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 fiancĂ©, 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


Anonymous said...

You said that Geithner has been considering "How to Abolish Fannie Mae and Freddie Mac" and replacing them with the big Four financial institutions. But him and his advisers know very well that these institutions will not be able to handle a space left by the GSEs, do you think their competitors will want to sell them all their loans? Besides, it will take them years to fill in the MBS business gap, these institutions are not better than the GSEs. At this point it makes sense to consider resurrecting the GSEs as an alternative.

Bill Maloni said...

I'm not sure that I ever stated the issue as you have me doing so.

I believe that Geithner and some other would like to replace F&F with something which could perform the Fannie Mae functions, but too many people right now disagree on what that should be.

Leaving F&F in place is almost a politically non-starter, since so many people on both sides of the aisle--plus many in the media--have made the two pariah, it would take a brave and very strong public official to make the case for resurrection. Although, I can think of two people, President Obama is one and the senior Senator from New York the other, who have the capacity to make that case.

The banks (and their mortgage banking subs) will sell their loans to any institution which allows them to stay in the mortgage business and transfer their mortgage risk to another investor. Fannie and Freddie did that superbly, before they crapped on themselves with the PLS subprime purchases.

There is no good market reason why they couldn't do so, again. If Congress, in its grappling for a solution, chooses one or more large banks to play the GSE role, trust me, all of the other banks will send their mortgages to it/them.