Monday, September 3, 2007

Labor Day 2007


President Bush and Fed Chairman Ben Bernanke produced a successful market 1-2 punch last Friday, with Bernanke’s statement addressing broader credit concerns and the President providing some hope on narrower mortgage market issues. The two events seemed to cheer “Mr. Market” and offer hope—in Bush’s comments—to some recent subprime borrowers. Let’s hope that good feeling can be sustained when the markets reopen after the holiday.

The Administration’s decision to expand the FHA’s role and help families into FRMs --who find themselves facing insurmountable ARM adjustments and increased monthly mortgage payments--is a solid step, albeit a small one. It is welcome news and the Administration gets kudos for acting.

However, the Bush White House needs to do more, specifically freeing Fannie Mae and Freddie Mac to help, because the myriad and intertwined subprime problems are far larger than FHA’s capacity to help.

The mortgage market players—not the White House—could help at the margin by nominating one of their own as “subprime assistance Czar.” That person would be a one-stop shop for “How do I get help?” or “How can I provide help?” coordinating and disseminating information on all private sector efforts to support subprime borrowers.

That helpful step action might convince some policy makers that those private interests--whose behavior looks the worst in this growing debacle--haven’t forgotten about the true “victims” of subprime financing.


My only sibling was a military veteran. And, in the 10 years leading up to my brother’s death in 2004, he received some of the finest medical care possible, from the Veterans Administration health system. My wife is a PhD nurse practioner, a multiple sclerosis expert working for the VA. I had several uncles and cousins in the armed services and several family ties to the military and the VA. I support giving our nation’s vets all necessary assistance the nation can muster.

But, I must admit to some process shock when I saw that the Ginnie Mae removed its $417,000 mortgage guaranty ceiling on VA guaranteed mortgage loans. Ginnie Mae now will begin insuring larger balance loans for servicemen and women than Fannie Mae and Freddie Mac are permitted. What was that all about; why and how did it happen? What was the catalytic event?

For those too young to remember, the Government National Mortgage Association--AKA “Ginnie Mae”--was born in the same legislation, which privatized Fannie Mae in 1970. Ginnie was created to do what the old Fannie Mae had done before the 1970 legislation freed Fannie to finance conventional mortgages, i.e. buy and securitize, for its portfolio, federally guaranteed and insured VA and FHA mortgages.

Fannie’s and Freddie’s single family conventional mortgage limits currently are set at $417,000, with some variations, and there is talk that this number could drop, when OFHEO reports on its annual survey of housing sales prices, around the end of September. OFHEO’s sampling work is what determines the annual change in the GSE mortgage limit, applicable in the coming year. (No, Virginia, Fannie and Freddie do not make up those numbers on their own!)

How can Ginnie Mae, an office in HUD, start making those high balance loans when the captive “private sector GSEs” can’t?

I haven’t heard any those outrageous howls from the mortgage insurance industry and the big thrifts and other lenders, who every fall-- when the annual GSE mortgage ceiling was recalculated (almost always “up”)--complained, wrongly, that “Fannie and Freddie are eating into our market!” Over the years, the GSE to “non-conforming” market share held constantly at about 75%-25% dollar volume of mortgages.

So now you have the federal government directly guaranteeing what used to be called “jumbo loans” and the more and capable efficient housing GSEs sitting on the sidelines, playing with their… securities, waiting for this Administration to wake up and smell the coffee.

If a government guaranteed VA mortgage works for our veterans, then I am sure that
conventional mortgage loans would work better. Some prominent Senator or Congressman, whose military credentials are above repute, like Senator Jack Reed (D-RI) or even Rep. Jack Murtha (D-Pa.), should consider legislation allowing the GSEs to help the vets in the same way as the VA and Ginnie Mae are helping.

And, if the VA now has moved into the “jumbo” world, how far behind will be the demand to allow the more active FHA to do the same thing?

I’m all for it! Remove that $417,000 limit for all mortgage guarantors and investors and level that mortgage finance playing field, “right f……. now,” as Jean Guy Drouin, the “Johnstown Chiefs” hockey team goalie demanded in “Slap Shot,” one of my favorite movies.

Hang Together or Hang Separately

There was another effort begun last week to bring together all of the DC based housing interests groups (think “usual suspects,” plus a few) to noodle the quite serious issues facing the business. The Homebuilder's EVP Jerry Howard hosted and chaired and the Housing Finance Board’s Geoff Bacino, along with Jerry, were active in managing the day’s program.

