Sunday, September 26, 2010

Congress: Put It Back, Because It Works!

(Excerpt from recent email I sent to friends planning a golf outing: ”Sorry can’t join you, but since so many of you paid for your kids’ college education earning money fighting Fannie and Freddie, I hope to give you a chance to do the same for your grand kids!”)

Why do Fannie and Freddie reform issues galvanize the Congress and some issues don’t? All together now class, “Politics.”

No surprise there. Being “being for or against something”--with a lot of buzz, glitz, and emotion to it-- drives legislative bodies. But so what? That’s a major component of our democracy and few would have it any other way.

Despite the politics, I hope I can generate some self interest/logic in this blog and appeal to congressional D’s and R’s--so deeply mired in their respective anti-GSE worlds--to reconsider their positions based on their own political self interest as well as practicality.

If it chooses, in a few months, Congress can fix the nation’s mortgage finance system by resurrecting Fannie and Freddie, with some substantive regulatory changes to ward off future excesses. It’s a working model—almost two years after “conservatorship”--with which American consumers, lenders, Realtors, Homebuilders are familiar and which works.

It’s a model that is needed right now given the reluctance of traditional commercial bank lenders to lend or certainly invest (keep on their balance sheets) in mortgage securities which aren’t Fannie or Freddie guaranteed.

Get Real and Get Practical

In testimony to its resiliency and appeal, it’s the system currently financing @ 90% of all conventional home lending, despite the fact that the two companies are operating with Treasury Department chains on them.

I suggest that congressional anger and bloodlust is phony. It mostly is externally generated and misdirected. It has been totally manufactured and falsely aimed at two institutions which—if reasonably regulated—provide the nation with a far greater bang for your legislative buck than starting de novo and grinding through what will be months of fighting with friends and foes alike over the shape the national mortgage market.

Naturally, most in Congress eat it up with both hands and would have trouble explaining their position with pages of talking points.

Both political parties, rhetorically, are pretty high on getting rid of the GSEs or dramatically restructuring them. But there is little agreement on how and general consensus that replacing them with nothing—save what’s in the market or works overseas--invites financial and broader economic disaster, no matter what American Enterprise Institute’s Peter Wallison claims. (In a recent Bloomberg article, Wallison calls for more private label securitization, “covered bonds”, and the “Danish Plan” as GSE successors. Watch for my response, Peter.)

But this won’t stop either party from trying and wasting much time on windmill tilting and political theater.

Unless someone follows my suggestion, expect a 2011 filled with political fighting, fatuous hyperbolic statements, perpetuating ideological myths, pandering to this or that interest group and generally doing a lousy legislative job with an inevitable untried Rube Goldberg “fix.”

Pre & PostSubprime GSEs

As I’ve argued (at the end of the blog, see a link to my interview with Fox News business reporter, Gerri Willis on this issue), I believe that policy makers should draw a distinction between F&F post-2006 (BAD!), when they began to acquire billions of dollars in Wall Street created private label subprime loan securities, and the pre-2006 companies (GOOD!), which performed very well, even when they had to finance 55% of all of their business for low, moderate and middle income families, as a result of excretive fiat first from the Clinton team and later the Bush administration?

The unrealism of the new GOP “Pledge” with Newt, the Tea Party, or whomever it is aimed, contains more tax cuts for the wealthy, homilies about balancing the budget and cutting federal expenditures, but little substance about how they would do anything about deficit spending.

What era as these folks living in and why do they think the American public will swallow the Bush/Gingrich recipe, a second time, when it failed miserably the last time the GOP tried pulling it off?

Can’t Republicans remember back just 10 years ago when George W. Bush did this dance and helped put Americans in a multi trillion dollar budget hole? Sadly for the nation, it came on the heels of Bill Clinton, with then OMB Director Frank Raines (applause!) and his then deputy Jack Lew, gave the nation two straight balanced budgets with surpluses?

The “Pledge” is filled with simplistic proposals, i.e. “Reform Fannie and Freddie”, meaning do away with them, but very few specific. Even Bush former Treasury Secretary Hank Paulson--who led the GSE takeover--would maintain F&F but in a different structure.

I’ll make a bipartisan case why, at least regarding the former GSEs-- now captive--of the US Treasury, the correct policy should be to allow them to move forward, repaying the federal government the money invested in them since 2008, and remain the foundation of the nation’s mortgage finance system. In it, the two exclusively inhabit the secondary mortgage market, buying and securitizing loans made to consumers by thousands of lenders across the country.

Recent Problems Caused by GSE Greed and Poor Regulation

Despite the very successful PR campaign against the companies, shaped and driven by their business, ideological, and political opponents, the GSEs major mistake was acquiring all of that subprime mortgage crap in 2007-2007 and then losing billions when it spoiled and died. Few errors--save in the view of ideologues--were made when they operated traditionally and carried out their congressional low-income missions.

