Nonbanks Get Unwelcome FSOC Attention
As promised Friday when FSOC’s annual report was released, we here go into depth on its implications for residential housing. Most notable to us in the lengthy report was its continuing concern about residential-housing price vulnerability, its new focus on MBS-market volatility, and specific action steps to address longstanding fears about nonbank mortgage originators and servicers.
Ginnie Gives Ground on Controversial RBC Requirements
Following its long-delayed release of eligible seller-servicers standards with FHFA, Ginnie Mae announced today that it is extending by one year its mandatory compliance date for the new risk-based capital standards. The announcement cites stakeholder feedback and evolving market dynamics –doubtless the economic downturn and concerns about procyclicality – in the agency’s decision for this extension, which sets a new RBC implementation date of December 31, 2024.
BIS Unveils Two-Tier CBDC Prototype
Reflecting the BIS’ preferred two-tier CBDC structure (see Client Report CBDC6), the BIS today announced the launch of a prototype two-tier retail CBDC called Aurum comprised of a wholesale interbank system and a retail e-wallet. The wholesale interbank system is designed to ensure that banks do not issue more retail CBDCs than the wholesale CBDCs that the bank owns or double issue the same wholesale CBDC asset as a retail CBDC asset. This system also tracks unspent transaction output, allowing users to prove ownership even if an issuing bank has ceased operations.
Forbear to Forget
A new Federal Reserve Bank of Cleveland study validates forbearance as a mortgage-market buffer, reinforcing the likelihood that policymakers and servicers will turn quickly to it if current mortgage-market conditions turn ugly under the combined stress of higher rates and slow to no growth. If bank regulators also reinstate regulatory forbearance on forborne loans, the regulatory-capital cost of higher-risk loans gets a nice counter-cyclical boost, perhaps encouraging banks to tread softly back into at least some of this sector if parallel calculations under the all-powerful stress capital buffer prove propitious.
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Booting Up for 2.0
FHFA and Ginnie Mae today let loose their long, long delayed standards for eligible seller-servicers. These will require more from almost all large nonbanks but not demand nearly as much as feared from them and from all small servicers. Pain is also postponed, facilitating compliance at a time when it might be particularly challenging for firms to tap markets to meet new capital, liquidity, and stress-test standards.
A Pragmatic Vision of a Purposeful Home Loan Bank System
Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed. That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option. When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised. But, unless the Home Loan Banks blow themselves up, they are here to stay. Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good. Traditional single-family mortgages don’t need the Banks anymore, but much else does.
Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed. That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option. When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised. But, unless the Home Loan Banks blow themselves up, they are here to stay. Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good. Traditional single-family mortgages don’t need the Banks anymore, but much else does.
The paper’s criteria for considering taxpayer subsidies are a very helpful guide for moving forward and thus worth quoting at length:
“There is, of course, nothing inherently wrong with government subsidies. But subsidies should meet two conditions if they are to be sound public policy. First, they must be shown to be correctives for identified market failures or instruments of targeted redistribution policies. Second, there must be governance mechanisms to ensure that the subsidies are used to achieve the ends specified by the legislature or regulator, and not for other purposes.”
I suspect the authors would agree with a third point: if a credible, forward-looking case for the subsidy cannot be made by virtue of demonstrable public benefits …
Following much talk about the need to update Community Reinvestment Act (CRA) rules since this was last done in 1995, federal banking agencies have finally agreed on a proposed redesign of standards essential to banks that wish to expand or acquire as well as those seeking strong community ties and the policy and political benefit these afford. Much of the complexity in the NPR results from the agencies’ decision to allow only partial credit for activities (e.g., mortgages) largely assumed in the past…
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…
CRA Regulatory Reform
Following much talk about the need to update Community Reinvestment Act (CRA) rules since this was last done in 1995, federal banking agencies have finally agreed on a proposed redesign of standards essential to banks that wish to expand or acquire as well as those seeking strong community ties and the policy and political benefit these afford. Much of the complexity in the NPR results from the agencies’ decision to allow only partial credit for activities (e.g., mortgages) largely assumed in the past to benefit low-and-moderate income (LMI) households if they occurred in LMI census tracts as well as to condition product approval on the extent to which LMI-household needs are demonstrably met. Offsetting these restrictions to some extent are broader criteria for eligible community-development and -service activities, but only wholesale and limited-purpose banks will enjoy the full benefit because new weightings require regulators to give the most weight to retail finance at most large banks.
Fintechs on the Firing Line
As we noted yesterday, the IMF’s financial-stability report includes a searing assessment of fintech risk. In this report, we drill down into one of the study’s case studies, which assesses mortgage fintech and concludes that this business model poses a raft of risks to financial stability. We note several methodological concerns with this conclusion, but it will nonetheless have significant bearing on what FSOC, FHFA, and Ginnie come to do about the nonbank business model.