Thursday, May 1, 2008

Don't Give In to the Administration

Republican Senators Dick Shelby (Ala.) and Chuck Hagel (Neb.) hope to force Fannie Mae and Freddie Mac to swallow an Administration designed poison pill and then march quietly to the gallows.

The Senators reportedly are backing a provision—which they hope to offer next week at the Banking Committee’s GSE reform markup--that would give a new GSE regulator unlimited authority to set capital requirements at any level for any reason (authority which doesn’t exist for any other federal financial regulator).

Similar Administration-supported language was knocked out in the House by an overwhelming bi-partisan floor vote of 386-33, before the legislation was sent to the Senate.

That's a lot of House clout to ignore! But the anti-Fannie and Freddie crowd and the Bush Administration insist that a new regulator needs that crippling and boundless power.

I would agree with them, but only if what they want to do is hamstring the GSEs, scuttle the efficient US mortgage market, and allow the large commercial banks to dominate the mortgage market.


My advice to the Senate Democrats is, if the Republicans won’t compromise and back off this new “silent death” provision, let the Shelby and Hagel intransigence kill the GSE bill. If the GOP won’t accept the House-passed provisions--which don’t have that language--let the failure to approve fall on them, their conservative counterparts, and their big bank allies.

Hagel has been an intractable GSE-foe, but former Committee Chairman Dick Shelby once was a cautious legislator, listening to both sides and acting moderately on GSEs issues. I’ve been curious why he now seems so punitive regarding Fannie and Freddie?

He either has totally swallowed the kool aid from the big bank anti-GSE crowd or he is being fed really bad advice by his staff and counselors. He understands mortgage finance, growing up in a family owning a thriving title insurance business.


As I noted last week in my blog, the Office of Financial Housing Enterprise Oversight (OFHEO) whiffed in its efforts to nail former Fannie CEO Frank Raines for an entire list of sins, related to Fannie Mae’s so-called accounting problems.

Think about it, if OFHEO had evidence of real Raines wrong doing, it would have prevailed. But, it didn’t. The Raines win was clear cut. The OFHEO loss was obvious.

That result begs this question—since so many of the current GSE attitudes grew out of the belief imbedded in the OFHEO charges that Fannie officials (and to a lesser extent Freddie) cooked the books to enhance their own incomes--why isn’t the new reality based on the more accurate read that some hubristic Fannie officers tried to integrate a very confusing new accounting principle and they came up short?

Fannie’s small accounting management team and back office shortcomings—both since rectified--didn’t help the company, when it came to implementing the Financial Accounting Standards Board 133 mark-to-market rule. However, there is a difference between law breaking and not employing sufficient corporate resources to understand and properly apply a new mandatory accounting rule.

The complicated FASB rule was one that every major financial trade association challenged in its drafting stages.

Hundreds of financial services companies, subsequently, threw up their hands, admitted errors, and had to re-do their books, because of the same or similar FAS 133 implementation mistakes.

The Senate R’s, who still are playing partisan games, might be more reasonable if they understood that their GSE world view isn’t supported by the facts, just a lot of PR and spin?


The Congress should create a new GSE regulator.

OFHEO has a sorry and conflicted record of regulating the GSEs, which is why Congress should approve a new GSE oversight agency. The actions that OFHEO initiated and implemented over the years never would occur at any other federal financial regulator. So, the Hill shouldn’t wonder why the GSEs don’t want to see a new regulator with authority to drop 10 tons of capital nukes on them.

Could you imagine if instead of an extra 30% capital, OFHEO’s Jim Lockhart had the authority to require double or even triple that amount? The doors would have closed on the GSEs and their affordable housing mission within minutes. But, that’s the scheme the Admin and its allies are pushing.

We’ve already seen the large banks sprint from the mortgage market when the subprime mess first hit. If Shelby and Hagel are successful pushing their amendment, what institutions take the place of the GSEs, efficiently providing billions in affordable financing to American families? The banks won’t and can’t be in the mortgage business at all times and in all communities, even if they are paid through the wazoo? Does anyone think HUD or the FHA is the answer?


The GSEs may not have bathed themselves in glory, recently, when they said “preserving capital” is a primary consideration. But when you are required to hold far more capital than is necessary—except in the mind of a vile opponent—what do you expect? The companies still are putting up an additional OFHEO-imposed 20% capital on top of the capital required by the statutory risk based capital rule to which they also must abide. Why? Just because OFHEO’s Jim Lockhart says they need it. There is no other reason, unless you want to note that before he left office, Alphonso Jackson endorsed this capital scheme, too.

There is a significant negative cost in market service, market efficiency, and mortgage rates, when excessive regulatory capital is demanded. And, when GSE operations are made costly and inefficient, it’s the big banks and their allies that financially prosper. The consumer always is the loser.

When Paul Volcker, Larry Summers and others called on Administration policy makers to free Fannie and Freddie to assist the mortgage markets, you have to ask yourself “from what constraints?”

It’s the very -OFHEO-imposed additional capital requirements and investment limitations which Shelby and Hagel say they want to enhance and expand.


The last time I checked the Republicans were not running Congress, with their blinders and biases. Democrats won both chambers for a reason.

I don’t care how collegial the Senate might be, this lame duck Administration and their backward looking Hill allies should not be shaping this nation’s mortgage finance policy for the “tomorrow.” They should not be allowed to neuter the GSEs by permitting future regulators exclusive authority to set unlimited capital requirements. Current GSE capital requirements are set out in statute, with the regulator having discretion to add a heavy dollop of 30% additional capital.

A fully functioning Fannie and Freddie still are part of the answer to get the residential real market back in operation. Burdened by ridiculous capital demands, they won’t be.

Another mistake the Democratic majority would make is to write legislation assuming that there will be a D in the White House in 2009 and the cabinet level agencies and all the regulatory shops will have thoughtful officials guiding ground breaking policy.

A bad turn in the political road could bring to DC a lot of new GOP faces driving the old policies.

Bush policy makers Gonzales, Rumsfeld, Miers, Bolton, Rove, Libby, Taylor, McNulty, Doan, “Brownie” and many more have resigned for cause, not just “to spend more time with their families.” Those names hardly complete the list of early departures. It has been a sorry gaggle of political appointees gathered here for the past eight years, but nothing in politics say they or their ilk can’t re-emerge.


It certainly would help if the GSEs woke up—maybe driven by their boards?--and worked more cooperatively with their supporters on the Hill. To do that, they would need some “blue mission thinking” and “blue mission people.” Think of it as the reverse “K Street Project” principle.

Both Fannie and Freddie boards of directors should look very carefully at the companies’ operations and personnel. It may be that the company leaders--who brought the GSEs through the accounting ills and books cleanups--are not the same officials required to do the necessary mammoth housing mission work. The priorities and the skill sets may be different. Producing massive amounts of affordable mortgage finance--often for people of color--might not be the right task for wonks, techies, accountants, and people who only can get warm and fuzzy with Lockie.

I have heard former GSE managements accused of a lot of things, but their critics seldom could suggest they paid insufficient attention to their housing mission, a charge that applies too comfortably today?

It’s incumbent upon the Fannie and Freddie boards to forthrightly answer a question reportedly asked by a prominent GSE congressional supporter.

(Paraphrasing.) “If you can’t help us now, when the market needs so much help, why do we even need you?”

Bill Maloni 5-1-2008

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