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


John M said...

Hi Bill,

Have you checked out young Anna Katherine Barnett-Hart yet? A year and a half ago, as a 23 year old undergraduate, she published an astonishing Harvard Honors Thesis that nailed just how stuffing those private label subprime mortgages into CDOs helped torpedo the banks in '08.

Bill Maloni said...

Will do so first thing.

Thanks, Maloni.