Tuesday, August 28, 2007

"How to Fix the Current Mortgage Market Problems"

I know the White House doesn’t want to admit that there are any credit problems or mortgage issues which lend themselves to intervention, yet Fed actions would suggest it doesn’t agree. The central bank has seen some ominous developments requiring it to jump in and take necessary steps to fend off more problems later. Just last Friday, the Fed revealed that it granted flexibility to Citigroup and Bank of America to help respective subs mired in mortgage liquidity problems. The previous week, the Fed pumped billions into the market to ease bank and consumer concerns.

Based on their words and actions, many in Congress seem to think the mortgage and credit markets need help, too.

I’m of that mind. I believe that Congress and the Administration should take ameliorative steps now.

Here is a barebones, three part, legislative proposal to bring relief--both near and long term--to the residential mortgage markets, regenerate consumer and investor confidence, and deal with real problems in both the subprime and jumbo segments It would insure that the broadest segment of the mortgage market, which has been well served by Fannie Mae and Freddie Mac, remains stable and in good hands, while also addressing subprime and jumbo mortgage liquidity issues.

Title I would remove the OFHEO-imposed portfolio investment caps from Fannie Mae and Freddie Mac. This is a result sought by many, most prominently Senate Banking Committee Chairman Chris Dodd (D-Ct.) and Senate Housing Subcommittee Chairman Chuck Schumer (D-NY), House Financial Services Chairman Barney Frank (D-Mass.), former Clinton Treasury Secretary Larry Summers, and the major housing industry trade groups.

Title II would create a temporary GSE single family mortgage purchase limit of $750,000, which would sunset three to six months after this bill become law. This short term emergency increase will allow the GSEs immediately to provide liquidity to the jumbo or non-conforming mortgage market, re-establishing a functioning secondary market there, until traditional jumbo investors return.

Title III would be identical to language already passed by the House, cosponsored by Barney Frank and George Miller (D-Cal.), creating a high cost adjustment formula for GSE purchases in states where middle-income housing costs are so far beyond other communities, like California, New York and Boston. Titles II and II are complementary. The Frank/Miller provision—which only would apply in selected communities--would take effect, when the temporary $750,000 single family limit sunsets.

The House Financial Services Committee and the Senate Banking Committee should eschew all efforts to amend the bill with non-germane items or amplification of what the committees believe is essential to achieve mortgage market equilibrium. You don’t want to keep stressing the all important housing sector of the economy, which accounts for 25% of the nation’s goods and services.

For their part, the GSEs would agree to take on a greater share of financing subprime victims out of their old ARM mortgages into conventional fixed rate loans, when the borrowers are capable of doing so. The latter effort would be in addition to the $20 billion, which each company announced --some weeks ago--they would invest in subprime mortgages.

Many of those 2-28 and 3-27 teaser ARMS just never should have been made and the brokers/lenders who made them—and the Wall Street firms which securitized them-- must bear those losses, while everything should be done to help the families hornswaggled into taking on those debt obligations.

Since any legislative activity will occur just about the time--traditionally late September--when OFHEO tells the GSEs what their new 2008 mortgage ceilings will be (based on the OFHEO controlled survey of lenders), any “new” GSE single family mortgage ceiling should be choreographed with the removal of the emergency ceiling.

If the nation truly is going through a residential real estate trauma, these easy-to-understand and implement legislative steps—immediately--should generate market calm and confidence, until other non-GSE investors return to their traditional roles and the breadth of possible subprime problems become easier to grasp.

The key for the Congress is to promptly pass this package—with no amendments—and send it to the President.

It this approach is too “activist” for this Administration, let President Bush say so loud and clear.

Then, those GOP office seekers, campaigning in 2008 on the Bush mortgage market “non-intervention,” will be able to chant (quietly to themselves), “*#%@+% Bush, Paulson, Hennessey, and Lockhart, they didn’t do their mortgage part, they didn’t do their mortgage part”--as their Democratic opponents’ vote totals scream past 50%!

(Possible alternative chant for losing candidates: “ #^&%#$@ Paulson, Hennessey, Lockhart and Steele, why did you balk at the emergency deal, why did you balk at the emergency deal?”)

Maloni 8-28-2007

Sunday, August 26, 2007


With a letter, in the American Banker last Friday, former ICBA head Ken Guenther asked why the Administration (paraphrasing) “won’t put Fannie Mae and Freddie Mac into the game” and let the two companies help bring additional mortgage liquidity to markets which still are shaky despite recent Fed actions.

Why, indeed! I’ve suggested that the Administration has so heavily invested in the “GSE as bogeyman” balderdash that it can’t extricate itself from its own incendiary rhetoric to do something which is so logical that their indifference defies logic!!

