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Housing Finance Reform Seen Gaining Momentum to Nowhere Again

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure


Housing Finance Reform Seen Gaining Momentum to Nowhere Again

Although leading policymakers have recently sounded an optimistic tone on housing finance reform, several analysts think it faces the same doomed fate as a similar 2013 effort.

Ever since the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac, known as government-sponsored enterprises or GSEs, into conservatorship amid the 2008 financial crisis, the government has dominated the housing market. Taxpayers were responsible for 78.5% of all first-lien mortgages in the first quarter, according to the Urban Institute.

Republicans and Democrats alike agree the system is unsustainable if not outright irresponsible. Treasury Secretary Steven Mnuchin has said politicians need to make sure they "don't put taxpayers at risk" by keeping Fannie Mae and Freddie Mac in conservatorship, and six years ago, then-President Barack Obama's Treasury Department issued a report that noted a "need to scale back the role of government" in mortgages. Despite bipartisan agreement that something needs to be done, there is little hope among observers that anything will happen.

I think clearly the act is gaining momentum and a lot of attention.

Rep. Jeb Hensarling, R-Texas, Chair of House Financial Services Committee, September 2013

"It's a complicated issue," said Rob Couch, counsel for Bradley Arant Boult Cummings with expertise in the mortgage industry. "It takes a lot of brain cells to address all these things. Bless their hearts, that's not something people are anxious to do. Congress taking on complicated, difficult issues is tough."

In recent weeks, there has been increased chatter that housing finance reform could happen in the current Congress, which runs through 2018. Several Republicans have said it will be a priority. Rep. Jeb Hensarling, R-Texas, is particularly influential as the chairman of the House Financial Services Committee.

"I think the stars have aligned to get that done," Hensarling said in a July interview.

Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., issued a joint statement in June that they were "extremely optimistic about the prospect of congressional action on reform in the coming months." Regulators have spoken up about the issue lately, too. Federal Reserve Gov. Jerome Powell said in July: "We're almost at a now-or-never moment."

For observers following the issue, many of the quotes might sound familiar. In 2013, there was similar optimism around the Corker-Warner bill to reform housing finance, a bill eventually replaced by a largely similar piece of legislation known as Johnson-Crapo, named after Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho. Hensarling also had a bill in the House that he said was "gaining momentum and a lot of attention." Both bills would go on to pass committee votes but never receive a full vote.

We need to scale back the role of government in the mortgage market.

The Treasury Department, February 2011

Several analysts said they are not convinced the rhetoric will turn into results this time around. There might be bipartisan agreement that the current situation is unsustainable, but the ideal form of housing finance remains hotly contested. Conservative scholars have pressed for wholesale elimination of any type of government guarantee with little concern that it might mean the end of the 30-year fixed-rate mortgage, a product uniquely prevalent in the U.S. But liberal scholars consider the 30-year mortgage a pillar of affordable housing and one that must be protected in housing finance reform. And the companies' stocks have posted tremendous gains recently as investors bet on a legal challenge to the government's control of the GSEs, adding yet another voice to the table.

Isaac Boltansky, an analyst for Compass Point Research & Trading who follows financial policy, pegs the chances of housing finance reform at just 10%. In July 2014, Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, said she was not optimistic housing finance reform would occur in her professional lifetime. She confirmed that remains the case.

In addition to fundamental ideological differences at a time when partisanship appears on the rise, a limited calendar window could make housing finance reform difficult. Republicans have so far prioritized healthcare legislation and have failed to pass a housing finance bill in either the House or the Senate.

It is past time for us to modernize our unstable system of housing finance.

Sen. Bob Corker, R-Tenn., member of Senate Banking Committee

Further, some say, housing finance lacks an immediate need: Fannie Mae and Freddie Mac are immensely profitable and the housing market has bounced back.

"Housing finance reform is a very dull topic that most taxpayers and voters don't really understand or care about," Couch said. "As long as the system ain't broke, they're not itching to fix it."

That could change at some point in 2018. When the GSEs entered conservatorship, policymakers foresaw the possibility of inertia and wanted to ensure action. The GSEs will be prohibited from retaining capital in 2018, meaning a small loss could force another bailout, presumably triggering some type of long-term legislative solution.

"When you take a look at the economics and the slow but steady drain of capital out of them, I think it's important that it ends up being a priority," said Joseph Lynyak III, a partner with Dorsey & Whitney LLP.

Freddie+Mac+and+Fannie+Mae+performance+chart

Brian Cheung and Syed Fariq Javaid contributed to this article.



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report
Download


Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report
Download


Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Highlights

- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

Read the Full Report
Download

Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.