Re: Fannie/Freddie-Thoughts on Don Layton’s “Living Will” Paper. This paper is a must-read; imho, it reinforces my primary GSE thesis: Receivership is NOT an option because TINA (There Is No Altnernative.” Cont’d...

The full paper is here: https://www.jchs.harvard.edu/sites/default/files/research/files/harvard_jchs_fhfa_living_will_rule_layton_2021.pdf. My thoughts follow.

I’ve believed from the outset in the TINA thesis, which is why JPS represent “perpetuity options.” Courts will only influence timing of recap IMO. Because TINA, recap is inevitable.

Don Layton’s core message about FHFA’s living rule proposal is that it is fatally flawed and needs to be reformulated.

“In some future GSE distress situation...receivership will probably prove to be a very unattractive policy alternative compared to others...”

“The housing market...accounts for 15% of GDP...If one or both GSEs went out of business, then, the economy would take a real hit...”

“Placing even one GSE into receivership...would absolutely exacerbate market distress...[requiring] the sale of a large amount of mortgage assets on a forced basis...”

The more I think about it, the more I think that MC made SM’s job impossible. If SM was DV, MC might be Palpatine because of his libertarian mandate to “‘shrink the footprint’ of the GSEs in some backdoor fashion, without any congressional support.”

The living will proposal contemplates that in a receivership scenario that assets would be liquidated or transferred to a Limited Life Regulated Entity (LLRE) which essentially would also be a run-off vehicle. Fraudulent conveyance, anyone?

Layton: “it would be almost impossible to do such a liquidation in 5 years without massive asset sales...that will depress the prices of mortgage assets, thus raising mortgage interest rates, possibly by a lot, and HURTING THE ECONOMY AND HOMEOWNERSHIP.”

“If a GSE were to fail and be put into an LLRE, it would therefore create TREMENDOUS STRESS in the second-largest global debt market; the EXPECTATION OF A CORPORATE LIQUIDATION WOULD ONLY EXACERBATE THIS STRESS.” In other words: 2008 on STEROIDS.

Bottom-line: TINA. More thoughts next Tuesday on RealVision...