Tuesday, October 20, 2009

Cats and Dogs

Public Option

If the history of the residential mortgage market is any measure, Hell, yes, we need a public health insurance option, if only to keep the insurers honest. Nothing will make the industry more responsive than opening the insurance system to competition and, by the way, forcing them to lower their prices if the public has the opportunity to get coverage “elsewhere.”

That’s what happened to mortgage products and prices in the residential mortgage market when Fannie and Freddie began forcing banks and savings and loans to compete for those lenders perceived was their God-given mortgage lending business.

F&F didn’t actually compete directly with the primary market lenders, because by law the GSEs were in the “secondary market,” buying loans from lenders, and the depository institutions were originating loans for families in the “primary market.”

But what the banks and thrifts started complaining about more than 20 years ago—and consumers loved--was that Fannie and Freddie succored a mortgage companies, non-depository exclusive mortgage lenders, which unlike banks and thrifts did not keep mortgage portfolios, but sold every loan they made to investors. (Mortgage “banker” is a euphemism, since mortgage companies never have been depositories, although today most are owned by large banks.)

This is the “competition” for which the commercial bankers blamed Fannie and Freddie and for years they battled, trying to hold onto their little honey pot making the mortgage market pricey and inefficient, with excessive fees and charges. GSE competition ended that behavior (which is one of the reasons the commercial banker anger and hostility aimed at the former GSEs seldom diminished).

The analog to what the Congress and the public seems to want to introduce into the healthcare debate is the equivalent mortgage industry “public option,” i.e. Fannie and Freddie providing high quality and low cost conventional mortgage products to the mortgage companies forcing the dominant mortgage providers of that era (banks and thrifts) to join the party offering the public competitive products and prices or face losing the business.
Remember, financial services companies—which is what an insurance company is-- all borrow money at one rate and invest it at a higher one. Competition and efficiency was good for the mortgage market. It should bring out the best in the health insurance industry and do away with some of the worst practices. In the meantime, the Congress should ignore the fear mongering that will flow from the insurance industry’s PR operations. They’ll say and do anything to hold onto their financial edge.

From my perspective, a big “Yes” on the public health care option.

Is The Congress Angry??

I hope so. Supposedly, it is so angry at the health insurance industry that it is planning hearings to examine the industry anti-trust exemptions, with the implied threat that Congress will alter this huge business benefit.

Go for it Congress, don’t just threaten.

It’s amazing to me that the Hill never has learned the lesson of taking concerted, definitive action, instead of blowing all so much hot air and doing little. (“My staff is looking…I have introduced a bill, which I hope will be referred to my subcommittee so that I…..I’ve asked the Chairman to ask GAO to……” Haff, Kaff, yak, gag!!)

Whack that industry and show the American public that their health care worries can be solved and their health protected.

And, while you are at it House and Senate, give the back of your hand—or a mailed fist--to the large commercial bankers who have screwed over you and the public on TARP, regulatory reform, consumer agency, restructuring bad mortgage loans, and executive compensation. (Having supped at the federal trough and still supping, how can they justify those comp levels?)

The Washington Post had a headline the other day suggesting that the financial services industry was losing its clout on the Hill.

I’ll believe it when I see the results, not the interim steps, which mean nothing since—in no other city in the world is “It’s not over, until it’s over” the rule as it is in Washington.

Until President Obama signs into law legislation which the banks hate—and the final regs are written implementing that law—I’ll never believe that the big banks have gotten paid back for their perfidy on the issues I mentioned and that’s just this year.

Fannie and Freddie, Keefe Bruyette Notwithstanding

Periodically, I receive calls from analysts and investors asking my opinion about the “future of Fannie and Freddie.”

I tell them, “I have no damn idea.”

But then, I offer them a few salient facts.

We have no conventional, non-government mortgage market, right now. And, nobody else has stepped up to take over the F&F role.

Every institutional mortgage investor today is funded by the government or is a government agency. That includes FHA and HUD, the former GSEs, and some banks still taking in or living large from their TARP dollars.

That is not a tenable situation and the easiest fix is to resurrect a private Fannie Mae and Freddie Mac in some form.

