Monday, July 23, 2007

Did Bernanke Mess Up, Fail to Fess Up?

A few weeks ago, I wrote that the Senate (and the public) will hear all sorts of negative things about the GSEs, as the White House and its allies try and get the Senate to pass a very restrictive GSE regulatory bill. I cautioned people to listen carefully to who says what and to critically question the messengers.

Last Thursday’s Senate Banking Committee hearing, with Fed Chairman Ben Bernanke, was a perfect example of a misstatement making headlines, while the “truth” slowly trailed.

At one point in his appearance, Chairman Bernanke was asked to comment on the Bean-Neugebauer amendment to the House Financial Services Committee’s GSE regulatory bill, which had been added on the House floor, overwhelmingly, by a bi-partisan 383-36 vote.

Chairman Ben was thrown this “softball” anti-GSE question so he could slug it out of the park and he did. But, in his answer, “BB” chose to ignore some salient facts and, hopefully, ended up undercutting his own position.

The problem for pro-housers is that desired boomerang may not occur, unless the Senators and their staff understand what happened.

Assault on Bean-Neugebauer and Bernanke’s Role

The floor amendment in question, offered by two Banking Committee members, struck out some Administration regulatory overreach—which was part of an early deal between the House Banking Committee leadership and the White House-- and instead gave the new GSE regulator interdiction authority similar to that of other federal financial regulators.

Reps. Melissa Bean (D-Ill.) and Randy Neugebauer (R-Ky.) successfully convinced the House that only matters pertaining to Fannie Mae and Freddie Mac should be considered in making decisions about the two companies and not exogenous economic issues, as the Bush Administration so desperately wanted.

The Bushies and the old FM Watch crowd still hope to get more restrictive language passed Congress, believing that a new regulator will punish the GSEs and force them to actively shrink their mortgage portfolios. The successful Bean-Negebauer mooted some of that.

As part of the anti-GSE campaign for the more restrictive portfolio language, Fed Chairman Bernanke dutifully played his part and opined about the House bill, with the new--and in his view--undesirable B-N limitations. With his answer, he tried to start the “GSEs portfolios are risky” snowball rolling down the “Hill.” (Pun intended!)

He trumpeted the same-o Fed “systemic risk” concerns and suggested that growing

GSE portfolios might be good for the companies, but not good for the financial system (“haff, kaff, harrumph, risky, trust me, I’m the Chairman, um Fed speak”).

So, with no clarification about the likelihood of that horrendous development occurring, listeners in the hearing room, viewers watching on television, or folks reading the news reports, saw Bernanke--in the wake of the House passed bill with the Bean-Neugebauer--express great concern about excess GSE portfolio growth causing “systemic risk.”

Bernanke’s answer was akin to talking about Germany, as if there still was a functioning “Berlin Wall.”


Over a year ago, Fannie Mae and Freddie Mac, separately, entered into consent agreements with the Office Federal Housing Enterprise Oversight (OFHEO), their safety and soundness regulator that limit their portfolio growth.

Those GSE portfolio limits have been and currently are in place and unless OFHEO backs off, changes its mind, or decides that portfolio growth is healthy and desirable, the UNBRIDLED GSE PORTFOLIO GROWTH STRAW MAN, which Bernanke created for the Senate Banking Committee, doesn’t exist. (Boldface emphasis, all mine!)

Tut. Tut. Some officials just will say anything to get the Senate to adopt stricter limits on the GSEs.

One enterprising wire service did catch Bernanke’s error, referenced it, almost apologetically, and suggested that his was more of a historical than a contemporary comment!

But, where was OFHEO in promptly pointing out the error by the Maestro’s successor? Why hasn’t OFHEO defended its “safety and soundness” initiative, capping what the companies can do in their portfolios? Why hasn’t Director Lockhart pointed out his “good deeds” and explained how Bernanke’s fears are unfounded? Where is the Fed, correcting the record--once they saw the news report--pointing out how the Chairman’s view were “macro” and not necessarily reflective of the GSEs current regulatory arrangements?

Ben and or “Two Gun” Should Correct the Record

Senate sources should ask themselves, who benefits from leaving this mistake uncorrected?

The Senate needs to understand Bernanke’s misstatement, so that nobody foolishly acts on it, as in “But, the Fed said…..”

Until the Fed or OFHEO steps up and clears the record or Chairman Dodd or ranking Republican Shelby asks them for a clarification, most people will think--based on Chairman Bernanke’s response--that Fannie and Freddie are poised to run amok and fecklessly grow their portfolios to generate huge profits.