Many observers have pointed out that the OFHEO-imposed portfolio investment limits are a political/ideological imposition, not a market driven necessity.

But, if you claim often enough that the GSEs represent “systemic risk” and/or have little value—as this Administration and its allies have done—you may undercut your available market remedies and paint yourself into a corner when bad news prevails.

The nation’s roiled mortgage markets don’t seem troublesome enough for the Bush Administration to unleash Fannie and Freddie. Joint pleas from the Homebuilders, Realtors, Mortgage Bankers, Housing Council of the Financial Services Roundtable and major players in the jumbo market have fallen on deaf WH ears. (That’s a lot of GOP money and votes to ignore!).

But, the Bush Administration (Paulson, Steele, Lockhart and whomever in the WH is making political calls, could that be you Keith Hennessey?) has been presented a more compelling and powerful reason to accommodate this request. It’s something that most people in Washington—even Bob Novak (see 8-23 column)--recognize and understand.

That reason is that three most potent congressional Democrats in the financial services world have asked this Administration to remove the GSE portfolio shackles.

How will President Bush get anything he needs accomplished if his Administration continues to snub Senate Banking Committee Chairman Chris Dodd (D-Ct.), Senate Housing Subcommittee Chairman Chuck Schumer (D-NY) and House Financial Services Committee Chairman Barney Frank (D-Mass.)?

To the GOP, I ask what am I missing here? What is smart or bold about showing your disdain to those august political personages, whose cooperation eventually you will need for some part of your agenda?

Forget Lockie for a moment, he’s just an order taker. But why is Secretary Paulson playing hardball with these guys, the very individuals with whom he must negotiate on all sorts of money matters, foreign and domestic?

The “I’ll hold my breath and turn blue, first” behavior is not the act you want to pull on the GSE portfolio limits, which is a small issue in the grand scheme of things, one which makes financial/economic sense, and is easy to rectify.

It was a questionable OFHEO regulatory action to begin with, imposed in a time when mortgage markets were stable, not like today.

The last time I checked George Bush can’t run again in 2008, so taking partisan positions just to isolate your political opponent doesn’t produce much. (Unless Karl Rove is working on a “going away surprise for us, revoking the 22nd amendment?)

Being so opposed to something which seems designed to “bring relief to middle income families”—and opening yourself to that incendiary charge--makes as much political sense for the GOP as saying “no” to health insurance for children in lower income families. (Oh wait the, Bushies already did that!)

The Administration claims that it won’t give the GSEs any relief until Congress passes reform legislation to more aggressively regulate the GSEs, i.e. to prior approve new GSE mortgage products, give the new regulator greater discretion to boost GSEs capital, and let the “new OFHEO” use any development—related or unrelated to the GSEs businesses--to move against the companies. (“Hello. This is Lockie. The sun came up in the east this morning and, in my ‘pinion, that doesn’t look good for mortgage finance. I’m going tighten those GSE risk based capital parameters a scosh! By the way, how’s the fishin’ in Kennebunkport and howmydoin’.”)

Just who are these mystery people who lead those congressional committees and subcommittees whom the Admin says must pass their entire GSE package of “legislative angina,” BEFORE it will consider the Dodd, Schumer, Frank request? Um, it’s um, now don’t tell me, it’s um, it’s Chris Dodd, Chuck Schumer, and Barney Frank.

Being pushed out there on portfolio limits to go nose to nose with these three guys, after you’ve figuratively thumbed your nose at them, sure makes that WalMart greeter job in Dallas look pretty good right now, doesn’t it Lockie??

Remember to remind the two powerful committee Chairmen, and the very able Senator from New York, that you expect to head this new GSE regulatory agency, which you insist they create for you and your boss, and that you plan to bring with you your entire crack OFHEO team! Yes sir and don’t forget to speak real loud and pound the desk for emphasis!

They love when you do that!

(My next blog will to offer a thoughtful “road map” for the White House and Congress to deal with the mortgage problems that we have all been talking about for weeks. Look for it in a few days.)

Maloni 8-25-2007

Tuesday, August 21, 2007

"The Lawyer"

The other day, I bumped into a man who “knows his way around Washington,” a big time lawyer, who spends a lot of time with other big time lawyers, doing what big time lawyers do—discussing the day’s big time Washington legal issues, especially those where lots of money is involved. (Sorry, counselors!!)

This fellow, who has the sublime taste and judgment to read my blogs, said to me, “Harumph (all big time lawyers say ‘harumph’), you know I’m almost certain that OFHEO doesn’t even have the legal authority to put investment limits on Freddie Mac and Fannie Mae.”

I swore that I saw dollar signs in his eyes.

I said, “Well that may or may not be the case, sir, but you need to have some lawyers test that fact in court, don’t you?”

He smiled back, wolfishly, “Lawyers, we have plenty of lawyers!”

