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.)


Bill Maloni said...

Very capable reader caught my ever present "typo."

The sentence should read "bite you" in the back office, not "buy you" in the back office.

Although with some, that's not fair. I wont' go there, just because of my spelling error.


John M said...

It would appear that IndyMac's CEO is supporting your thesis - "Unfortunately, the private secondary markets (excluding the GSEs and Ginnie Mae) continue to remain very panicked and illiquid."

Bill Maloni said...

Great (and disturbed) minds think alike!!