amended at any time, and the negotiations are not subject to public scrutiny, it is vulnerable to shifts in the political climate.

“It’s certainly subject to political changes,” said Dworkin.

The Housing Policy Council, which represents large mortgage lenders and servicers, and whose president, Ed DeMarco, was once head of the FHFA, disagrees with the MBA, and is not pushing for changes to the PSPA. Reopening the agreement introduces uncertainty in the market. The trade association also believes that the MBA’s fears are unfounded, and the PSPA cannot undercut the ability of the entity to update its own regulations.

Other stakeholders were also supportive of the FHFA’s proposed changes to the capital framework, while they had some suggestions for further improvements.

The Community Home Lenders Association said reducing the leverage buffer is “a welcome change, but leaving in place overly stringent requirements that, as noted, will force the Enterprises to raise prices and shrink their credit boxes to comply.”

Freddie Mac is similarly supportive of the proposed changes to the capital rule, but proposed that FHFA “go a step further and allow greater capital relief” for credit risk transfers, by using a sliding 0% to 5% credit risk transfer floor.

“The economics of CRT depend on multiple factors beyond the regulatory capital framework and take into consideration other variables such as market conditions and credit characteristics of guaranteed collateral,” Freddie Mac wrote. “All else being equal, the proposed amendments to the CRT securitization framework combined with Freddie Mac’s proposed adjustments significantly improve the economics of these transactions and create an incentive for the Enterprises to execute CRT transactions.”

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