As long as the Senate is subjected to the “siren songs” of the anti-GSE crowd, they need to keep in mind the very positive “mortgage market cop” role, which Fannie and Freddie play, and why hamstringing them--as the Admin and their allies propose--would merely open the mortgage lending playing field to domination by the worst elements in the lending community. (Thankfully, some of Sen. Dodd’s comments during this hearing suggested that he is very much aware of that fact.)

The Senate also should see clearly that what happened with subprime lending is exactly what could happen to large elements of the “A” mortgage market, if Fannie and Freddie are successfully stifled and the “slimy slug lending network” is permitted to fill the vacuum, confuse and dupe borrowers and charge what the traffic will bear.

I’ll give Chairman Bernanke the benefit of the doubt and say—with all of the other things on his mind—he just forgot that Fannie Mae and Freddie Mac ARE operating under regulatory portfolio growth limits. But, I would respect him more and OFHEO, too, if one, the other, or both, made that point clear to the Senate Banking Committee.

Maloni 7-23-2007

Wednesday, July 18, 2007

Big News on Bachus Lender Regulation Bill?

Ben’s Bomb

I may be overreacting, but, if I was Rep. Spencer Bachus (R-Ala.), ranking Republican on the House Financial Services Committee, I would feel 10 feet tall and start my staff cranking out press releases, as fast as they were able.

In response to a Bachus question this morning, Fed Chairman Ben Bernanke seemed to endorse Bachus’ bill to require all mortgage lenders to be covered by federal regulation, which certainly means the mortgage brokers of the nation, but also federal regulation for the mortgage banking industry. (Commercial banks, savings and loans, and credit unions already have federal regulation.)

From Bachus’ perspective, this is part of the answer to the recent subprime mess and he may have gotten a huge advocate in Bernanke, if the Chairman’s handlers don’t “clarify the record,” this afternoon, when he gets back to the Fed’s office at 20th and Constitution—once they realize his advocacy for additional federal regulation.

Good job Spencer!!

Bachus suggests that one answer to the phenomenon of roving gypsy mortgage thugs, who conduct business in states, are nailed for transgressions, then break down their tents, hop on their wagons, move onto another state and conduct the same havoc.

Suggesting that 3% of all mortgage lenders are responsible for over 90% of the subprime problems (a number which I think is low, since there are plenty of questionable actors in mortgage lending), Bachus says federal regulation is part of the answer to getting rid of the worst elements in the lending community.

I agree, but I know the brokers and lenders won’t.

If Bachus gets any momentum from the Bernanke endorsement, you will hear howls of complaints from the usual suspects about how regulation will add costs to and hurt borrowers, blah, blah, blah, blah, blah.

The brokers and mortgage banker trade groups will pay lip service to the principle of the Bachus bill, but complain about “using howitzers to kill fleas” and call for industry self regulation. They will use all the banality employed against serious regulatory proposals, which discomfit happy businessman.

Hang in there Rep. Bachus, you are onto something.

One of the best hopes for subprime relief--and housing finance, in general-- is that they lead to Congress to pass legislation like the Bachus proposal, then, look at the appraisal, title insurance, and mortgage insurance industries as well—all of which would be better run and more consumer friendly, if Uncle Sam—not the states and localities--regulated them.

Maloni 7-18-2007

Wednesday, July 11, 2007

Lockhart, OFHEO, and Subprime

I’ve talked about OFHEO Director Jim Lockhart’s public negativity regarding Fannie Mae and Freddie Mac. Many business and political observers think his comments are inappropriate and pathetic.

I believe it is unprofessional for any regulator, let alone one whose agency regularly certifies that the companies are financially well and possess more than their required capital (remember that 10 year “financial Armageddon” stress test that each must have sufficient capital on hand to survive), to spew venom designed to create disparaging and false conclusions about the companies he regulates.

“Two Gun” reminds me of a stopped clock. He’s correct twice a day, but wrong the other 1438 minutes.

I saw a recent article in which Lockhart expressed great skepticism over the GSEs subprime commitment, i.e., refinancing subprime ARMs into fixed rate loans for the weak credits facing default and aiding lenders who face possible default losses. Speaking in New York City, to the Mortgage Bankers Association (they sure have clean hands when it comes to subprime!), TG suggested that Fannie Mae was interested just in “the cream” of the subprime market loans.

Looking at what Barron’s this past weekend called an “$800 billion” subprime mortgage problem (weaker credits needing refinancing into more affordable, ideally fixed rate loans), I didn’t realize this public mess—caused by Wall Streets greed and mortgage broker culpability and avarice--was so far behind us that OFHEO would dump on any form of serious assistance, especially a $40 billion GSE offer of help?