But they hardly were alone. They were joined in the grievous error by every large American investment bank, commercial bank and international mortgage investor. The GSE failures weren’t unique to GSEs.

Not a financial regulator in Washington, not the Fed, Comptroller, FDIC, OTS, SEC or certainly OFHEO (the GSE regulator now called FHFA) saw it coming or did anything in time to stop the excesses.

But sellers need buyers and the buyers all around the world were blind to the threat, also, ergo the failures of investment banks Merrill Lynch, Bear Stearns, Lehman Brothers, and commercial banks Wachovia and Washington Mutual, as well as many other smaller institutions.

AIG, the massive insurer and re-insurer, was another huge failure, but the government has given it a lifeline and kept it functioning.

Don’t Conflate The Issues

It is the pre-2006 Fannie Mae/Freddie Mac which Congress should examine and decide if what the nation was offered then is good enough to perpetuate it, with appropriate regulatory changes to make sure “sub prime” or its equivalent never happens again and corporate earning are reasonable given the “new GSE” tasks.

I am not suggesting that Fannie and Freddie be absolved. But, they did what everyone else did, but more importantly they violated the rule most of our mothers warned us against, “Just because every other kid in the neighborhood wants to jump off the bridge, that doesn’t mean you need to follow them!”

I believe that pre-subprime, Fannie Mae and Freddie Mac were the foundations of our efficient modern mortgage finance system. Better regulation—insuring no more subprime purchases or their equivalent—and some control of earnings,prices, and size of affordable housing mission, would be a far better public policy answer than what I see emerging in the next two years with political warring in Congress, partisan positioning and angry vitriol to set up the 2012 presidential elections.

Also, at the end of this blog, I’ll post a piece by Karl Smith a faculty member of the University of North Carolina’s School of economics, titled “Fannie and Freddie Acquitted.”)

GSE Business Realty

The irony right now is that housing markets—filled with reluctant commercial bankers and still ravenous Wall Street—still rely on Fannie and Freddie, because none of the commercial banks want to get into a game where booking mortgage loans means taking on interest rate and credit risk, absent a Fannie or Freddie guarantee.

So, as my “mortgage fantasy” ends, let me describe my dream, with a congressional assemblage of Speaker Pelosi, Minority Leader Boehner, Barney Frank, Paul Kanjorski ,Spencer Bachus, Peter King, Scott Garrett, Jed Hensearling, Tim Johnson, Jack Reed, Chuck Schumer, Dick Shelby, Mike Crapo, and Barack Obama—suborning politics for smart policy making—cluck clucking, while they point to the current GSE leaders and declaring in unison (with only Shelby and Hensearling moving their lips but not uttering any words). Shh, cue the ethereal music.

"You really screwed up with those subprime purchases and we insist that you pay back the federal government.

"But, you also brought huge systemic value to the nation’s homebuyers, Realtors, lenders, and homebuilder, with sureness, cash availability, standardization, market efficiency, automation, creative products, the 30 year fixed rate mortgage's certainty, applicant equality, and all the jobs which flowed from that attendant economic activity.

"Although some of us still &^%$#* dislike you for reasons we can't intelligently articulate, our new plan is to “free you,” regulate you more tightly and limit some of your prices and profits.

"We agree to this out of pragmatism and because we know the unreliability of commercial bank interest in undertaking large scale mortgage lending, let alone insuring that some (percentage to be decided) lower income families need additional mortgage help. We also know that the only other source of the necessary financing to carry our nation’s mortgage finance system is Uncle Sam and nobody wants that.

"Ergo, reluctantly we swallow all of those horrible things we said and give Fannie and Freddie a real second chance to work more like they did before senior managements, made the disastrous 2006-2007 private label subprime and Alt A purchases.

"We want to reprise a time—before the subprime financial orgy—when you were a positive force steering innovation and efficiencies and keeping consumer prices down."

OK, so I laid it on thick, but I also strongly believe that beyond eating some crow--and understanding the political and market realities--little needs to be done to restore real estate market sanity and equilibrium. Many of the GSEs former business opponents would agree, especially given their cloudy fate in an unknown successor.

New market regimes take years to evolve.

Almost everyone who cares knows how to relate to the current national mortgage investor's presence. In the current rotten economic and political environments, the chances of doing solid policy change are unlikely. The likelihood of wasting two years is manifold.

I believe the Congress—if it objectively examines the issues—looks at the increasing supply of reports and data, which show how the 2007 financial debacle occurred and who started and perpetuated it, will reach the conclusion that the current mortgage finance system--with his 7000 or more local lenders and two giant competing secondary mortgage market investors--provides benefits that consumers, builders, Realtors, and lenders seek and like.

Fannie Mae and Freddie Mac. They Worked!

Maloni, 9-27-10


--Maloni Fox Business News interview.

Link to video:
© 2010 FOX News Network, LLC. All rights reserved.

--Karl Smith paper.


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