This brief exchange came back to me as I read several stories about Senate Banking Committee Chairman Dodd’s understandable agitation over OFHEO’s rejection of lifting the GSE investment caps and the Administration’s standard GSE intransigence. (Not smart, the man is the “Chairman” and also a presidential candidate.) There also was Senator Schumer’s very predictable umbrage and stated intention to introduce legislation, in September, to jettison the caps (and do God knows what else to OFHEO).

I suspect both Senators and their colleagues are upset that the Administration/OFHEO really has done nothing concrete to address the rocky residential mortgage markets, since the White House can’t take credit for the Fed’s actions.

House Financial Services Committee Chairman Barney Frank was exercised at OFHEO, as well, and made that clear in interviews last week.

Legislation will be hard to pull off this year, since either political party can kill what the other wants. (Someone should tell that to Secretary Paulson and President Bush, the latter thunders as if he still, independently, has some political clout to move bills).

Assuming the White House continues to be “housing tone deaf,” are there alternative actions available?

This is where the big time lawyer’s observation comes into play.

What if a close examination--by the counsels on the Senate Banking and House Financial Services committees--produces some reasonable doubt in their minds about what powers OFHEO has to impose sanctions?

Indeed, if the congressional lawyers agree and believe that OFHEO doesn’t have the statutory authority it claims--and which the agency already has exercised to cap the GSEs investment portfolios—the Hill lawyers would have to make that clear to OFHEO (and the Justice Department, too) and seek some redress or accommodation

Legally, OFHEO has overreached before. It lost a court battle with former Freddie Mac Chairman Leland Brendsel and other Freddie Mac senior managers, over compensation granted to the mortgage officials under legal contracts entered between them and the Freddie board.

The court decided that OFHEO did not have the authority it claimed and the agency was stopped from trying to recover the compensation it sought.

That’s one major precedent, if anyone is looking to see how solid the legal ground is under OFHEO’s portfolio cap determination or if OFHEO lawyers are prone to read more power into the agency’s safety and soundness authority than the Congress gave them or the courts might believe.

A congressional legal opinion challenging and agency action alone wouldn’t shake mountains, but it might get some “downtown officials” to think less punitively about the GSEs and maybe show even some “love” to Fannie and Freddie, as well as the nation’s dizzy mortgage markets. Backing off would be an agile Administration move, if for no other reason than they might be able to avoid a spirited debate over the boundaries of OFHEO’s legal authority, an exchange which might upset their neat apple cart.

It’s not as if this Administration lacks a track record for interpreting the law expansively, when it wants to do something weird, especially something Congress may not want it to do or that Congress didn’t contemplate when the original statutes were written. The Democrats say the Bush Administration operates egregiously in that regard.

It’s probably just wishful thinking that OFHEO and its White House bosses would change their minds just because someone on the Hill disagrees with them over what the OFHEO charter may mean, since difference of opinion (legal and otherwise) is what drives this town. Hopefully, the mere suggestion won’t panic OFHEO’s GC to begin purging his files, getting rid of any memos which support the opinion of our mysterious “man about town.” Besides, purging your files is so wrong, so “Scooter Libbily,” or so “Karl Rovie.” (There is a “Wade” joke somewhere in that “Rovie” line!)

If OFHEO is given a strong congressional legal opinion that it does not have the power to cap the GSEs portfolio investment capacity, would this Administration suddenly show some flexibility and grant both companies greater authority to provide the markets with much needed liquidity, as those committee leading congressional Democrats, major housing and mortgage finance industry groups, and Fannie and Freddie have asked?

You never know unless you try, but—If I was in this White House and my team was losing the media battle over responsibility for credit woes, as badly as the Bush team is—I would be looking for every conceivable way to work with Hill Democrats, as well as try and appear sensitive to the problems of the broad middle class.

Agreeing to allow Fannie and Freddie some more capacity to put mortgage loans in their portfolios really is a tiny step and it would be good Administration policy and politics, if it weren’t for all of those years claiming that the two companies exemplify “systemic risk.” If anything, this past six weeks turned that phony assertion upside down, as almost everyone in the mortgage business but Fannie and Freddie seem to be the cause of systemic risk in the subprime and jumbo markets. While Fannie and Freddie and their lender networks were working smoothly and not missing any beats in their mortgage segment niche.

Of course it’s easier for Congress to discuss legislation than take on the role as an “amicus” in a legal battle over whether the Administration has locked the GSEs in the mortgage world “Guantanamo.” But, there are “amicus filers” and, then, there are “AMICUS FILERS!”

OFHEO should find a way to accommodate Dodd, Schumer, and Frank on the investment limits. They are the people who hold OFHEO’s legislative fate in their hands. All of the huffing and puffing by the Administration can’t do squat to move a bill, if these guys don’t want one.

