Category: FHFA


Basel III will increase capital requirements for big banks, resulting in higher mortgage rates, the Federal Housing Finance Agency said.

The FHFA made that assertion in a paper released this week on proposed mortgage servicing compensation rules.

Basel III capital requirements were designed with the intent of ensuring systemically significant banks possess enough capital to cover future risks.

Because capital requirements are going higher, FHFA says "some of the largest originators, who are market leaders in setting mortgage rates, will need to either raise the mortgage rates offered to borrowers while reducing servicing released premiums paid in order to compensate for any incremental capital required, or accept lower returns."

Corporate borrowing costs – especially in Europe – also will feel the headwinds of stricter regulations spawning from Basel III, Standard & Poor’s noted this week.

"The Basel III regulations, due to come into force in stages between 2013 and 2018 are likely to result in a repricing and even a rationing of credit for corporates globally, and change the behavior of lenders and borrowers," S&P said in its report. "Yet, European corporates will feel the effect more harshly than their U.S. counterparts because they typically rely more heavily on banks for funding relative to capital market sources, the report states."

The  global Basel III requirements for systemically important banks also is catching heat for going against the American capitalistic grain.

In his own push back against Basel III, Christopher Whalen with Institutional Risk Analytics, punched holes in the  regulatory structure.

"I think we can all agree that the statist, anti-democratic construction of Basel III is out of step with traditional ideas of American democracy and free enterprise," Whalen wrote. "The world of Basel III is all about top down management of the economy, the sort of socialist claptrap that was introduced into the U.S. political mainstream after the two world wars. Banks are, in fact, run like most other businesses, from the branch level up to the head office, but the deterministic world of Basel III is entirely European in outlook."

Whalen seems to see Basel III as a contradictory construct that  will  actually create a system riddled with greater risks.

"Americans need to reject new era concepts such as market efficiency and fair value accounting, two of the key pillars of the Basel III world that encouraged the growth of opaque OTC markets in mortgage securities and derivatives," Whalen said.  "In good times, Basel III was an enabler for bad banking practices and excessive leverage. Now we are seeing the very same global bureaucrats who fomented the financial bubble rush around setting new, incomprehensible rules that we call Basel III.”

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The decision of the Federal Housing Finance Agency to sue major banks under representation and warranties clauses prompted Paul Miller with FBR Capital Markets to criticize the plan, saying it will likely further drain capital from the banking system.

Miller’s criticism is pointed mostly to the unintended negative impact the lawsuit may have on the average American. As banks tighten purse strings further, for whatever reason, future qualified borrowers continue to stay on the sidelines.

Miller’s analysis arrives days after FHFA announced it would sue 17 banks – including Bank of America (BAC: 7.40 +5.87%), Citigroup, (C: 28.78 +3.90%), Goldman Sachs (GS: 107.33 +2.65%) and JPMorgan Chase (JPM: 34.59 +3.44%) among others – for selling toxic mortgages that became part of the securitization process that eventually led to the housing market meltdown.

Miller wrote: "Because there is no centralized housing policy coming out of Washington, housing agencies (Fannie Mae, Freddie Mac, and Federal Housing Authority) are acting in their own self interest as opposed to that of the broader U.S. economy. For Fannie Mae and Freddie Mac, this means minimizing losses by digging through their loan books and pushing back loans barely delinquent on their mortgages under reps and warrants clauses."

Miller said suing banks for securitization issues would further pressure the housing markets, delaying a recovery and draining capital from the banking system, keeping many borrowers out of the market.

In his report, Miller claims "we believe the banks have developed overly cautious residential lending standards as a result of concerns over reps and warrants claims, even as they struggle to grow revenues."

His report estimates repurchase losses could reach as high as $121 billion, with 60% of those losses being incurred by the nation’s top four banks – Bank of America, JPMorgan Chase, Wells Fargo and Citibank. That is up from previous estimates which said the industry would see $54 billion to $106 billion in losses, with the nation’s top four banks facing 40% of those losses.

Keefe, Bruyette & Woods estimated that a remedy to the claims could cost the defendants as much as $60 billion, but added it’s likely a settlement will be reached between mortgage originators and the FHFA for a smaller amount.

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Homeowner associations (HOA) exist to maintain the welfare of their communities.  To sustain such initiatives, HOA rules and regulations require a number of fees to be paid by residents.

Recently, the Federal Housing Finance Agency (FHFA) published a Notice of Proposed Rulemaking that will dramatically affect HOA’s. While the regulations cover a variety of subjects, there is much skepticism as to whether they are actually beneficial to the HOA’s themselves.

One of the most sweeping areas of reform aims to allow Fannie Mae, Freddie Mac and the Federal Home Loan Bank System to regulate transfer fees paid to investors, as well as to the associations themselves.  More specifically, the FHFA seeks to implement the prohibition of investor transfer fees nationwide. These payments, made to investors whenever a house is sold in a planned community, don’t serve any true purpose in context to helping and sustaining the community and its surroundings. The Community Associations Institute (CAI) has agreed that this change would be positive for homeowners.

The FHFA is also trying to pass regulations that are not necessarily beneficial for both homeowners and homeowners associations.  For example, community transfer fees have been in use for decades to minimize the financial burgeon of maintenance and any special assessments that may pop up out of the blue. Still, there is always a margin for error, and the FHFA aims to limit the use of community transfer fees solely for maintenance and improvements.  This regulation, if carried out, would in theory help to reduce the effects of irresponsible actions made by HOA board members, but it would also remove a great deal of the operational flexibly necessary for an association as a whole.

Of course, not every homeowners association is the same – and some may find it more difficult to tend to their community’s needs and wants with a decrease in flexibility.  More importantly, the homeowners themselves have the most influence over their HOA rules and regulations, and the benefit of this proposed limit is already supplemented by the voice of each individual resident; ineffective polices are always due to be replaced at some point or another.

Another limitation that would affect a HOA’s operational flexibility stems from regulation that would allow non-residents to use common areas for free.  This decision has traditionally been up to each association to determine the best steps to address this issue, with the consideration of homeowners’ unique and specific demands taken into account. Some homeowners may be more comfortable in certain situations than others, which is why homeowner associations avoid ‘one-solution-fits-all’ policies, and instead develop policies based on their community’s needs.

The last regulation proposed by the FHFA would prevent HOAs from voting to have a transfer fee for an area move farther than 1,000 yards from their property line.  Both the CAI and homeowners across the nation are vehemently opposed to this since it’s not a very logical option, especially for larger communities who often consist of a so-called master associations and a number of sub-associations.

The CAI has voiced displeasure over many of the FHFA’s proposed regulations – and for good reason.  Decisions made and carried out by an HOA are based on the good judgment of the homeowners and board members themselves. This scenario represents a majority of HOAs across the nation.

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