Friday, August 15, 2008

Do We Need A New non-GSE Mortgage Wholesaler?

Secretary Paulson proclaimed last Sunday that he doesn’t believe it’s necessary to bolster Fannie Mae or Freddie Mac with federal funds, since neither currently requires the capital help to conduct their daily business. I hope that situation prevails for a long time.

Paulson’s statement won’t stop people from speculating on what a world without the two governments sponsored mortgage enterprises would look like and, indeed, lobbying Congress—or Secretary Paulson--for those changes.

In the current environment, where villains appear plentiful and there is a lot of angst and confusion, policy makers and everyday citizens are directing their scatter shot rage at the mortgage market’s structure and various participants.

In my view, they are no desirable alternatives to Fannie Mae and Freddie Mac administering our nation’s secondary mortgage market, without unnecessary and undesirable cost, upheaval, consumer negatives, and restructuring downsides.

To reduce some risks, the nation could all but do away with fixed rate mortgage finance; pulverize Fannie and Freddie into tiny pieces and reintroduce a lot of market inefficiency, which the GSEs have removed from the mortgage finance system; give banks new Fannie and Freddie like secondary mortgage market authority; or nationalize the two GSEs, run them out of Treasury and either stop there or wait a reasoning period while the bodies cool off, and then recreate Fannie and Freddie under different names.

Banks—which already control the primary market place, where borrowers go to take out a mortgage loan--would be the changes’ major beneficiaries. But when people complain about Fannie’s and Freddie’s “government subsidy” and not being “free market,” I wonder how they ignore the huge government benefits which flow to commercial banks from federal deposit insurance.

Federally insured deposits supply banks with over $5 trillion in working capital at rates far cheaper than what Fannie and Freddie pay for their GSE debt, but somehow that federal bank “subsidy” gets ignored.

And do you really think any bank would do 55% of its annual business with low, moderate, and middle income families as the GSEs must now do?

Certainly there are non F/F options, but none are appealing since they involve dramatic mortgage market or consumer changes. Given the real possibility of better GSE management and oversight going forward, we should just hold onto what we have and improve it.

Bank Mortgage Lending Without the GSEs, a Failure

A successful secondary mortgage market requires a constant presence and a principal—the authority of which is acknowledged and accepted by all--that can move assets in common form among all of the buyers, sellers, investors, and other competing mortgage market interests.

That’s not what commercial banks do.

The US has lots of different home mortgage lenders--you can find them on every street corner--and some of them quite large commercial banks. But as the banks quickly would testify and, frankly, as they have shown, banks are not structured to hold onto and manage a home mortgage’s embedded long term interest rate risk and, sometimes, even the inherent credit risk bothers them.

Nor are banks inclined always (since they are not compelled) to invest exclusively in mortgages—the key Fannie and Freddie function--when economic setbacks occur. Commercial banks can, unlike Fannie and Freddie, look elsewhere (including overseas) for non-mortgage lending alternatives often where the return is greater.

Despite what they will say, most banks like knowing that they can lay off the mortgage loans they originate on Fannie and Freddie, take the money and go re-lend it.

Recently, the commercial bank and investment banking mob mistakenly undertook a major GSE-copycat effort without employing Fannie Mae and Freddie Mac and used a cabal of mortgage brokers and Wall Street firms to originate untold thousands of low quality default prone mortgages, which were packaged in securities and sold all over the world.

That exercise is what produced the subprime crisis, which currently is ravaging our domestic real estate market and shutting down financial services companies across the board.

It was a no good, horrible, very bad experiment for which the nation has paid a very heavy tab and may do so for a long time!!

Of course, Congress could leave the banks unchanged structurally and just mandate that all home mortgage activity be conducted with short term adjustable rate mortgages (ARMs), the rates on which change—both up and down—as national lending rates move. That might encourage more commercial banks to hold them in their portfolios. But we are a nation of fixed rate mortgage (FRM) borrowers and we like the certainty of that same monthly mortgage payment for as long as we live in the house.

And which Senator or Member of Congress would want to do away with something consumers so prefer, just to make it easier for the banks to protect their assets?

Take a Deep Breath, Leave the GSEs Alone and just Exhale(r)

Congress might just decide to scuttle Fannie and Freddie and create new institutions, with different names, to do what the two existing GSEs now do.
That’s a guaranteed few years worth of work and they’ll never get it right---once all of the voices seek their piece of the action--plus the market will suffer in the interim.