In the meantime, there are scads of lawyers around town who would love to explain to Congress why a careful reading of the 1992 law would show that “Emperor Lockie” and OFHEO may be a garment or two short, with regard to GSE portfolio investment limits.

Maloni 8-21-2007

Friday, August 17, 2007

"In the Corner," A Brief One Scene Play

(I’m sorry, but I couldn’t resist or wait! Maloni)

BB: Class, class, come to attention, please!

Class: Y-e-s-s-s-s Mr. Bernanke.

BB: I have an announcement. Now, anyone looking for Billy Poole will find him over in the corner, wearing the dunce’s hat, but only after he writes on the chalk board, 100 times (twice for every basis point we cut the bank borrowing rate), “I will not utter every word, publicly, which crosses my narrow mind.”

Maloni 8-16-2007

Wednesday, August 15, 2007

The OFHEO Letter and a Temporary Solution to "Jumbo" Illiquidity

Karl Rove soon will be gone, but you almost could hear him pulling “W’s” strings last week, when the President told a press conference questioner that the Administration didn’t support granting Fannie Mae and Freddie Mac portfolio investment cap flexibility.

President Bush did not say it this way, but under Karl’s tutelage and the President’s renowned syntax, he easily could have said:

"My Administration--the George W. Bush administration—and I say ‘no’ to Frannie Mae and to Freddie Mae, too. America needs good, strong American homes and American houses, too. I know I own a house, so do my parents. I was born in a house, a good strong American house, with veterans nearby. Heck, I almost was a veteran. But, we cannot permit any company, who is not up to order and who does not have its own home in line, to move on up. So, it's ‘no, no, and no, ’until such time as we see the need to say ‘yes’ to America, to American house markets and to our American GESs, I mean the GS…!"

It Is Not Over!

Anyone who thinks the OFHEO letter to Senator Chuck Schumer (D-NY), rejecting the Fannie Mae request to remove the GSE portfolio investment caps, killed this issue, didn’t read the letter or doesn’t understand how Washington works.

The Lockhart to Schumer response, in my view, was a temporary political place holder.

OFHEO wisely added a “not at this time” to its rejection, leaving them some wiggle room, if the subprime and “jumbo” markets, which are weak, do not respond to the current limited non-GSE stimulus.

That should allow plenty of time--in September, when the Senate returns--for Senators Dodd (D-Ct.), Schumer, Clinton (D-NY), and Rep. Barney Frank (D-Mass.) and others, who requested the policy change--to champion the investment cap issue and related matters. Just yesterday, the Homebuilders, Realtors, and Mortgage Bankers weighed in supporting an investment cap removal.

What I don’t understand is why OFHEO choose to pin some of its refusal to remove the caps on Fannie and Freddie not having have current financial reporting?

Both companies, previously, formally announced that they will be current soon, Freddie within weeks and Fannie Mae, shortly after the end of 2007.

Neither Fannie Mae nor Freddie Mac could have made a public statement of that magnitude WITHOUT PRIOR OFHEO APPROVAL. So, why did “Lockie” choose—once again—to use his letter to denigrate the companies for being weak and unprepared, when he knows, factually, that isn’t the case and he understands that shortly both will be SEC compliant?

It really makes you wonder, when the Administration's minions will drop their “the GSEs are cancer” routine, or will they just collectively ride into the Texas sunset, in 2008, clinging to that housing horse manure?

Virtually all mortgage observers point out how well the GSE market is working and how poorly the subprime (not, traditionally, GSE territory) and the non-conforming market (which the GSEs, by law, cannot access) are doing? But, not OFHEO’s letter, which highlighted the GSEs warts.

I guess when you are the Bush White House—and OFHEO, by extension—and you have no credibility; you’re not giving anything up by spewing more nonsense.

An Obvious Solution

There is an obvious compromise here that OFHEO/the GSEs actively should consider, especially if you can believe the number of behind the scenes calls that the big banking interests have made to Fannie and Freddie executive offices asking for help in the non-conforming market.

OFHEO should temporarily let the GSEs securitize “jumbo loans,” pursuant to agreed upon credit risk parameters (including appropriate credit enhancements), until the illiquidity problems in that sector go away and the secondary market players for non-conforming product come home from their self-declared vacations!

That would work to revive the private label market faster than giving smelling salts to “Aunt Pittypat.” (For you kids out there, see “Gone With the Wind”).

Come on “Lockie.” You say you want the GSEs only to securitize and you know the jumbo market is ailing, so why not make the obvious linkage and become part of the solution, not part of the problem?

The GSE markets mavens, plus the wizards at OFHEO I am sure, could come up with a temporary regulatory fix, which would allow Fannie and Freddie to bring some quick relief to the moribund “jumbo” market and then return to their niche.

