Sunday, August 29, 2010

Hooray for Shirley Sherrod

Mrs. Sherrod--the Agriculture Department official first fired by Secretary Tom Vilsack and then offered a higher post-- doesn't know me nor does she read my blog, but this past week, she took the advice I offered her in my July 3 Blog and refused the Obama Administration's job offer, oops I mean an offer from Agriculture Secretary Tom Vilsack. to take a senior level post which had no real power to make cultural changes in an agency notorious for its unfairness to minorities, both inside and outside the Agriculture Department.

Vilsack, his Ag staff, and the White House rushed to demand Mrs. Sherrod's resignation when she was "punked" by a conservative political activist, who placed a story with Fox News, based on distorted excerpts from a speech Sherrod recently gave to mostly minority farmers. Later, even the white farmer supposedly involved in the tale rejected it, noting Sherrod's fairness and virtues.

Rather than calmly verifying this matter, the Admin overreacted to the charges of "Sherrod's reverse racism" and dumped Sherrod. Once its mistakes were obvious, Vilsack and the White House acknowledged the rush to judgement and tried to put Humpty Dumpty back together, offering Sherrod a senior do nothing position which paid well.

I am happy that Shirley Sherrod, last week, rejected the proffer. She'll do more for the nation and her own family by telling her story in the inevitable book, movie, and television offers which will come her way.

The Strange World of GSE Politics

Why would Fannie's regulator, the Federal Housing Finance Agency (FHFA) and its Director Ed DeMarco, figuratively pinch the nipples of his titular boss, Treasury Secretary Tim Geithner, by issuing a report saying that Fannie's losses occurred more on the securities side than the portfolio business. The report came shortly after Geithner called for GSE mortgage portfolios to be wound down but made no reference to their securities activities.

Is that an "in your face" or what, especially from a GOP holdover who--by all rights--should have been replaced long ago when President Obama took office?

For whatever conventional wisdom may be worth when discussing Fannie and Freddie, the cognoscenti always claimed that putting loans in portfolio--where the GSEs booked interest rate and credit risk, while generating greater profits--was more risky than the securitization business, where the GSEs took on only credit risk when they slapped their corporate guarantees on a bundle of loans.

I am still trying to figure out whose agenda this FHFA report serves? (There always is an agenda.)

Near term, it does question Geithner's position. But maybe DeMarco feels that enough mud has been dumped on GSE portfolio lending that he now can focus on blaming their securities business, too.

Or, maybe Mulder, DeMarco was...............!!

Geithner, Redux

I had reason to read Secretary Geithner's opening remarks at the "future of mortgage finance" conference and either he is very "housing naive," which I doubt, or duplicitous/disingenuous.

He talked about getting private capital back in the mortgage finance system as if wishing would make it so, while starring at a mortgage market place--filled with commercial bankers and their mortgage bankers subsidiaries--which will not invest in a mortgage which can't be sold to Fannie, Freddie, or the Federal Housing Administration (FHA).

He knows the only thing these skittish money lenders might respond to is a "big enough" federal safety net, read "subsidies," that will make their lending near risk less. Absent that, they will stay on the sidelines or venture out only if they find borrowers willing to overpay for mortgage credit and cover the inherent mortgage risks that the banks hate to take.

The very banks that Geithner helped fatten with TARP money--and are getting fatter-- all but refuse to lend their cash for mortgages or commercial loans.

The Boehners, Bachuses, and Shelbys--who also crow about getting the government out of the way so the private market can work its magic--know damn well that the banks want and need federal safety nets to do mortgage lending. That makes the rush to get rid of Fannie and Freddie all the more ridiculous since federal support is federal support--whether invested in Fannie and Freddie or given to large commercial banks--and, until their subprime debacle, Fannie and Freddie used their implicit federal relationship quite responsibly.

The Republicans and the conservatives I mention love to throw around the phrase, "The GSEs privatized the gains and socialize the losses." I challenge anyone of them to show me evidence of that behavior, before George W. Bush let Hank Paulson take over the companies and invest cash in them. Neither Fannie or Freddie asked any Administration for a dime, prior to Paulson's action.

That's just more right wing BS that policy makers need to understand and wade through.

