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


Chip said...

Thanks for the BLOG.
You have an interesting viewpoint and its nice to find supportive commentary regarding the GSE's, for years all one could find were the Washington think tanks firing missives at the scandal hampered behemoths.

I don't quite understand the fiery passion for lifting the caps on the retained portfolios. I can see the immediate benefit for stockholders of the two GSEs but otherwise I don't see what the big deal is.

For the following reasons, I'm puzzled.
1) Both entities are free to securitize the entire universe of conforming loans. No caps on pass-thrus.
2) Freddie Mac doesn't even have an OFHEO imposed cap. Theirs is a voluntary cap.... so why the legal argument?
3) Market movements being what they are, the GSEs would have to throw caution and underwriting standards to the wind to bring about a RAPID and substantial increase in liquidity in today's credit market. The potential for benefit is definitely there but it would be symbolic in the short-term and gradual over time.

If the market is seizing up, why do the GSEs want to leave the reservation and wade into the toxic swamp of loans underwritten outside or on the fringes of their credit standards?

Bill Maloni said...

Chip--I can't answer for the GSEs, but I'll try and answer for me.

As I've stated several times, the portfolio investment caps are the result of "political decisions," imposed by the Bush Administration not GSE driven market or not business ones.

Both companies have had portfolios 33% larger, each nearly a trillion dollars, and generated no systemic risks or anything problems across the mortgage community.

The Admin had both companies over a barrel, because of their "accounting follies" and extracted a partial step toward what GOP administrations have been seeking for years, i.e. limits on the growth of GSE portfolios.

It is my understanding that both GSEs agreed to portfolio limits, as part of signing "consent decrees" with OFHEO.

In the absence of anything suggesting a business or safety and soundness ratioanale, I resent that this Administration has tried to tie management's hands and dictate HOW the GSEs provide liquidity to the market.

Do the current caps cause problems?

Fannie canceled one of its regular notes offering the other day (the first time in 4 years), because they apparently didn't have the portfolio capacity to use the money buy/securitize product.

As you point out the portfolio produces twice the earnings as the guaranty business does for the companies, but that's why they are paid to manage the company and make those calls.

Either the Administration lets the company managers manage or the business gets run by bureaucrats from HUD or OFHEO. That to me, occurs more than most people are comfortable with, and is a recipe for disaster.

Most jumbo are carefully underwritten and don't represent
substantially more risk that a GSE loan.

Yet, nobody seems to be buying them, unless it's at a deep discount or charging a large premium. That seems to be creating a lot of problems for lenders, Wall Street, and others.

IMO it's not the risk that holding back investors, it is a general fear of mortgage investment, in general, when the securities don't have a F/F label. It also is a result of the paranoia/fear birthed by the subprime difficulties.

Letting F/F securitize jumbos for a very brief period, until the traditional providers of non-conforming liquidity return, would be my short term answer.

Just like in the upper tier of the market (non-conforming), I think the GSEs can do more at the subprime end. Possibly30% to 45% of those folks written into 3/27 or 2/28 loans could and should be re-underwritten into FRM, with the GSEs help.

The other 50% to 60%--minus those that FHA might be able to help--
probably represent losses that will wind up, ultimately on Wall Street's doorstep, but sweeping away a lot of the traditional middlemen..

So, I think the :portfolio limits" are a poltical call, gone bad, and I think--with some Admin cooperation--F/F can help RIGHT NOW in both of the three mortgage segments, where it appears help (liquidity) is needed.

Thanks for your comments and question.


Evinx said...


As Mr Spock (Star Trek) has said, "the good of the many outweighes the good of the few" -- don't you think a whole lot more people would be better off in the long run, if r/e prices come down more in line with fundamentals?

Wouldn't more affordable housing (from the markets forcing pricing to come down) be much better solution in the long term?

btw, a significant part of the liquidity problem was caused by the stated income standards -- and that is not only subprime but alt-a and even prime.

imo, the markets will be a lot more efficient at solving the problems than any kind of govt intervention.

Bill Maloni said...

Evinxs--Welcome to the site and thanks for your question/comments.

Two of the three major segments of the mortgage market are undergoing major problems, subprime and jumbo or non-conforming loans.