Feckless Banks and Their Partners

This limp “jumbo” market performance underscores my major complaint about the large banks, especially when they, the Fed, and various Administration “yakkers” claim the large depositories can create the same consistent and successful secondary mortgage market that Fannie and Freddie have.

Bull pucky, thrice over!!

Where are those guys today in the non-conforming mortgage market, the one segment of the real estate finance market the non-GSEs control without any Fannie/Freddie competition? The answer is that the NC players folded their tents and have gone into hiding.

Policy makers should remember that you can’t trust those non-GSE interests to maintain the “jumbo” market, 24-7, when they have investment opportunities elsewhere and are not obliged statutorily or otherwise to provide non-conforming mortgage liquidity “in good times and bad.”

The private label guarantors and investors have gone “MIA” and the entire world sees it. When they were needed, they disappeared or squeezed lenders, demanding huge premiums, to take in jumbo loans.

The Congress needs to remember this “bad movie” especially when the banks and their allies contend that they can be just as reliable and competent running a secondary mortgage market as Fannie Mae and Freddie Mac.

There are those on the Hill, in the Administration, among the right wing think tanks, and the old FM Watch crowd, who—wrongly--would have these same feckless companies, control the entire United States residential mortgage market, if they only could be successful at disassembling Fannie Mae and Freddie Mac.

Those efforts, thankfully, seem to be failing.

Lockhart vs. Schumer?

Poor Lockie. I have a snarky question for the Administration supporters. Why, after President Bush put the near term kybosh on the idea, did Lockhart compound the President’s mistake by codifying it in a letter, thereby picking a fight with the letter’s recipient, Chuck Schumer?

Most people would rather go head-to-head with “Vlad the Impaler,” knowing the “pointed” consequences of losing to “Vladie,” then to cross swords with the senior Senator from New York, especially when it isn’t necessary.

If Schumer gets PO’d at Two Gun, it’s good news for the GSEs and real bad news for the Director.

At least when you fought and lost to Vlad the Impaler, he left something behind for your relatives to see. That’s not the Schumer style! Schumer brings the word “atomize” to political fights.

Good Bye Karl and What’s to Become of Lockie?

Now that Rove, “the most senior, valuable, and loyal of the President’s troops,” has packed it in, watch for the appointed grunts to start leaving left and right, or right and right.

How long does Lockie stay in his job?

I guess Texas financial interests are mammoth enough to hide, I mean, to find jobs for all of the DC “friends of W’s.” But OFHEO hasn’t exactly been a great career launching pad for prior Directors.

If the Hill Democrats pick up any hint of the OFHEO Director, “Two Gun” Lockhart, leaving his post early, they should make his remaining days deservedly uncomfortable, given all of his anti-GSE hubris, antagonism, and public posturing.

In my humble view, if that’s done, it will be good for Fannie Mae, Freddie Mac, housing, and the American people.

Maloni 8-5-2007

Friday, August 10, 2007

Mr President, Get on the Bus!!

What’s a President to do when the markets are reeling from “credit concerns?”

Well, the first thing is not to say and do dumb things and the next is to get out of the Fed’s way!

Can his mind even encompass what the Fed and Treasury might have to do if Wells, Citi, or one of the investment banks couldn’t meet their commitments because of real estate losses?? (May it never happen!!!)

Shouldn’t Paulson be “schooling” W?

The action you will see in the next few days from the Fed is a reflection of the line that we used to throw around to each other when I worked there in the early 1980’s, to the effect that the central bank is “more powerful than the White House, except we don’t have the nukes!”

Expect the Fed to move into the market, providing reserves, and pushing levers here and there to assuage frightened market participants, who now appear to be in every nation and selling on every exchange.

President Bush doesn’t seem to have the political currency (pun intended), confidence or even warmth to give comfort to the markets, nor the understanding to assure the world that he will do “whatever it takes” to keep domestic U.S. financial ills from adding to his current foreign policy shortcomings.

Wouldn’t a combination of the Fed ”priming” and Fannie and Freddie providing billions in liquidity look pretty good right now?

A good politician and leader would have jumped all over the Fannie Mae request for portfolio investment relief and turned it into a gain for his agenda, not repeat some tired old right wing rhetoric. Someone please tell him, “In helping them, George, they are helping you!”

(The following was written about 10 PM on Thursday evening and still is relevant, but is far less acerbic than it should be, given the Administration’s behavior this week.

I like Washington DC in August, despite the brutal heat and humidity, because a whole slug of DC area residents leave, making it easier to get around, shop, bike ride, go to restaurants, etc.

With the Congress “home” for summer recess in August--and Congress is the straw that stirs the Capital of the nation’s drink --you often don’t get any political “action,” in the year’s eighth month, but that hasn’t been the case this past August week!!

