Thursday, September 13, 2007

"You Can Call Me Al"

(This segment been planned for the blog I published earlier this week, but it grew too long and I decided to pull it and give Al Dellibovi’s letter--and my reaction to it--its own, exclusive treatment.)



I first met Al Dellibovi when he managed HUD for Secretary Jack Kemp in the early 1990’s.

As HUD Under Secretary, Al made the department’s trains run on time--to the extent that is functionally possible in an agency called “11 floors of basement,” no matter which political party controlled it--while Mr. Kemp did a lot of the “out front” work. That arrangement later helped Kemp get the number two spot on the 1996 GOP presidential ticket, behind Senator Robert Dole.

For 15 years, Al quietly has done an excellent job as President of the New York Federal Home Loan Bank. But recently he took on a slightly larger profile than seems wise for someone who cut his political teeth in tough New York state politics, was a protégé of former Senator Alphonse D’Amato, and who knows the value of “quiet is good.”

Some weeks ago, with appropriate fanfare, Al appeared to “take one for the team” and sent a supportive letter to OFHEO noting that, contrary to about zillion anecdotal and hundreds of news reports, there were no real mortgage finance problems in his New York/New Jersey region.

The letter—providing temporary succor to OFHEO’s embattled director, Jim Lockhart--arrived near the time that several major housing trade associations, a former Treasury Secretary, and four prominent Senate and House Democrats (Dodd, Schumer, Clinton, and Frank)—including both NY senators--called on OFHEO for help, suggesting that there were major real estate worries everywhere in the nation.

Ooops!

Bank System is Great, Just Ask Al

Last week, Al was on one of the business network talk shows extolling the wonderful job the Federal Loan Bank System had been doing, as other lenders abandoned the subprime mortgage market. He urged families to go to System members (smaller commercial banks and thrifts) if they were stuck in a subprime mortgage nightmare and needed a new loan.

The New York Bank president discussed how well the twelve regional Home Loan Banks were responding to member institutions requests for billions of dollars in advances, presumably to handle the mortgage loan demands from people flocking to banks and thrifts responding Al’s message.

BTW, the Bank System funds its advances by borrowing money in the national/international debt markets, just like Fannie and Freddie, and then re-lending it to its bank/thrift members on a collateralized basis.

There is nothing wrong with Al or any other System official being an industry cheerleader. But the “rah, rah” factor ended last Friday, when I believe that Al crossed the factual line and—in a letter to the American Banker--tried to hang a huge “guilt by association” charge on the GSEs, fingering them as major subprime culprits.

He wrote that Fannie Mae and Freddie Mac--through years of work with mortgage bankers and the bankers’ broker networks--had enabled those players to incubate, survive, multiply—like, like mortgage brokers--and go on to produce the current subprime mortgage nightmare which is battering the nation.

Almost like a scene from “Invasion of the Body Snatchers,” Al implied that Fannie and Freddie had acted as birth pods for people who marched on zombie-like and caused the monstrous subprime problem. (The dramatic interpretation is the blogger's, not AD’s.)


I Disagree With Al…


Al's specific allegation was both dramatic and pretty inaccurate. It would be news to most knowledgeable people, who believe the answer to who/what is responsible for our current subprime woes falls much closer, literally, to the NY Home Loan Bank’s zip code, meaning Wall Street. The investment banks created the hedge funds and then marshaled broker networks to generate billions in subprime loans, which—because of the nature of the loans and the people underwritten—carried higher yields, that seemed perfect to feed hedge funds seeking above market rate returns? If Wall Street hadn’t tapped the brokers, the IB’s would have found others to deliver the necessary high yield product.

..So does history


I also think that history will note that the boom in the mortgage banking industry, the evolution of the “we serve any/all lenders” mortgage broker network—and, indeed, the rapid and sustained growth of the secondary mortgage market—which Al blames on the GSEs, ironically, was a direct result of the demise of the thrift industry, with its massive self-induced breakdown, disassembly, and failure in the 1980’s.