No consensus developed, save that each of the many industries and institutions represented were facing major problems if some control and leadership didn’t soon manifest itself from this Administration and the Congress.

Having participated in dozens of these meetings, in far less perilous times, I know how difficult it is to get consensus of anything. The participants plan to meet again and hopefully find common ground, which they can express publicly and support actively.

But, clank! Whose bright idea was it to invite OFHEO to this “industry” meeting? That agency is part of the current problem, as letters from most of the major players present at the meeting suggest?

With their regulator hanging on every word, I am sure that the Fannie and Freddie reps were quite vocal, offering a variety of strident views and stinging possibilities! (I am being sarcastic, very sarcastic, with the last comment about what the GSE reps did!)

C’mon Ben!

After briefly making my “hero’s list,” for his deft moves supplying cash to a frightened market two weeks ago (and his calming words last week), Fed Chairman Ben Bernanke made it back to the “bad list,” with his unnecessary comments about Fannie Mae and Freddie Mac in a letter to Senator Chuck Schumer (D-NY).

BB told the Senator that Fannie and Freddie don’t need portfolio capacity to service the mortgage market, implying that they could securitize everything that came their way and sell it into the market.

Two questions. Where do Fannie and Freddie put those securities BB, if investors aren’t buying or if there isn’t enough of the product to make a securities market? And, isn’t it a fact Mr. Chairman, when Fannie and Freddie—especially in illiquid markets—establish a market bid to buy securities for their portfolios, their action brings down the price of the mortgages which will make up that mbs? (The more bidder/buyers for the security, the better the price, which then gets passed back to the mortgagor.)

What is lapse in political judgment causes these congressional liaison types to keep feeding their bosses to the “shredder called Schumer?” Personally, I am in awe of the senior Senator from New York's capacity to discombobulate, skewer, and reduce to a blubbering mass even the mightiest personage, let alone folks like “Two Gun” Lockhart.

Senator Schumer is brilliant and tenacious, especially when he knows that he is onto something.

With apologies to Jim Croce, “You don’t tug on Superman’s cape, you don’t spit in the wind, and you don’t get on Chuck Schumer bad side because he will……. (think of something medieval, from your worst nightmares)!"

BB You Don’t Need/Want This Fight!

The Bernanke swipe at the GSEs—which certainly won’t deter Senators Schumer and Dodd from pursuing GSE portfolio cap relief--is just more of the same worn out dogma, which itself is not accurate. It’s an old script from which Bernanke should run, not walk.

Chairman Bernanke must ask himself, does he really want to continue saying, and “Fannie and Freddie are risky and can pull down the entire system, blah, blah, blah.”
There are lots of entities—especially the bank holding company behemoths, created by the Fed and even larger than the GSEs--that could bring down the system, if they failed.

Please Mr. Chairman, don’t forget those other bad boys as you unnecessarily focus on the GSEs. Oh and BTW, when you were speaking in Jackson Hole, President Bush was decrying those borrowers inappropriately put into subprime ARMs. The world—and certainly the central bank--never should forget the role Alan Greenspan played in encouraging families to get out of fixed rate mortgages and into adjustable rate mortgages. A Fed mea culpa or two, on that score, might be nice to hear from someone who works at 20th and C Streets.

BB also should make sure that he reads the Fed report, referenced in the famous Steve Pearlstein Washington Post column, which identified his predecessor, “The Maestro,” as someone who spread GSE disinformation, ignoring the central bank’s own GSE risk findings.

The GSEs are not your fight Mr. B. It was Greenspan’s, based in large measure on his ego and perception about who in Washington had more power than whom?

Don’t you have enough on your plate without getting bogged down in AG’s agenda, which easily could become your tar baby, if you allow it?

I’ll go out on a limb and say that before this housing crisis mitigates, the GSEs will be employed by this Administration--after it is pushed by the Congress--to help the broader mortgage markets and the many families that FHA won’t be able to reach. The companies portfolio investment caps will be removed and possibly their mortgage ceilings will be increased, since Fannie Mae and Freddie Mac are logical and natural assets/helpers in this kind of situation, which will not be ameliorated in a few short months.

Only the ideologues now insist that Fannie Mae and Freddie Mac cannot possibly help.

To all of my hardworking friends, family, and critics, “Happy Labor Day 2007.”

Maloni 9-3-2007

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