Tuesday, September 11, 2007

The WSJ And Other Things

The WSJ. Was I “Murdoched” or Just Dissed?

Last Monday, I sent the following letter to the always anti-GSE Wall Street Journal, in response to one of their “What’s causing problems in the mortgage market” articles, by Holman Jenkins, a WSJ editorial board member. My letter was not printed, which I believe occurs to most letters that criticize the Journal’s icons. But, here’s my missive for your information.

Holman Jenkins continues the WSJ campaign against Fannie Mae and Freddie Mac, suggesting that the GSEs business activities involve "channeling a current $1.5 trillion in artificially cheapened capital into the housing market." One presumes that he is describing F/F's "implicit" federal relationship and the lower borrowing costs that it produces.

How does Mr. Jenkins refer to the $3.8 trillion in insured federal deposits, which is the lion's share of commercial depository’s mortgage finance working capital that produce far lower borrowing costs than F/F enjoy?

How many of our nation's banks could attract that volume of checking and savings deposits--at such ridiculously low costs--if Uncle Sam didn't insure the first $100,000 in every account? But, somehow, there is the suggestion that these institutions are part of the "private sector" and F/F are not?

Banks are just now starting, again, to pay for federal deposit insurance, but that’s after 10 years of getting the FDIC coverage for free.

That was--and continues to be--a huge explicit federal subsidy, which Alan Greenspan once testified was equal to about 13 basis points, annually.

What the banks now pay for FDIC protection is small and even that is offset by new tax benefits. Remembering these facts is important when making apples-to-apples comparisons between various mortgage investors and the effective use of their government benefits.

Fannie History

A brief version of Fannie Mae’s housing mission history would read, “David Maxwell made a weak company very strong. Jim Johnson made a good company great. And Frank Raines endeavored to surpass Johnson’s success.”

Each of these former Fannie Chairman and CEOs cared deeply about the company’s affordable housing performance and each sought to improve in significant ways.

Maxwell initially directed the company toward the lower end of the market and started the corporate investment and work force diversity that became its hallmark. Johnson harnessed Fannie growing resources and insisted that the company invest billions of dollars financing low income housing, with very creative outreach and products, aimed at people and neighborhoods that historically had been tough to serve. Raines made sure that Fannie benefits were distributed broadly as reflected in the dramatic increase in homeownership rates for African American and Hispanic families when he ran the company.

All three were single focused on the absolute primacy of mission success so that the charter couldn’t be challenged.

My question is, “Are both companies doing enough housing mission work to bolster their charter rights and if they are not, who or what is stopping them?”

Are some GSE officials worried that you can’t make enough profit on “mission business”--especially with the ruins of the subprime glut facing the country--or is OFHEO blocking GSE efforts to do more “mission” business or subprime financing?

When I worked at Fannie Mae, its mission regulator HUD--and later OFHEO--never got that involved with the GSE product mix, the risk parameters, the pricing, or the credit components inherent in those product and marketing decisions.

I mention this to try and ascertain if OFHEO--which now plays a much greater role in day-to-day GSEs product, pricing, and business decisions--is in any way smothering GSE efforts to do more for people stuck in subprime loans. Is OFHEO dissuading the companies from taking on more risk, owing to the agency’s safety and soundness priorities? Certainly, the S&S regulator needs to be sensitive to those issues, but is OFHEO trumping the companies “mission” instincts with the agency’s safety and soundness priorities? If so, is OFHEO wise to stress such overly prudent lending when GSEs taking on more risk is the need of the day?

And where in all of this is HUD, the statutory GSE “housing mission” regulator?

Suffice to say, I think the GSEs can do more in the subprime world as well as aid other mortgage market segments. To not utilize them—because of ideological or political disagreements—is bad public policy.

The flip side is if the GSEs have their shackles removed--because of industry and Capitol Hill support--they need to accelerate performance and not be gun shy about taking new risks, that won’t be priced to their traditional credit paradigm.

If the companies want to increase eligibility and lower their profit return on riskier borrowers--to reduce what families have to pay for mortgage financing--would OFHEO stand in the way, citing excessive risk concerns? Has the agency done this already?

“Two Gun” should answer that and related questions, the next time he’s called to the Hill.

David Berson

Good luck and best wishes to David Berson, Fannie Mae’s longtime chief economist, a smart fellow and all around good guy, who is taking Fannie’s nice retirement package and heading for another financial services gig.

Contrary to rumors, David’s departure has nothing to do with his insane rapture over all things “University of Michigan,” his alma mater, or the fact that he confidentially convinced many fellow “Big Blue” alumni to “bet the ranch and take Michigan,” giving the points against Appalachian State, in the first game for both schools of the 2007 NCAA football season.


When “Ap State” beat the Wolverines in Ann Arbor, before 105,000 stunned Michigan fans, it probably wasn’t the biggest upset in NCAA football history, except that nobody could remember a bigger one.

One contest—which reportedly came close to equaling the shocking Michigan loss—was said to have occurred in early Rome, when one of the soon to be martyred Christians drew an almost comatose lion in a Coliseum bout. The Christian held his own. But, even that lion, though woeful and staggered, came back and succeeded in kicking a last second field goal to beat the Christian, unlike Michigan.

It’s Good to Have Him Back!

Welcome back to the legislative wars Senator Tim Johnson (D-SD), one of the quality guys in public office and one of the better “housers” in the Senate chamber. Bets wishes to Senator Johnson for continued health and success!

(Coming soon: “You can call me Al.”)

Maloni 9-11-2007

1 comment:

davidwb said...

At least we beat Notre Dame last weekend -- and hopefully our good play will continue this weekend and we'll beat Penn State. Which will make Bill quite sad, as he roots for anything or anybody west of Harrisburg in the Keystone State.

Thanks for your nice words, Bill.