FHFA to the Rescue

Throughout my GSE blogging, I have tried to emphasize my belief that the Fannie Mae (and Freddie) from 1983 to roughly 2006, represented the halcyon of limited federal support for mortgage finance, with a huge maximum return to the nation and taxpayers.

But, all of that good work and goodwill quickly evaporated when the senior managements of those companies chased market share and profits buying billions in Wall Street-created and guaranteed "private label" mortgage backed securities. The miserable underlying loans quickly failed, the private "guarantees" were worthless. and both companies plunged into deep red ink, paving the way for the Paulson takeover (which many people still question).

However, with that being the case, I believe that policy makers need to look carefully at Fannie and Freddie before 2007--before the subprime madness--to see what worked and why it did.

The Jekyl and Hyde FHFA recently helped the companies in this regard, when it backed very aggressive efforts by F&F to collect payments on bad loans (those which mortgage originators or borrowers misstated facts in the underwriting process) sold to them by private label issuers, generally Wall Street investment banking firms or large commercial banks.

Keys to the Subprime Debacle

In unraveling the subprime mess and trying to find culprits and causes, policy makers must understand that, not too long ago, the only major conventional loan MBS guarantors were Fannie and Freddie, with Ginnie Mae doing the same for government loans.

The growth of private label Wall Street "subprime" securities changed all of that.

In the context of alerting financial institutions that the government believes they owe F&F money, DeMarco's agency wrote to 64 different mortgage backed securities guarantors which originated, packaged and guranteed loans during the recent lending debacle. These firms employed paid-by-the-loan mortgage brokers to quickly generate tons of loans--most of which soon became non-performing--putting near useless corporate guarantees of timely payment of principal and interest payment on a variety of subprime products.

Fannie and Freddie bought lots of that mess in 2007 and they and their current and former shareholders have to bear those crosses.

But "subprime" (named so, because it was below the Fannie/Freddie "prime" business) was created and brought to the world, literally, by the large Wall Street financial institutions and banks.

Predictably the banks and others are resisting the F&F financial payment demands. But the facts are--despite the hyperbolic and no-nothing GOP rhetoric--the subprime binge is what crushed Fannie and Freddie, not their traditional low income community lending efforts. Successfully getting those "private label issuers" to pay their debts to Fannie and Freddie is an important part of reducing both the GSEs and the federal government's losses.

Again, policy makers should want to understand and appreciate the distinction, between the pre-2007 GSEs and the PLS subprime addicts--the Administration and Congress seek replacement institutions for Fannie and Freddie, which seemingly ignored their own "prime mortgage" underwriting standards when acquiring the garbage loans and securities.

Final Observation Re Banks and Mortgage Lending

To truly replace Fannie Mae and Freddie Mac, an institution or institutions would have to be "in all markets, at all times, good and bad" (paraphrase from F&F charter).

Creating or managing a consistent and reliable market, for any type of lending, can't be conducted by institutions which flee markets when things get bad, i.e. see banks and "jumbo mortgage lending" or just look at the banks, now, with traditional mortgage lending.

Pre-2007, F&F were in every market, all of time no matter how distressed they were, often providing the mortgage as well as economic stimulus to help those markets survive and thrive. (See Texas and Oklahoma in the 1980's and later New England and California.)

"Sunshine" or "fair weather lenders," which many large banks have become, should not be considered as Fannie and Freddie successors unless they sign up to do all of the gritty work that F&F did (before 2007).

Bill Maloni, 8-30-2010

Sunday, August 22, 2010

Not his Finest Hour

Washington DC, in August, is such a quiet place, with fewer crowds, less noise and traffic, and Congress out.

But, no matter how quiescent the town is, in the Internet Age that didn’t help Tim Geithner hide his very weak performance at the Administration’s initial conference looking into the future of the nation’s mortgage finance system, i.e., “How to Abolish Fannie Mae and Freddie Mac."

At least that was my initial reaction to the Administration’s first day of hearings on ways to change and improve on the current national mortgage finance system.

Geithner Shortcomings

I thought Treasury Secretary Tim Geithner labored long and failed, both as a discussion leader and as the top Obama politico.