With the great uncertainty in the credit markets, problems popping up all over the mortgage market, huge jumps and drops in the stock market, the GSEs find themselves in the middle of some very compelling political and industry drama. Unfortunately, the Bush Administration once again is showing its hind parts to the world and making bad matters worse with very questionable decisions.

To wit, on Monday, August 8, I blogged that the White House and Congress collaborate and remove the portfolio investment caps, which had been placed on Fannie Mae and Freddie Mac over a year ago, by their safety and soundness regulator, OFHEO, and its Director James Lockhart.

I argued that if the WH took that easy regulatory step now, it could have a major calming benefit; show leadership and market savvy; was a low risk move in a high stakes game; and be welcomed by the lenders and investors who’s bad case of nerves were making the mortgage markets unstable and potentially super risky.

At the time I made the suggestion (the blog was completed on Saturday, but I waited until Monday to do a fact check and then publish), I did not know that Fannie Mae was preparing--indeed that very day--to formally ask OFHEO for the relief I was suggesting.

On Tuesday, Senators Chris Dodd (D-Ct), Chairman of the Senate Banking Committee and Chuck Schumer (D-NY), Chairman of its Housing Subcommittee, endorsed removing the GSE investment caps. Later, Senator Hillary Clinton, in a housing position paper released that day, also called on the Administration to creatively employ Fannie and Freddie to work on subprime mortgage and credit problems (a truly ailing segment of the market, which I have noted, ad naseum, can be blamed on Wall Street and a hired corps of mortgage brokers, fueling the hedge fund high return investment mania).

The next day, House Financial Services Committee Chairman Barney Frank (D-Ct) added his voice to the Senate legion, giving the Administration the perfect political cover initiate this simple action, which never was sold as a total panacea, but as a smart substantive gesture that would be viewed quite favorably by all concerned, especially the very nervous lending, banker, investor contingent.

But the problem that many of us noted at the time (none more accurately than Steve Pearlstein, the Washington Post’s fine financial services columnist, in his Tuesday column) was that the Bush Administration had so demonized the GSEs that it might not be able to back away from its campaign and bring itself to realize the benefits that “removing the handcuffs from Fannie and Freddie” (my blog description) could bring to the markets and to the Administration’s own credibility.

Through two presidential news conferences this week, that position seemed to prevail as President Bush was twice asked about removing the GSE investment caps. (HUD Secretary Alphonso Jackson, separately, was asked at his own press event the same question.) Bush was adamant in his rejection of the suggestion, throwing out some puff answer about the need to “reform the companies first” and then look at other ideas, as if he had any congressional clout or leverage to get that done.

Great observation “Nero,” but isn’t that smoke over there?

Secretary Jackson, obviously not yet on the White House song sheet, seemed more open to the proposition, but since his response was sandwiched, in time, between the Prez’ answers, don’t look for anything but AJ getting quickly into line.

In a brief contemplative mood this morning, I observed to a friend that Fannie and Freddie were like fine, super efficient interstate buses, which have been carrying families back and forth across the nation’s highways for years, providing great service at low cost and earning user satisfaction. The problem is that ideologically, the Bushies have been criticizing, maligning, and degrading these “buses” for years.

Facing shaky credit and mortgage markets and with no abundance of flexible solutions it controls, the Bush Administration needs, figuratively, to get, quickly, from “Bad Nervousland” to “Good Promisedland” and its transit choices are to walk or use the GSEs.

Be smart, Mr. President. Get on that bus, now!

The world does not want to hear another Katrina-like boast, “Great job, Lockie! Um, Lockie? Lockie?”

(Speaking of OFHEO’s Jim Lockhart, please see Jim Cramer’s latest video “take” on “Two Gun” at TheStreet.com and then think about the game “Whack-a-Mole.)

Maloni 8-10-2007

Monday, August 6, 2007


A part of the solution to the illiquidity now savaging the mortgage market, adding to the woes created by subprime and beginning to infect the prime market, virtually is being ignored.

It doesn’t take and act of Congress, merely a decision by the White House that there’s less grief in going this route than hoping that the market smoothes itself out, and the sudden lender and investor failures, stop occurring.

The relief can come over night and in ways that the mortgage market and the broader debt markets understand and welcome.

The Administration should make the decision to take its political hand cuffs from Fannie Mae’s and Freddie Mac’s business operations and encourage the companies to pour billions of dollars of liquidity into he market, before more carnage occurs. In other words, let the GSEs do what they do best, until the market rights itself.

Unless the White House has a better answer, the nation’s mortgage market, and indeed the slumping economy, can only benefit if Fannie Mae and Freddie Mac are directed to go into crisis mode and are directed--in a major way--to purchase thousands and thousands of mortgage loans from originators and smaller investors, providing those less stable institutions with instant cash relief and keeping them out of financial “emergency room,” or worse—funeral homes!