The first is filled with bad loans, which many of the mortgagees cannot afford and soon will lose, when the loan adjusts to higher market rates.

Some of thsoe people probably lied about various matters to facilitate getting the loan, but many did not and I those were "hustled" by smooth talking brokers, working for Wall Street that was desperate for "high yielding securities," fitting their hedge fund needs.

I place more blame on the last two actors than on the borrowers, although there is plenty to go around.

The Street placedthese loans into securities with other loans and now they are gone into the "mbs neitherworld," while good people try and track down their number and locotion.

The jumbo problem is one of disappearing investors who traditionaly have securitized those loans, which F/F can't buy, ergo the name "private label securities." The buyers have vanished for general reasons of panic or fear of all mortgage products, which don't have a F/F stamp on them.

I still am waiting for your "private sector" to address those needs, but--so far--I and a lot of others still are waiting.

Will it be a week, two weeks, two monthsd, a year before they come back? Can the economy take that? Housing still is "25%" of the national economy, why should we (the Administration) screw with that??

And here's a dirry little secret, there is far less of a "private market" than you think.

Every single feederal depository (banks, thrifts, credit unions) benefit from an EXPLICIT federal subsidy in FDIC/NCUA federal depositinsurnace, which--until recently--was provided free. (Greenspan once conservatively valued that subsidy at 13 bp, annually.)

That's why banks' cost of funds (what you and I make on our savings and checking accounts) is so much under what F/F pay for debt. The lenders have huge overhead--compared to the GSEs--so that massive federal subsidy they get disappears quickly, whereas F/F's "implicit" (no federal cash or serviecs exchangign hands) hardly measures up.

I think F/F can do more in both of those sectors, while still providing the liquidity to their traditional market niche, which has suffered almost no problems.

Lastly, it will take a creative--ideally coordinated--approach with the GSEs and others doing what they do best to tamp down these markets concerns both real and imagined.

My pitch to the Admin is that it is prudent to use the GSEs (and others) now, before the tent catches on fire than to wait and ask them to pull your fire horses as the place is burning down.

Please check in, again.


Evinx said...

There is lots to disagree with you about but for starters, let's just focus on this comment you made:

"Possibly30% to 45% of those folks written into 3/27 or 2/28 loans could and should be re-underwritten into FRM, with the GSEs help."

I suspect you plucked the 30%-45% from thin air. More importantly,
how are you going to get these folks (subprime) into full doc mortgages that they can qualify for when the appraisal will show them underwater and (for F/F) they will need some d/p money (which they don't + didn't have)?

Are you really suggesting that the GSEs lower their standards AND raise their limits?

BTW, IndyMac and Natl City just got back in to the jumbos with 15% down + full doc.

Evinx said...


As Mr Spock (Star Trek) has said, "the good of the many outweighes the good of the few" -- don't you think a whole lot more people would be better off in the long run, if r/e prices come down more in line with fundamentals?

Wouldn't more affordable housing (from the markets forcing pricing to come down) be much better solution in the long term?

btw, a significant part of the liquidity problem was caused by the stated income standards -- and that is not only subprime but alt-a and even prime.

imo, the markets will be a lot more efficient at solving the problems than any kind of govt intervention.

Bill Maloni said...

Actually, my estimate can from a meeting I had with a MI official and it was theirs.

But, you are right nobody knows the exact number of SP mortgages written or how to contact the borrowers to offer them "help," if that is the decision.

I was told, but have no independent evidence, that some lenders are offering the 2-28 and 3-27 borrowers a third or fourth year, at the initial rate, in hopes that "time" produces some solutions.

I think implicit in what I've said, as well as what Fannie and Freddie announced, when they each reported that they hoped to do about "$20 billion" in subprime help, is some flexibility re their standard underwriting.

As I've noted, repeatedly, I am not in touch with either of them and have no idea what changes or flexibility they would introduce to accomodate the early tranche of subprime borrowers.

It's good that investors are returning to the jumbo market, but reliable partners don't scoot when thinsg get tough.

Say what you want about F/F but staying in all markets "in good times and bad" is how you keep markets liquid and reliable.

The MIA jumbo investors didn't do themselves any good by skipping town, when things got tight.

As much as anything else their behavior underscores the value of F/F.


(2 AM EST. I am headed to bed.)