Geithner missed some golden opportunities. His lame presentation didn't assure the American public (the voters, remember them) that the Obama Administration will keep alive the 30 year fixer rate mortgage and a national mortgage system which supports fairness, efficiency, standardization and modernity.

The Secretary also offered no examples of how the secondary mortgage market did work successfully for 25 years.

This is not about resurrecting Fannie and Freddie, that ghost is gone. It is about the federal government’s future role in the mortgage finance system.

The major pragmatists and housing realists in the first day’s debate were PIMCO's Bill Gross and "the father of mortgage backed securities" Lew Ranieri (God love him), both of whom tried to bring back to earth a series of exchanges that were too technical and lacked meaning for people not steeped in the intricacies of mortgage fiancé, let alone history of the former GSEs.

Federal Government Still Needed

Most discussants—in their comments, their previously provided papers, or op-ed pieces--seem to understand and establish that without the Feds in the market setting standards and establishing mortgage guarantees, in the near term you will have a vastly smaller mortgage market, far less liquidity and a crazy quit of standards and products, none of which is good for consumers or the businesses which hope to serve them.

The mortgage market’s pain and scars of the past three years won’t wear off soon, maybe never. That’s the true backdrop for these meetings, as well as future congressional considerations.

There is no private capital in the market and it won’t suddenly emerge if the federal government—listening to the Wall Street Journal, Forbes and all of the right wing whackos—“gets out of housing and mortgage finance.”

Even the big banks don't want to assume Fannie's and Freddie's mortgage market responsibilities, without the federal government in place to protect the banks’ mortgage investments.

While Geithner’s failure as an effective politico is not surprising, I think he intentionally avoided saying anything positive about the GSEs, instead he noted that nothing which has occurred to Fannie and Freddie since 2008 (the Obama election) is the cause of any problem.

GSEs, the Positives

The Admin has longed viewed Fannie and Freddie as pariah, but it was a paper written by five New York Federal Reserve Bank researchers*—never known as a reservoir of Fannie friends—which established many of the solid contributions that the GSEs made and their huge systemic value. Note: the GSE contributions stopped when they lost their heads and bought billions in Wall Street created and packaged private label subprime (PLS) securities, which still continue to bleed on the former GSEs books.

The Fed employees, ironically former colleagues of Secretary Geithner—who contributed a paper for the current future of mortgage finance discussions (in which they suggest a mortgage co-op to do many of the things F&F did)—at least saluted the GSEs major contributions to the nation's mortgage system.

Among the more notable, the Fed folks hailed GSE mortgage standardization and innovation; the economy of scale the GSEs introduced, lowering mortgage costs for consumers; perpetuating the availability of the 30 year fixed rate mortgage; providing a secondary market for multifamily loans and therefore rental housing; keeping alive and lowering costs of “jumbo mortgages,” after the the big banks abandoned the higher value loans; and –most important in the authors view—creating and maintaining the “TBA” (to be announced) mortgage market where virtually all mortgage loans are created starting with a forward sale of mortgages by a lender to an investor, with the GSEs providing the securitization guarantees.

In my own list, in addition to the above, I would have added huge support for minority homeownership, the outreach to make it happen and national mortgage products and pricing, which allowed families—regardless of where they live in the United States—to secure the same mortgage product at similar prices. Lastly was just plain old national leadership for in an industrial element which is about a fifth or more of our GNP.

Geithner—still the Wall Street banker--could have noted any of these things, but didn’t because it doesn’t go with his script.

Keep in Mind, the Positives

But, serious policy makers—as they seek to replace F&F—should want to maintain many of the virtues the two brought to the mortgage market.

This list of positive contributions should be the standard which policy makers use to identify and implement a successor to the current Fannie/Freddie dominated market.

If critics insist on looking at Fannie Mae in 2007 as evidence of failure then fairness dictates that they look at the 25 years (and certainly the period from 1992 until 2008) where they served the nation exactly as Congress intended,

A fair review also will show that Fannie and Freddie--before their managements went haywire purchasing junk loans--showed that it was possible to finance "affordable housing" and still earn a profit, even operating in a very hostile Bush Administration generated political environment.

The Administration’s hearings exercise will produce a series of policy recommendations and then the Congress will begin serious review of these in 2011, a Congress which could feature GOP control of one or both houses, following the fall elections.