Yes, Virginia, the GSEs then would keep the loans in portfolio or sell them to other investors. But that would be far safer regulatory move than a possible mortgage market meltdown, because the two companies are better able than virtually anyone else to manage those interest rate and credit risks explicit in mortgages.

Sure, there will be deals and “haircuts” (premiums, discounts and price cuts) all along the way, but it will be “the market” making those accommodations, not HUD in some bulky government plan or the Fed and Treasury suddenly pumping cash into one or more of the large investment banks or money center institutions, when it shockingly and without warning taps out on some sultry mid-week afternoon. And, GSE relief can flow quickly and efficiently, the minute the Bush Administration gives the word.

Why Wait?

Remember folks, “a stitch in time!”

If you can believe “the squirrels,” those chattering folks behind the scenes folks in DC, who spend their days exchanging stories and rumors, in return for more stories and rumors (one of the reasons why there are no secrets in DC), some mortgage interests already have approached OFHEO’s “Two Gun” Lockhart suggesting an “emergency” increase in the GSE mortgage ceiling, to allow Fannie Mae and Freddie Mac to provide liquidity for “non-conforming mortgages” (a term that historically has meant loans above the F/F mortgage ceiling). Others are wondering why “massive mortgage liquidity relief,” for the traditional “A” markets and subprime, can’t be provided by the two government sponsored enterprises, created for just that purposes.

Even Karen Shaw Petrou, an extremely capable financial services observer (and hardly a traditional friend of the GSEs), reportedly has speculated on Fannie and Freddie moving out of their historic “conforming” niche and--as an emergency gesture--helping provide liquidity to the aforementioned non-conforming lenders, with some tie back to the lenders providing relief to the subprime market. In a perverse way, the “systemic risk” facing America today is not the Fed created “GSE problem,” but it is an absence of liquidity starving other elements of the mortgage finance system, with the GSEs sitting there possibly as a major part of the solution, but currently handcuffed.

Leadership in Congress and Downtown

For Fannie Mae and Freddie Mac, operationally, to provide all of the liquidity that the mortgage markets require, it will take a knowledgeable and motivated Bush Administration and an equally cooperating Congress, willing to stand up together and share some of the responsibility (and political reward) for calling on the GSEs to deliver this “liquidity Care Package,” to lenders throughout the nation. It also will require that OFHEO work cooperatively with the companies and drop its institutional adversarial persona. (I wonder if TG and his handlers see the golden opportunity here for them.)

Someone, let’s say the bi-partisan leadership of the Senate Banking Committee and the House Financial Services Committee, should communicate with the Treasury, OFHEO, and the Fed, and suggest—administratively—that the GSE regulator give Fannie and Freddie “a mortgage purchase green light,” through the end of 2007, to provide the liquidity that the mortgage markets demands (conforming and no-conforming).

The broader economy, as well as the mortgage sector, can be monitored--regularly-- during that time to see if markets have calmed and it’s appropriate to go back to the buttoned-up Fannie and Freddie, or if more GSE purchases are required.

Congress is gone for the summer, but it doesn’t require passing a law to accomplish the necessary complementary effort I’ve described, just a top staff driven letter, on the appropriate letterhead, blessed by the four congressional principals.

The Democrats run Congress, not the GOP. Sen. Chris Dodd (D-Ct.) and Rep. Barney Frank (D-Mass.) might not want to wait for their GOP colleagues to sign up, if they think the action makes sense.

Of course the Administration could act unilaterally and might have to swallow some of its politically motivated “systemic risk concerns,” which currently hamstring the companies. But what’s worse, if the Bush White House swallows a little of its political hyperbole or hosts an unfolding financial disaster, leaving valuable tools unused on the side of the road?

A thoughtful Bush Administration also should realize that the two GSEs are easier to oversee for possible “post-purchase surge” problems (since OFHEO has staff living in both companies) than to tightly monitor a thousand lenders, real estate investment trusts, and Wall Street firms, any one (or more?) of which the Fed and Treasury might have to bail out, using the Long Term Capital Management precedent of “too big to fail.”

Will a Timely Half Trillion Dollars of Liquidity Help?

I have no idea how big the “mortgage problems” might be and how much relief is necessary before the market settles, but let’s assume that, together, Fannie and Freddie might have to bring $500 billion of help (that’s a half trillion dollars). If you added that mortgage amount, proportionately, to the two companies portfolios, that only would increase the GSEs portfolios to where they were a few years ago, meaning that portfolio level is not without precedent.

Policy makers should make this change NOW, not after more major market carnage. Activating Fannie and Freddie is also the kind of thing that—following a disaster—some bipartisan commission will ask, “Why didn’t the White House and Congress employ the GSEs to….?”

