Tuesday, July 29, 2008

Who Has the Tissues and the Time?

The GSE haters are all over themselves with passage of the new legislation and probable Bush signature into law this week. But they are confused. As my favorite hockey announcer Mike Lange says about the opposition, when the Pittsburgh Penguins score, “They don’t know whether to cry or wind their watches.”

The bad guys are not sure if they won or lost.

Fannie and Freddie still are standing and doing high quality business, too. The Bush Administration unfailingly says the GSEs are needed/necessary to pull the nation out of its real estate doldrums, adding “in their current form.” A possible Obama Administration looms large. (“Omigod, you don’t think he’ll name……”)

The GSE press has been uniformly bad, with the standard dollop of incomplete and erroneous facts. (In my mind, there is no federal bailout until someone asks for or gets one, but that didn’t stop a legion of reporters and headline writers suggesting the opposite.)

The “Right Wing” knows Paulson pulled off something, but they are not sure what. They have been screaming for a new regulator, various limitations, GSE punishment, compensation caps, bans on political giving and lobbying, etc. etc, but they don’t see all their demands in law.

The Washington Post today gave “FM Watch” and its progeny credit for beating the GSEs (“true dat!”) and notes that group of lobbyists may be taking a victory lap and closing its doors?

And the commercial banking system—which most of these conservatives think is ready to replace Fannie and Freddie--still stays on the sidelines or merely dips their big toes in the mortgage waters, preferring instead, once again, to let the GSEs do the hard work.

Bill Poole

In my humble opinion, there is no greater purveyor of anti-GSE foolishness—and tool of the crazies--than former St. Louis Fed President William Poole, now ensconced at the Cato Institute (where, reportedly, he brought his own togas).

Writing an op-ed in last Sunday’s New York Times, Poole called for the government to manage the post-legislation Fannie and Freddie out of existence over 5-10 years with other elements of the market picking up the business.

Poole buttresses his point by pointing out how little the market really needs F/F and cites 2005 when the two companies—operating under regulatory portfolio growth restraints—made up just under 15% of the total new mortgage volume that year.

Now, for all of you who believe that Poole is a genius, a guru, a thoughtful and reasonable observer, I suggest that you pause (and gag?) and please realize that the year Poole heralds as proof that the American mortgage buying public doesn’t need the GSEs was possibly the high point of those very same banks and Wall Street firms flooding the market with “private label” (meaning non-Fannie Mae and Freddie Mac) disastrously underwritten, subprime mortgage loans packed in hugely flawed high yield mortgage backed securities.

Now, most observers think that Poole’s proffered GSE nadir and zenith of non-GSE participation is the single largest reason why the country is reeling today in that ocean of red mortgage risk ink.

Is that really what our nation deserves, even if the advocate is wearing a slinky bed sheet?

It wasn’t the Fannie and Freddie securities that have been going bad, Mr. P, it was those issued by the righteous financial elements that you think will protect the US mortgage markets from the GSEs.

Using 2005 to represent the best of the non-GSE times is like saying "Stalin was good at controlling the Soviet Union's population growth," but at what cost?

Disagreeing as I do with Mr. Poole, I would argue that a more accurate example of GSE systemic value was what happened in the "jumbo mortgage market," AFTER the subprime mess hit an unhappy condition which persisted until Congress stepped in and changed the applicable law.

Two years ago, there was a major slug of mortgage activity which—by law—couldn’t be touched by the GSEs. Those were “jumbo loans,” i.e. loans about the GSE maximum mortgage purchase of $427,000, which by statute only could be originated by non-GSE clients.

As soon as their subprime losses started to bite, large commercial banks and Wall Street firms sprinted to the sidelines away from their exclusive rights to the jumbo market, leaving borrowers with few if any options.

Buyers in Los Angeles, Boston and elsewhere, where high prices forced them into jumbo loans, couldn’t get a jumbo or “non-conforming mortgage” (to GSE size limits) without paying a huge premium—and often, not even then.

That “abandonment” is not the desired behavior of any entity or group of businesses on which Congress should rely for maintaining a national secondary mortgage market (which buys, securitizes, and sells the balance of all primary market loans made to consumers) primary market) and which keeps that market open and liquid no matter what the prevailing cross currents. But it is by interests who do not have the wherewithal to stay in mortgage markets at all time and in all communities.

Have You Seen?

The “jumbo mortgage market,” important to California and many large eastern cities, all but dried up and came to screeching halt because the only permissible lenders—Mr. Poole’s banks—forsook them. That caused Congress, separately, to approve an emergency measure—as part of the economic stimulus package--letting the GSEs buy higher balance loans (up to $725,000) just to jump start the market. The bill which the President will sign this week lowers the mortgage ceiling to some $625,000 for 2009, but makes it permanent in hopes the banks won’t repeat their jumbo real estate perfidy.

The GSEs started buy those larger loans a few months ago and mortgage money instantly became available—from the banks and thrifts that wanted to make but not hold what had been non-GSE” eligible loans--and the prices to consumers fell.

But, until that moment, I remember being told that it got so bad in many of those non-conforming mortgage markets that grocery stores began carrying milk cartons with the names and headquarter pictures of those missing banks, with key demographic facts listed under “last seen.”

Maloni 7-29-2008


Anonymous said...

Wittingly or not, Poole is a tool!

Does the housing bill as passed still include all those silly grabs at FNM money and the operational restrictions? Cramer argues that the housing bill will have huge benefits for BofA et al.---do you agree?

FM Policy Focus's website has been oddly silent on the current "crisis." I bet they wish that their Wall St backers et al. hadn't made such a hash of their big chance to prove the superfluity of FNM/FRE! It should be emphasized that much of FNM/FRE's losses are the result of Wall St's demand-pull for poorly underwritten loans--that's what hyperinflated/crashed the RE market.

Bill Maloni said...

Yes. the new law contains the "Fund," which sets up a GSE percent of earnings expropriations that will eventually go to the states on some forumla basis for low income rental housing. (That mechanism was labeled a "tax"--by a WSJ reporter --the other day.)

In the first three years of the Fund, however, the GSE money would first go to cover any losses which the FHA experiences in it's "new"
single family refi of subprime ARMs initiative, which is the centerpiece of the non-GSE regulatory reform legsialtion.

(Interestingly, new HUD Secretary Preston downplayed the value of the new mechanism, sayign that the authority HUD has on hand has greater value.)