The Fat Lady Isn't Singing, Just Yet

Just because Hill Republicans claim to want to “abolish” Fannie and Freddie doesn’t mean that it will happen or be easy.

A host of Republican leaning business interests want the federal government—and for now that means Fannie and Freddie—in the market and managing the mortgage risk they originate. (Every mortgage, no matter how well it is underwritten, contains future interest rate and credit risk, which somebody has to manage deftly.)

Getting from where we are, with the federal government now touching about 96% of all mortgage loans, via the FHA and the former GSEs, to some other model—especially if the GOP diehards insists on a much smaller federal government presence—it not going to be easy politically or structurally.

This “cluster jam” only is going to become better street theater when Congress thrusts itself into the matter and starts the kinds of bloviating reviews and hyperbole only it can conjure.

Thank God we have Tim Geithner playing “Horatio at the Bridge,” making the nation safe for efficient and affordable mortgage finance. (That last point made with heavy sarcasm.)

Maloni, 8-24-2010

*New York Fed report: A Private Lender Cooperative Model for Residential Mortgage Finance, by Toni Dechario, Patricia Mosser, Joseph Tracy, James Vickery, and Joshua Wright Federal Reserve Bank of New York Staff Reports, no. 466 August 2010 JEL classification: G21, E02, G28, G01

Sunday, August 1, 2010

Hank Paulson, Iran’s Nuclear Work, and Snooki

Is Hank With Us or Against Us?

Good old Hank Paulson, who ever thought that he would be a “houser” or that he would wax eloquently in support Fannie Mae and Freddie Mac, the companies he helped assassinate?

But, there he was on Friday’s Washington Post op-ed page, initially making out like “Horatio at the bridge,” saving the world from the mortgage giants, but then slightly changing his tune and arguing the case for some continued national mortgage finance role for Fannie and Freddie.

Paulson acknowledged the major work the diminished Fannie and Freddie have taken on since most commercial bank and Wall Street money—except that which is funneled through F&F--has run from the mortgage market. (I always wondered while federally insured depositories, which now own most of the mortgage companies and with their big honking FDIC insured deposit subsidy—call themselves “private,” but Fannie and Freddie always were considered “government?” The media, which helps perpetuate this farce, must think the FDIC no longer is part of our government or offers no value added.)

With this op-ed, either Hank’s gone two faced on us or he is waking up to what I’ve been suggesting policy makers are going to realize and that is that the Fannie “model” is not a bad one.

No, I am not even calling for—as Hank does—a possible resurrection of F&F as controlled utilities, merely that you either have federal money in the mortgage market place—which would mean smooth flowing credit and a certain standardization and active securities market—or you would “go Marine” and have only private lenders and no federal money.

The latter would bring the residential real estate market to a near grinding halt. Not even the big banks and Wall Street really want that, even though many claim they want F&F demolished as per Barney Frank’s wish.

Like it or not and understand it or not, Fannie and Freddie—which didn’t create themselves--were the Congress’ creative models for federal mortgage market presence in the disguise of private money or the reverse, depending on which side of the road you stand. For 25 years, they were roaring successes at carrying out their congressionally designed housing mission.

If you want the mortgage finance system to continue to offer the “good” that each company did--and that was ample--policy makers will design a new system which will recreate much of what Fannie and Freddie did (and does), i.e. dedicated national mortgage investor which allow hundreds of local primary market lenders to finance families all across the country—with similar mortgage products and prices. Local lenders then should be able to pass on those mortgage and their inherent financial risks to an entity better able to manage the interest and credit risks.

Nobody who reasons should get blindsided by the phony arguments that Fannie and Freddie, helping low and moderate income families get mortgages, gave birth to their own financial problems nor caused the broader financial services industry meltdown.

That’s line of argument is just standard GOP propaganda designed to deflect dealing with what really occurred, which was piss poor Bush Administration federal financial regulation and craven GSE management, which acquired billions in Wall Street generated private label subprime securities post 2004.

My friend and former Fannie colleague, Barry Zigas, did a nice job of responding to the Paulson piece in his own Huffington Post op-ed, which also appeared last Friday.

