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

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