I stumbled over the term “staycation” this weekend, referring to those people who chose to stay home with families, because of the cost of driving and the other headaches of Memorial Day travel.
Holidays along with home and family always blended together for me, long before gasoline went to $4 a gallon. With that thought in mind, I decided to resurrect a blog which I failed to publish originally because of a computer breakdown. The blog was meant for publication last Monday, May 19, a day before the Senate Banking Committee’s Tuesday GSE markup. With Memorial Day’s theme of honoring our war dead and subtler themes of home and family, I’ve decided to go with what I would have put out a week ago, which--in part--laments what I anticipated (accurately) would happen at that mark up and why I thought it could hurt housing aspirations for those who don’t yet own their own homes.
Note that neither company has truly complained about the Senate Committee bill, in the manner I have, nor have investors chosen to madly sell off their GSE stocks, based on the legislation’s ugly implications, although both stocks have fallen since last week.
Since my blog is more opinion and less newsy and my opinions haven’t changed, I have no problem publishing it post facto. I have one lingering doubt about the Senate work, which I will save for future blogs should my analysis of this proposed legislation be wrong and it becomes a major GSE “positive.”
Can Batman survive the canny machinations of the Joker? Will Lex Luther con Superman into wearing a kryptonite necklace? Can Indiana Jones find the skull before the forces of evil vanquish him? Will the GSEs, this week, survive the latest GOP legislative attacks which have been reported in the popular media??
None of those Hollywood good guys seem ever to suffer in the end, but the betting is off on whether the Bush Administration can whack Fannie Mae and Freddie Mac and restructure the residential mortgage market, especially now since the Bushies have some active help from Senate and House Democrats, marching arm and arm with Senator Richard Shelby (R-Ala.) and his big banks allies.
Are Risks to the GSE For Real?
Is the risk to Fannie and Freddie hyperbole and overstated, like those facing Batman and Indiana, or is it legitimate?
If the nattering nabobs can be believed, it’s for real!
The GSEs hoped tomorrow’s Senate’s GSE consideration would produce nothing worse than the House passed bill. But it looks now like far more damage is looming and they might come out of the Senate—where there once was a coterie of GSE allies--looking like one of those Christmas trees on which people stick holiday wishes for needy children
But these wishes all represent new congressional mortgage market mandates, added GSE operational difficulties and new costs.
Bad Things for the GSEs in a Senate Bill?
The scuttlebutt now is that the Congress (some combination of House and Senate D’s and Shelby) wants the companies to do even more mission work, but at the same time seems bent on be taking away their managerial options, requiring greater capital, asking them to bail out the FHA and, oh, “put some more money into affordable rental housing,” the latter of which the GSEs will have no underwriting or managerial control.
In effect, these combined actions would deprive the GSEs of necessary market tools, needed revenue, and also drive up their business costs.
If the D’s go ahead and make these GSEs changes to appease the three headed Shelby/Administration/Big Banks “monster,” then some prominent Democrat should own up and admit that the two companies will need to increase costs across the board to pay for everything, not the least of which is the regulatory interference, that now will be mandated in statute.
Pretending that nothing will change and that the mortgage finance system will be better, cheaper, and more transparent under this scheme would be disingenuous. But seldom does anyone—certainly not Senators or Congressmen--ever consider the consequence of weaving everyone’s pet project into legislation or “adding a little legislative thing here, putting something over there, and a adding touch there, and……” Someone will figure it all out!
The GSEs Made the Primary Mortgage Market Work for Consumers
About 15 years ago—when the GSEs current regulator was created--Congress acknowledged its own failure to force the nation’s primary mortgage market lenders (commercial banks, savings and loans, independent mortgage companies, and credit unions) to finance affordable housing for low income families by requiring Fannie Mae and Freddie Mac to assume the task and invest half or more of their annual business in such loans. Congress’ best effort until that point was the toothless Community Reinvestment Act, which had great PR value for banks—complaining about federal interference—but helped very few low income families get homes.
The GSEs in turn leaned on the recalcitrant primary mortgage lenders, using market incentives and muscle, and encouraged them to make more loans to the desired families, loans which Fannie and Freddie then bought or securitized removing most of the lenders’ financial risks.
Until “subprime” shook the Congress and the mortgage finance system, that model worked fabulously because the GSEs were free to impose Congress’ will and priorities on the broader primary market and, as a result, the number of homeowners in the nation grew, especially among lower income and minority families. Mortgages became standardized as they were packaged and sold as securities. Consumer prices for mortgage finance generally were kept down, innovations came regularly (often forced on the reluctant primary market lenders), and things seemed to be fine, unless you were an anti-GSE ideologue (and they existed in droves).