In the aftermath of that costly taxpayer debacle, virtually all thrifts took on the façade of commercial banks and moved out of exclusive mortgage lending, opening the way for other more efficient home lenders, mainly mortgage companies. Independent mortgage bankers (most now are owned by banks )--with no portfolios to hold loans--stepped up their origination of mortgages and sold virtually all of their product to Fannie Mae and Freddie Mac, which in turn grew furiously. Intelligent S&L managers, not wanting to get caught borrowing short and lending long, as the industry just had, started selling mortgages to the GSEs, too, rather than holding them.

Adding also to the demise of old style “It’s a Wonderful Like” mortgage lending was Wall Street’s “mortgage securitization,” packaging loans in mortgage backed bonds—with GSE guarantees--for sale to investors here and abroad.

This is the successful secondary mortgage market model—started in the early 1980’s-- which still prevails, i.e. lenders serving borrowers at the retail level and then selling their loans to Fannie, Freddie and other investors. Major foreign and domestic financial institutions, including central banks, investing in GSE and others debt—supplying a lot of the initial mortgage capital--and then purchasing GSE and “private label” mortgage backed securities, through the New York investment houses.


Contrary to Al’s suggestion mortgage bankers and brokers, lenders of all stripes, depositories as well as mortgage companies, took advantage of the changed times and lower costs offered by the “mortgage broker business model” and used contract help (brokers)—to complement or in lieu their own employees--to feed loans to their mortgage operations.

Tying Fannie Mae and Freddie Mac to the evolution of mortgage brokers is a bit of a reach. Brokers cannot sell loans to the GSEs. Fannie’s and Freddie’s customers are approved banks, thrifts, mortgage companies, credit unions, etc. Those primary market institutions originate the loans any way they choose—using in house staff or using brokers—and then sell them to Fannie and Freddie, with the lender standing behind the underwriting.

Why Now Al?

But why would Al resurrect all of this history and some say re-write it, now?
Is he’s trying to get tight with the GOP in DC, feathering his own nest, while trying to balance some of the major opposition to OFHEO? Does he want to take advantage of OFHEO’s angst to settle some old industry disputes, with a three corner bank shot? Is the wily Mr. D just is taking advantage of events and hoping to get some market share for the banks, at the expense of the mortgage companies and Fannie and Freddie? Or maybe it’s part of some move to disguise the fact that most of the Bank System officials don’t want a new regulator, because the status quo serves them nicely!

Who knows?

What I think my old colleague really accomplished—whether by design or not--is to draw undue attention to the Home Loan Bank System, which has flown under the radar as Congress spent time restructuring creating a single new regulator for Fannie, Freddie and the Home Loan Banks. Before and during the House hearings and mark ups on regulatory restructuring legislation, Fannie and Freddie had their operations sliced and diced and were given the equivalent of a media proctological exam (not comfortable for those not personally familiar with the process), while the Bank System largely was ignored, even though a few of the regional banks had their own “accounting issues.”

Stay Hidden

I wish no ill will on the Bank System or for my friends who work for it. My advice to System fans is to just “stay gray,” continue to hide—institutionally—in the bushes, where nobody knows or inquires what the System does and nobody asks embarrassing questions, for which you don’t have easy answers.

The Bank System has gotten a free ride from Congress for years and I doubt if Lockie will be around long enough to reciprocate any cosmetic kindnesses that Al or anyone else extends to him. He certainly won’t be running any new GSE regulatory agency.




Maloni 9-13-2007

34 comments:

Marianne said...

I could not agree more. I realize that many of the residential subprime and stated income loans have been problematic. However, there is a commercial lending benefit to keeping this loan type alive. Financial institutions like Ocean Capital in Rhode Island maintain an up close and personal policy with the commercial lending that they do to folks trying to start a business and who may not have a portfolio substantial enough to make them attractive borrowers to the big box lenders. Sometimes, you have to purchase the gas station, auto repair shop or motel to generate revenue. Subprime commercial lending is oftentimes the only opportunity for certain new business developoment and should be retained.

Bill Maloni said...

Marianne--Thanks for agreeing, but I am not sure on which point we agree?

Did I miss the predicate?

New York Mortgage Home Loan said...

A mortgage consultant can also be an independent source of information and an unbiased help in wading through the myriad of options available in the mortgage industry today.

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