Lawmakers could structurally change one large national bank or an amalgam of same, investing that institution with Fannie and Freddie powers. The new GSE could set the mortgage lending underwriting guidelines for the nation. That might work, if you prohibited it from doing anything else besides mortgage lending, but who really trusts the big banks to do the right thing, especially when they now control the entire primary mortgage market, too?

When all is considered, the best step for the maximum interest of the country’s mortgage system and its home buying consumers is to stand with—not behind, but with—Fannie Mae and Freddie Mac and let them work themselves out of the current problems, which well could be short term (a year or less) and not fatal, as Secretary Paulson seemed to suggest this past weekend.

A new regulatory regime has been passed into law and can deal with any GSE excesses, but an incoming Obama Administration would do well to apply a deft hand when choosing an Administrator to oversee two institutions which—if you listen between the polemics--policy makers and public officials in both parties claim are necessary to lead our nation out of its current real estate credit crisis.

Vlad the Impaler!

--On his trip to China when he spoke to Vladimir Putin, did George Bush look into Vlad’s heart and see the “Slayer of Georgia?”

And it is not true that when informed that the Russia army had crossed into Georgia that President Bush said, “Those people in Atlanta are going to be real upset!”

Edwards the Impaler!

--CNN conducted a poll asking readers their opinion on John Edwards’ political future? What future? He cheated on a wife, who both has cancer and had shown amazing energy and support for his political dreams, while he engaged in hubristic “Me” antics.

What kind of political future can he possibly have or deserve? He may have trouble just being a trial lawyer!

Larry Kudlow the Inhaler!

I laughed when I read an online copy of Larry Kudlow’s National Journal article, gushing over the very tough stand that John McCain took (in a St. Petersburg Times op-ed) against the Paulson bailout mechanism for Fannie Mae and Freddie Mac. The always- lacking-in-credibility and pompous Mr. Kudlow waxed eloquent over McCain’s tough stand against the two companies who Kudlow tut-tutted had spent “$170 million dollars” for lobbying over the past 10 years.

I wonder if Mr. Kudlow would be surprised or annoyed to find out that three of the top people still around Senator McCain—and two seasoned veterans who just left the Senator's campaign in the last few months—once were GSE political consultants and on the receiving end of that GSE political gold.

Jim DeMint the Free Speech Derailer

Sen. Jim DeMint (R-SC) wants Fannie and Freddie to stop lobbying his colleagues or making campaign contributions to them, since he doesn’t think its right. (What is it with these right wingers when it comes to casually tromping on constitutional rights?)

Well, I agree with Sen. DeMint, but only when and if Fannie and Freddie take a penny of Treasury financial support. If the latter occurs, in my view, their right to be private companies ends and they should operate under the same rules as any other federal instrumentality, meaning their can have congressional liaison officials but not lobbyists and no political giving.

But, until that time and until Congress changes the law, Fannie Mae and Freddie Mac enjoy the same First Amendment rights as any other American corporation.

The Senator might want to check his history. More than 10 years ago, GOP Majority Leader Dick Armey (R-Tex.), angry over some Fannie/Freddie lobbying antic challenged those rights and asked the then General Accounting Office (GAO)--Congress’ investigative arm--to look in the matter. Mr. Armey wasn’t happy when GAO affirmed that Fannie Mae and Freddie Mac could lobby and make political contributions just like other businesses.

Maloni 8-15-2008


Bill Maloni said...

I have been appropriately chastised by one of my favorite people and readers, who said today's blog didn't make clear enough that my "villains" are the very large commercial banks, not the smaller guys who work very well with the GSEs.

That's a fact and if I was not clear in that premise, I hope this corrects it.

Barry said...

Critics can rightfully point out that large regulated depositories pay for the federal deposit insurance that has tied them to government intervention in a direct way for decades.

But these same depositories' ownership of the "other" GSEs, the Federal Home Loan Banks, is really where bank-dom's GSE critics' hypocrisy takes full flight. These institutions use the same implied credit guarantee of the US Treasury to raise money that can be used for just about any damn thing, and earn the dividends from the float generated from loaning each other the money.

Bill Maloni said...

"Tru dat!"

76s said...

Interesting perspective from the credit trenches of FRE:

Bill Maloni said...

"Scary" might be a more apt description.