I just hope that my pals who are out there on the “abolish the GSEs” ledge are careful, because that could be a disastrous (political) fall if events prove you are wrong.

Of course, if that befalls the Wall Street Journal or Washington Post editorial folks, it wouldn’t be disastrous, just righteous.

Sen. Ben Nelson (D-Neb)

November’s congressional elections likely will cost Democrats seats both in the House and Senate, meaning the party’s tenuous 60 vote occasional “veto proof majority” likely will be lost to GOP gains.

BFDI If it is lost then it’s lost and the D’s—if they stay in charge of the Senate-- just will have to work harder.

However, slimmer numbers and all, if I was Harry Reid (and still Majority Leader in late November), I would move to pitch Sen. Ben Nelson from the Democratic Caucus, the agenda which doesn’t draw too much voting support from Nelson.

National Journal magazine identifies Nelson, based on his votes, as the most conservative Democrat in the Senate, with a voting record to the right of 5 “liberal” Republican Senators. This weekend Nelson announced he will oppose Obama Supreme Court nominee Ellen Kagan, adding to the list of dozens of Obama nominees and initiatives, to which Nelson has said ”No.”

But, challenged by fiscally conservative Republicans, "Maverik" Nelson didn’t back off the hundreds of millions in federal setasides he authorized, which reportedly helped his son’s business clients.

Again, who needs Ben Nelson, since he abandons the party more than he supports it? Why give him “majority status,” plus a chairmanship which goes with being a Democrat, when he votes, looks, acts, and speaks like a Republican. (“If it walks like a duck, talks like…!?)

Nebraskans are entitled to elect whomever they want, but the Senate Democrats don’t have to accept that person in their Caucus.

Come on Harry, prepare to show some!

A Muscle Not Used Becomes...

The United States hasn’t employed a truly major stealth pre-emptive military assault in years. When we have donesomething big (invasion of Kuwait and later Iraq), we’ve usually telegraphed the move to both intimidate the enemy and allow non-combatants to avoid combat areas.

In an article in yesterday’s Washington Post Outlook section, former Clinton and Obama national security advisers, respectively, Steven Simon and Ray Takeyh, asked whether President Obama ever would move militarily against Iran’s nuclear facilities and under what circumstances?

They didn’t answer the question about such a sudden strike, merely asked the question and noted all of the problems from unhappy allies, UN opposition, domestic political angst, and possible negatives among our Middle Eastern Muslim state allies (where significant US military facilities exist), which would flow and need managed.

Now a military assault against Iran’s nukes and the, likely, resulting ground hostilities requiring some US “boots on the ground in Iran,” would give some short term political gain to Obama (maybe more), from the US Right and grief from some on the US Left.

That act likely would generate public anger from all of our “traditional” allies, save Israel.

How many of us, privately and not so privately, have said, “Screw the (name an "ally"), it’s our world that’s being threatened?” (Would this be an appropriate moment to mention that most French tanks, reportedly, have five reverse gears and one forward, the latter being just in case French forces are attacked from behind.)

When “nothing if off the table,” as the President claims with Iran, then nothing militarily really should be off the table. A pre-emptive military capacity never used in stealth allows that muscle capacity to atrophy from non-use.

No Administration should allow that to happen.

The world and our enemies never should think that we would fail to use any weapon in our arsenal, including the atomic ones, should the threat to our nation warrant it.

Snooki Polizzi and President Obama

Last week, while in a doctor’s office magazibe reading and waiting for a test men hate, I learned who New Jersey’s Nicole “Snooki” Polizzi is. Two days later, I saw a picture of a very inebriated Snooki, being hauled by a friend from some New Jersey beach scene and reading that Snooki had been charged for public intoxication or whatever they call it in New Jersey, the state where “big hair” never has gone out of style.

Television reality "star" Snooki—who once was arrested for selling alcohol to minors, including one who died that night in a traffic accident, and who is studying at a local community college to become a veterinary technician--apparently doesn’t like President Obama and will repeat her presidential disdain on the opener of her “Jersey Shores” TV show.

Let’s see Snooki or President Obama, Snooki, President Obama, Snooki, President Obama…?
Sorry Snook, you lose. I have a feeling that your “15 minutes of fame” soon will be up.

Maloni, 8-2-2010