FHFA Five-Year Plan – No Changes!

The FHFA released its five-year plan today. There are no surprises in this report. There are no innovative plans to change the troubled mortgage giants FNM and FRE. The five-year plan by FHFA calls for them to do what they have been doing for the past year as FHFA and for the past decade as OFHEO. Not much in the way of supervision or control. Just business as usual.

The primary goal set forth by FHFA is as follows:


How are they doing in their Primary Goal? Not so good. On page 29 of the report is the following:

“The GSEs have not met and may continue to be unable to meet many regulatory standards”

A critical component of the report is missing. Where is the exit strategy for American taxpayers? There is none in the five-year plan. This topic is glossed over with a reference to the requirement by the Conservatorship Agreement that a) limits the maximum balance sheet of the GSEs and b) a requirement that those aggregate limits be reduced in a significant manner over a number of years. This sounds like a way out. But it is not. It is misleading to leave the reader with that impression.

Any balance sheet caps by the Agencies are worthless. The other wing under the FHFA is the Federal Home Loan Banks. They are ramping up their balance sheets to adjust for the limits at the Agencies. There are no effective limitations on assets under the FHFA umbrella.

In addition, there are no restrictions on the amount of MBS that either FNM or FRE can guarantee. So the amount of mortgages they can have at risk is unlimited. This open-ended guaranty is a backdoor way to maintain and expand the Agencies position in the mortgage market. So far this year their balance sheets have been stable. But they sold nearly $1 billion of newly issued guaranteed MBS to the Federal Reserve. This is just moving the deck chairs. The end result is the same. The taxpayers are at greater risk to the mortgage market today then ever. The systemic risk is continuing to be concentrated exactly where it should not be. In the hands of the government.

A five-year plan should have at least addressed this problem. Even I understand that there are no quick fixes to the mortgage mess. Our feet are stuck in this cement. It would have been refreshing if Mr. Lockhart had included as one of his goals that FHFA would create a Blue Ribbon type panel to take on this very serious topic. The panel should include academia, existing and former Fed and Treasury folks, the private sector financial side and some people who do not have an axe to grind. There should be a bulldog running this.

If we let the FHFA set the five-year plan for the FHFA then in five years we will have accomplished nothing. The government’s role will be bigger than ever. One FHFA goal should be:


FHFA puts the following sentences at the bottom of its correspondence. They are very proud of this big number. The folks at FHFA want this number to grow every week and month forever. If we are not careful that number will grow to $10 Trillion in five years.


I did like the cover and all the other pictures of the happy home owners.