Of course, TG knows more than we know, just ask him!

When reading his vitriol, I get the image of an unhappy, loutish regulator and some questions for TG, also come to mind.

Why are you on the circuit talking down the GSEs, like a venomous “FM Watch” lobbyist? Why have you chosen that role?

You control the companies, man. You have your hands all over them. You say “jump” and they ask “how high?” Where is your responsibility for their subprime response?

Why did you let them announce a $40 billion package of subprime relief, if you thought it wasn’t real? What’s that say about YOU?

Nobody says that you have to be an advocate for the GSEs, God forbid, but you could tone down your little “attack” act and choose a more traditional and responsible behavior.

Likely, you should just go about your job, quietly, and call as little attention to yourself as possible. Let the GSEs do their subprime help effort and then pounce, if it is not sufficient.

You already are associated with bad things for this Administration. Remember the House acceptance of the Bean-Negebauer amendment, for which your public boasting and posturing largely was responsible?

The particular subprime article I read, which talked about your MBA comments, also put you in pretty negative company. Bert Ely (“I discovered the S&L crisis, er remember?”) and Judy Kennedy, President and CEO of the National Association of Low Income Housing Lenders, also were quoted in the article, offering similar complaints about the GSEs announcement.

Bert is a professional GSE critic, a “Johnny one-note,” as is Ms. Kennedy, who hasn’t had a good word to say about Fannie Mae in God’s lifetime. The latter behavior goes way back to an era when Ms. K was a Freddie Mac lobbyist, in a far more competitive/adversarial GSE environment, and she constantly was coming in second on Capitol Hill, in a two horse lobbying race. The otherwise capable Ms. Kennedy was unforgiving and volatile then, still seems so and—reportedly—continues to wonder how and why Freddie managed to survive all of these years without her?

Nope. No “GSE love” lost in that lady, whatsoever.

You are known by the company you keep, TG. Instead of Bert and Judy, you might be better off hanging with Dick Cheney (as long as you remember to wear face armor).

Lockhart’s boorish behavior does remind me of the managerial dilemma that the GSEs face, daily, and which often is overlooked by their foes and friends alike.

The GSEs have to operate their businesses, managing to three conflicting and constant obligations.

The Congress wants them to take risks and do heavy “housing mission” work, which involves lots of financing for low, moderate, and middle income families who possess varying degrees of credit worthiness. The GSEs shareholders want strong growth, no losses, with management adding portfolio assets, and generating healthy earnings, so the stock value goes up and dividend income and buybacks are viable options. And, OFHEO hopes the GSEs limit growth, take minimal risks, securitize but not purchase assets for portfolio, and stay away from financing the riskiest among us (who often are the weakest and the poorest), so that the companies don’t lose money and/or become financial cripples.

It’s not easy satisfying all of those “Gods,” each of which has every right to demand primacy. And each of which could withdraw their crucial support, if the companies seem to be ignoring their wants. The key is deft management or balance, which Fannie Mae and Freddie Mac seem, successfully, to have done over the years.

As Congress and the nation reads more about subprime matters—and notes the absence of any media suggestion that Fannie Mae and Freddie Mac had any part in the selfish mess, Congress should focus its attention on the bad actors and make sure that Fannie and Freddie are able to conduct their secondary mortgage market businesses freely and without interference, a right they have earned and from which the nation benefits.

Let’s close with some sound advice for Mr. Lockhart. A really smart regulator would consider the following, if you think the GSEs might waffle and come up short on their subprime pledge, announce that you plan to aggressively monitor them and hold their corporate tootsies to the fire. (Hurry and make it your idea, before you get asked to do so by the Senate “knee jerks,” Sununu, Hagel, Dole, and Martinez.)

And, when the GSEs produce against their promises, you should be the first one to stand up and salute Messrs. Syron and Mudd—or whomever is leading the companies, then-- and promptly take credit for helping create the environment in which Fannie and Freddie succeeded ameliorating some of the subprime woes.

It’s an old regulatory model and it works.

That’s what President George W. Bush did in his first term. “W” was as ill suited in his pro-housing role as you are in yours, but, following his “major” homeownership announcement in Atlanta during National Homeownership Month, he got housing kudos for months after, based on Fannie’s and Freddie’s deeds.

But, if all you do is whine, then you’ll just join Bert and Judy on the “Sourgrapes Express.” (“Whine” and “sourgrapes” was not an intended pun, but, I’ll take it!)

Maloni 7-11-2007