Keefe Bruyette and Woods this week opined that both companies are worthless and their common and preferred stock have no value, because of their new relartionship to Traesury and the Fed as well as their taxpayer debt.

True now, but--in the ways of Washington--none of it may matter. When the Obama Administration and Congress finally take a breath from their other priorities and look at the mortgage market, I think it will become obvious that the “secondary mortgage market model” works, which means a plethora of primary market lenders dealing with the public and then selling or securitizing those loans with a few dedicated national mortgage investors is an ideal structure for the nation.

Any money F&F owes can be paid to the Treasury over time, say 30 years, and if changes in their mission (please make those!) are necessary, as well as limits on their business, Congress can make those, too.

The toughest thing the politicians will face when the time comes to fix Fannie and Freddie is swallowing all of the bile they heaped on the two companies, accusing them of every crime under the sun and a few that aren’t there.

Thank God for Speed Dial

It was widely believed inside Fannie Mae, when I worked there, that its regulator, then the Office of Financial Housing Enterprise Oversight (OFHEO) was engaged in a guerilla campaign to knock down the company’s stock price and embarrass its officials, because of the agency’s impotence in dealing with both Fannie and Freddie.

There have been several law suits, some still ongoing, to prove this allegation.
Recently, lawyers for three former Fannie officials still involved in litigation, sought to interview a former OFHEO official, whom they argued might shed light on these matters, including why her boss at the time--who was head of OFHEO ‘s external operations--claimed more than “200 times” that he couldn’t remember salient agency facts and issues.

That’s a ton of bad, weak, lame, and distorted memories. With memory grasp like that, no wonder those OFHEO guys did such a crappy job! It makes you wonder how they could even remember the reporters’ numbers to whom they leaked all of that bad mojo.

Maloni 10-20-2009


Lawrence said...

very insightful and most informative lfl

Bill Maloni said...

Thanks, Uncle Larry.

(Just teasing. Thank you for the most appreciaetd comment!)

Anonymous said...

I wasn't aware that you were unhappy with the treatment you've been provided for under your private insurance coverage. When the government tells you whst procedures you're entitled to be reimbursed for, let me know if you still favor a public option. By then, there will no private insurance as it will not have been able to compete with the government insurance, subsidized with our tax dollars.

Come on Bill, wake up.


Bill Maloni said...

I am not unhapy with my health insurance, which just paid almost every penny of a "whopping bill" for my two week hospital stay. But, I've been paying into that coverage for 30 years and I am not poor. Ask me, again, next month when I qualify for Medicare.

My point is that Fannie and Freddie were give "housing mission" because the private sector refused to provide mortgage finance to those with lesser incomes or credit profiles or did so while grossly overcharging.

The health insurance industry could do a much better job policing itself and holding down cost, but hasn't and won't unless pushed hard.

They have a gold mind and are fighting to keep everyone else out. The public option--which "the public" seems to want and some pols don't--will correct some of that.

Don't believe all of the industry hype about the "PO" being the end of the world re quality health care. It might be the end of the industry's monopoly, but for the insured or those who without health insurance,it likely opens up better options and better pricing.

Gzonic said...


With the Fed promising to scale back its trillion dollar investment in mortgages and the market assuming that that will translate into a 50-100 bp increase in mortgage rates, won't the administration be wary of allowing the mortgage market to become the charnel ground of the banks, hedge funds and who knows what? That will kill the recovery in housing in a hot minute. I asked a couple of Treasury officials recently and they responded in a way that reminded me of the Skins attempting to convert a 3rd down. Can we count on Barney to impose some adult supervision?

Bill Maloni said...

I think the answer is "yes," but Mr. Frank, in addition to being the brightest House member on these matters, can sometimes be mercurial and unpredictable.

However, if the residential real estate market (and the Realtors and Homebuilders) begin seeing reversals and a slowdown--if not reversal--of what has been slowing improving numbers, I would hope the House and Senate solons would pressure the WH, Treasury, and the Fed to reconsider any policies which are hampering home sales and all that goes with it. "Housing" still accounts for one fifth or more of the nation's GNP.

I'll touch on this in my next blog, but what is "FM Watch" up to, reorganizing their anti-GSE efforts?