Maybe Congress should look again at how the GSEs generate capital. “Capital,” the unencumbered cash which can be utilized for any corporate emergency—and the stuff of which everyone says Fannie and Freddie need more--usually is a product of earnings. When a company generates positive earnings, whatever isn’t spent each year on operational overhead or paid to shareholders as dividends generally goes to a company’s capital account to protect against future losses.
If GSE earnings get further directed to FHA bailouts, state housing finance agency funds, more set asides for loans put on their books, and who knows what else, what will the GSEs use to cover their new capital costs, burdens, mission changes and the rest of Dick Shelby’s Christmas wishes?
Bad Chickens Coming Home
If the news stories are accurate, Fannie and Freddie will come out of this Senate GSE legislative exercise more heavily controlled by their new regulator, with less managerial ability to chose and bring new products to market, greater capital charges for what loans they can finance, regulatory control to set GSE capital at any number for any reason, paying out of profits for a low income affordable housing fund--controlled) by non-profits--and, following last week, backstopping the FHA historically less than efficient pursuits of new business activities.
Wow! Is this every ugly chicken coming home to roost that the GSEs spooked for the past 20 years?
The finance-the-FHA-losses “gem” reportedly is the contribution of Senator Shelby (R-Ala.), who claims this mechanism will prevent the “American taxpayer” from sharing in FHA losses. (Psst, blogger to the senior Senator from Alabama, Fannie and Freddie pay some pretty hefty federal taxes, but why let that fact ruin your headline?)
Let’s review the Federal Housing Administration plan. First, Congress wants to turn the FHA, a HUD department which never has been bathed in glory or efficiency, into Fannie’s and Freddie’s direct competitor, letting all three finance $700,000 mortgages? (It must be noted that the FHA often aims its federal agency government subsidy at riskier lower income families, some with credit problems, meaning those unable to meet conventional market standards (non-government guaranteed or insured).
And then, in “Shelby-land,” he wants Fannie and Freddie to pay for FHA’s mistakes. That makes as much sense as Congress telling McDonald’s to price its hamburgers at 50 cents and requiring Burger King to cover Mickey D’s inevitable red ink. Even the non-GSE friendly Washington Post cast a skeptical editorial eye at the equity of Shelby’s financing mechanism.
FHA Losses and Higher Costs
When the FHA losses occur—and, with due respect to Daniel Day Lewis, there will be FHA losses—wouldn’t it be more equitable to ask the 50 or 100 largest FHA users to pay a fee to cover any red ink, since it is those lenders, acting as FHA’s agents to insure mortgages on behalf of the government, whose mistakes will produce the red ink?.
FHA doesn’t have any field staff. Private lenders use FHA guarantees to underwrite and approve borrowers, with the FHA on the hook. If any errors result in FHA insurance losses, it would likely be because some lender made a mistake making them directly or indirectly responsible for any FHA financial problems?
Why should Fannie and Freddie be held financially liable???
If Congress persists and this giant GSE crap sandwich becomes law, will the D’s accept responsibility for higher mortgage costs since they will have provided the R’s with the votes and given the pen Shelby to author his anti-GSE venom??
I could be wrong in my prediction about what might happen to the GSEs if all of the bad ideas which have been discussed actually wind up in a GSE/Housing legislation wagon train sent to the President, but I doubt it.
Despite what Congress thinks it knows, it seems to have forgotten that for more than 30 years Fannie and Freddie kept down systemic mortgage costs, standardized mortgage products, and introduced operational efficiencies--which the market elements abhorred and fought, but for which the GSEs pressed--and aided millions of lower income families to become homeowners.
Bath Water Removal
Congress should get over its subprime angst—congressional hearings showed the GSEs largely blameless—help those mortgagors stuck with bad loans, but forget about destabilizing Fannie Mae and Freddie Mac. Bath water and baby, Democrats, remember?
If the Congress wants the GSEs to walk another housing mission mile, it should embrace Fannie Mae and Freddie Mac not “kneecap them” first.
Congress can’t possibly believe that the commercial banking community will take up the GSEs market slack. Didn’t the banks show their colors when the subprime mess hit the mortgage market and the virtually all of them, including the biggest, headed for the sidelines, where some still hide?
What are Senator Chris Dodd (D-Ct.), Rep. Barney Frank (D-Mass.) and the other Democrats thinking? Yes, Barney likes Hank Paulson, but what does either Chairman owe George Bush, who will be long gone if this time bomb goes off?
I still am waiting for the first brave Senate Democrat or his House counterpart to say, “I agree with Dick Shelby and President George W. Bush. We need to help those big banks get more competitive, throttle Fannie and Freddie, and make qualifying for home mortgages more difficult and costly. Consumers will love us and it will be our legacy!”
Bad legislation cannot pass, without active Democratic help.