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


Bill Maloni said...


One former Hill colleague suggested that my proposal was promising, but the $750,000 emegency limit looked like an "effort to help the rich."

I acknowledged the appearance, but pointed out that I was trying to come up with a useful tool to bring movement to a frozen jumbo market, not necessarily to help the people whose loans were ticketed for that market.

But,in fairness to his point, the Congress could pick a lower number
or it could say that the new ceiling applied only to loans originated BEFORE the date of legislative introduction or some other arbitrary date, to make clear that allowing the GSEs to buy the previously non-conforming product-- at which the provision was aimed--is sitting in some lender's portfolio, because the traditional jumbo secondary market investors have disappeared, except when they offer to buy, if given steep premiums.

The other point I made is--if there is illiquidity in the jumbo market--it is affecting ruinously the same lenders which produce F/F's mainline business. Check the list of top jumbo originators. Most of the names are the same companies selling conforming product to the GSEs.

So, in creating liquidity for jumbo/non-conforming lenders, the GSEs actually would be helping lenders who make much smaller loans to their traditional low-mod income customers.

John M said...

Anyway, full marks for not falling for the "largely symbolic" spin about the "four little piggies" at the Fed's discount window.

How much extra strain will your proposals put on the Enterprises? My own view is that prior to F&F riding to the rescue we'll see the US buying all their stock, so their senior debt will be backed by full faith and credit, and they'll revert to being actual government agencies instead of the present funny hybrids, something like our "Crown Corporations," but a bit more privatized.

Sorry to be alarmist, I just think the subprime crisis is serious for us like the fall of the Wall was serious for the Soviet Union.

That being said, good luck with your proposals. I suppose proposing some help to the markets at this point can't hurt, although with the amounts of money we're talking about, it's important to calculate the consequences.

Bill Maloni said...

John--Thanks for reading.

If you've read all my previous "stuff," you'll see that my suggestions are not proposed to solve all of the current and ppendign problems. But, as you noted--and former Treasury Secretary Larry Summers did earlier--it exactly this type of mortgage maladies for which Fannie and Freddie can provide the graetest help.

I just hope the Administration listens.

I do not think that--even if the mortgage markets worsen--you will see a federal takeover or nationalizing of the GSEs.

It isn't necessary to put them on budget, just to get them them to provide more mortgage market liquidity.

It would be sufficient and market reassuring if the Administration and its allies just stop trashing them.

Keith Gregory said...

Bill- this doesn't fix the structural problem- trust.

End investors don't trust Wall Street, because they've been burned.

The key phrase is fiduciary responsibility- who owes who, and who works for whom.

Rating agencies rate MBS & CDOs, but they work for Wall Street, but institutional investors depend on them to help them understand what they investing in- clear conflict of interest.

Mortgage Brokers work for themselves and don't really care whether the mortgage is good for the borrower- hence 2/28s that are set to reset and blow up.

Fannie & Freddie can play a role, but the first thing that needs to happen is trust needs to be re-established throughout the entire process.

If you legislate fiduciary responsibility to loan originators, much like the concept exists for financial advisors, everything will start to fall into place- investors will have confidence in the loan- and if there is a 2/28, then there is a reason that the borrower went that way (i.e., moving in 2 years for sure, verified, etc).

Longer rant here:


Bill Maloni said...

Keith--Thanks for your comment, with which I agree.

I'm old testament in that I think the thieves should be caught and nailed, doing jail time for fraud and being otherwise drummed out of the business.

But, I don't know how to insure that "justice prevails," unless a lot of people do time (which is fine with me). Although I suspect the mess being caused by the sloppy and near criminal subprime business will sober up a lot of people in the industry and for a while you'll see more prudent businesses practices.

More legislation to control all aspects of the mortgage lending process is desirable IMO, but the "businesses in the business" will fight it tooth and lawyer!

(In an earlier blog, I pointed out the need for greater federal control over MI, appraisal, and the title industries.

There is an interesting disclosure proposal embodied in a bill introduced by Spencer Bachus (R-Ala), the ranking on the House Financial Services, which could get some attention if they do any kind of legislation this year. Bachus is an able Congressman, whose heart and head--for the most part--are in the right place.


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