Monday, February 15, 2010

All yee, all yee in free!

(This is a special two-part blog, with the next segment coming in two days. I want to thank my former Fannie Mae colleague and friend, Gwenn L. Hibbs, for her collaboration and note that she still is one of the best and smartest financial lawyers in town, despite the fact that she retired a few years ago to—among other things—edit a book and work her musical magic with special needs kids.)

A Simple Fix: Fannie and Freddie Come Home!

I want to help the Congress resolve their conflicts over creating a new residential mortgage finance system. My plan also would allow the Democrat-controlled Congress working--with the White House--to succeed for themselves (read re-election), support the American people, and the world's mortgage marketplaces, where so much US mortgage money originates.

I am going to suggest to Congress a way to keep alive the long term fixed rate mortgage with semi-private capital and later with totally private money; earn the love/support of their constituents; reinvigorate the national real estate market by encouraging banks, thrifts, and mortgage companies to make responsible home loans to American families; keep alive a national secondary mortgage market, so local/national lenders are not burdened by mortgage risk; strengthen mortgage market regulation; serve low and moderate middle income families, with homeownership aspirations; and save yourselves the anguish of untold volumes of hot air on Capitol Hill.

Admittedly, this option has a few minor drawbacks for the most popular congressional approaches to post-Crisis reform, i.e., playing verbal “Hangman.”

Many Members also might have to sidestep the rivers of Wall Street money sloshing through Congress right now to protect the status quo for "Goldmine Sachs," Citibank, AIG and the other "Even Bigger to Fail" mega banks created in the panic of 2009. That is a status quo in which the housing sector remains incredibly weak; millions of underwater borrowers are likely to walk away from their loans; and even more millions will experience foreclosures over the next two years as investors, servicers and lenders sit on their hands rather than participate in principal reduction or mortgage modification.

Congressmen and Senators might also have to sacrifice the titillation of holding endless hearings designed to “Swift Boat” informed debate. Sophomoric insult fests about the GSEs' implosion -- tailored for evening sound bites for the Tea Party crowd -- might have to yield to consideration of actual facts. And some would be forced to dial down the blood lust quotient of recent public statements, like the wish to "abolish Fannie and Freddie" as well as the unidentified House Democratic staffer who promised many opportunities for the majority party to excoriate Fannie and Freddie.

(Have the Democrats stolen a page from the GOP and now resort to desecrating the graves of the formerly helpful, but now commercially dead?)

Restore Rational, Professional Oversight.

Here is the how-to guide to a much better prospect for a housing recovery and more stable economy overall.

The White House--because at the end of the day, this is a political issue-- needs to direct Fannie Mae and Freddie Mac, currently operating under Treasury’s ersatz and failing form of "conservatorship," to reestablish their individual mortgage underwriting standards and begin pricing mortgage risks appropriately. Require the two companies to repay the federal government what Uncle Sam has lent them, at a reasonable interest rate, over the next 30 years (just like a mortgage). Congress should ask why the GSEs are now paying interest rates of 10 percent on their government loans while the TARPsters like Goldman and Citibank got a 5 percent loan rate.

The Administration should agree to sponsor F&F debt for the next two years or so (in effect letting them borrow as GSEs), reduce their "housing goals" to 35% or 40% of their annual business volumes; increase their capital requirements (slightly); limit the two companies’ portfolio growth; direct the Fannie and Freddie managements and unload the garbage securities in their portfolios, as expeditiously as possible.

Then the White House should step up and fire most of the current Federal Housing Finance Administration regulatory staff and fill those posts with responsible professional examiners and mortgage finance/securities professionals, who know their trade and have not built careers undermining the former GSEs.

Deconstruct the Myth of Perverse Incentives

"Oh, the Congress can't do that. Why, it would reward....Who, what? Who benefits if Congress thoughtfully resurrects Fannie and Freddie, with limits and controls as mentioned?

In my plan, the American people, the national mortgage finance system, and the national treasury would be the beneficiaries and get the rewards. The GSEs would again be self-supporting and tax-paying citizens, rather than the source of trillions added to the federal balance sheet, if we "abolish" them but add them to the budget to avoid a “Chinese fire drill” fiscal panic.

Let's wake up and acknowledge that the Federal government is now funding and running the nation's entire mortgage market and not very well. That is not a sustainable or efficient model.

The banks and other lenders won't make mortgages, unless the decks are so stacked in their favor that they can't possibly lose money. And, still the markets are moribund, save what a handcuffed Fannie and Freddie are bringing.

Yep, some GSE employees could enjoy business success and earn remuneration, under my scheme. But, so what, someone has to do the hard work and why not people who know how to get it done, if properly incented? Congress should never underestimate the power of Fannie and Freddie to drive primary market lending.

Please, Congress, try and remember that the old GSE bad guys are gone; the operations now are being run (wastefully) by government employees, not company workers.

Our nation’s single family and multifamily markets are suffering. The former GSEs aren't making enough money to pay back the government because they aren't being allowed to bring any entrepreneurial skills to the products and services they offer. Better regulation can manage congressional concerns about excesses.

Fact, Facts, Facts

The Congress should examine what went right at the mortgage giants and what caused the wheels to come off and encourage the first and protect against the second.

Go back a few years--say 2002-2007--to see the best and worst if you look closely--assuming you understand why they were created and what Congress expected the GSEs to do and how--you'll quickly see the shortcomings (few but obvious) and the strengths, many and super beneficial.

In that epoch, you'll find close to the GSEs zenith and their nadir and probably easily can point to the management errors and separate those from the structural strengths. If you're sophisticated enough, you'll also see the regulatory weakness, few of which were improved when Congress recently transformed the Office of Federal Housing Enterprise Oversight (OFHEO) and replaced it with the Federal Housing Finance Agency (FHFA).

You can change names and organizational boxes but when you leave the same incompetent regulatory officials in place, you reap what you sow A skunk, by any other name, still is a polecat!

(To be continued later this week.)

Maloni, 2-15-2010