Someone should put the question to Chairman Bernanke, “Ben, should we let Fannie and Freddie try and let the air out of this mess, now, while there still is some calm in the market, or should we wait for one of the big investment banks to faint dead and then let you and Treasury try and put Humpty Dumpty back together?”

Is the White House creatively up to employing the GSEs to do what the companies were created to do, or will the Administration hold onto its political ax and risk some collapse in a crucial economic sector, only to call on the GSEs for help after housing hits the fan????

The proposition represents a very small downside and a huge upside for the economy and the country.

Maloni 8-6-2007

Thursday, August 2, 2007

Would They Take Back Their Letter, If They Could?

A few days ago seven trade associations*—all representing commercial banking interests—called on the Senate Banking Committee leadership to move expeditiously on its consideration of the GSE regulatory reform bill, a version of which having already passed in the House.

The letter might be one the trades want back, since it was sent before Countrywide issued its market roiling second quarter report--suggesting payment problems in the prime mortgage market--and before this week’s American Home Mortgage funding problem.

I am sure that each of those groups—with predictable short sightedness--has its own particular form of destabilizing legislative pain and suffering that they hope the Senate will inflict on the GSEs, the sum total of which likely would leave just two smoldering holes in the ground where Fannie and Freddie headquarters once stood.

But, as the credit markets tighten, in part over the actions of some of those who signed the letter, the mortgage lender element in those trade groups might want to keep one principle in mind and it isn’t “location, location, location.”

It’s “liquidity, liquidity, liquidity!”

Fannie and Freddie were created for the sole purpose of acquiring those mortgage loans that lenders make every day and hope to sell, when holding them doesn’t make economic sense. The GSEs take the risks that the lenders don’t want and turn those loans into cash for the banks and their subs, while packaging them into securities and selling them to other investors or placing those loans in their own portfolios, because they can more easily manage the interest rate and credit risks than the average bank.

If there is a real credit crunch, not just a serious slump as now is shaping up, “Who ya gonna call Mr. Lender….Ghostbusters?”

Query lenders? In a credit squeeze, which entities first will turn their backs on you, shutting their purchase windows and leave you up a proverbial tree, mortgage-loving Fannie Mae and Freddie Mac, or those risk-adverse commercial banks—some of which are your “parents?”

Be careful what, implicitly, you call for in letters, because it could come back and buy you right in your, um, back office!

The trades can hide behind the phony excuse of, “We only were urging the Senate to move on the process,” but most observers know what you are hoping.

How disingenious and naïve!

Do you really think the Congress is going to screw around and hamstring the nation’s two mortgage market GSE ramparts, when confronting the problems facing mortgage lenders and investors today?

As opposed to your Washington politicos, is that what your business people really want? (Remember, liquidity, liquidity….!”)

How many Senators and Members do you think want to brag, “We listened to the banks and we cold cocked Fannie and Freddie, big time,” when they go home to run for re-election in 2008.

Get a grip bankers

No Major Restructuring Legislation??

I have no idea what Fannie Mae and Freddie Mac want out of this legislative session, except not to be dismembered by the Bush Administration, which still wants to gut the GSEs.

But, now that the House Banking Committee has approved, as a separate piece of legislation, Chairman Barney Frank’s bill to create a GSE funded “affordable housing fund,” the outline is there for no GSE regulatory legislation this year, because of the aforementioned mortgage market problems. Primarily, because the nation’s mortgage markets might require strong, unfettered Fannie and Freddie to bail out the lenders and keep housing afloat.

The fact that OFHEO—despite some questionable policy calls—seems to have the GSEs under appropriate lock and key, a reasonable observer might ask why Congress even has to waste its time this year working on a major regulatory restructuring bill.

Congress should consider taking Mr. Frank’s stand alone housing fund bill, adding a provision giving OFHEO 50 or more additional staffers, take the agency from under the appropriations problem, pass the legislation in both chambers, send it to the President, and go home for the year, congratulating itself for thoughtful legislating.

That makes a lot of sense.

Unlike some physicians, I like to think that Congress—especially the committees chaired by Chris Dodd and Barney Frank--is wise enough to follow its own version of the “Hippocratic Oath” and do no legislative harm as it considers what—if anything—to do about the GSEs.

Even the House regulatory reform bill was approved while subprime was just building a head of steam. The additional prime mortgage market issues—which have arisen since —call for thoughtful statesmanship, not wild forays in legislative gamesmanship, and no debilitating GSE changes.

Dues paying members of those banking trades, when they think “credit crunch and very illiquid national mortgage markets,” should ask their DC employees to send a new Senate missive--something simple, like, “Please forget our previous letter!”

Maloni 8-2-2007

(*America’s Community Bankers, American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, and theMortgage Bankers Association.)