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