Sunday, October 3, 2010

Successors to Fannie and Freddie?

Peter Wallison is a “GSE gadfly,” who has maintained a constant anti- Fannie/Freddie drumbeat for the past several years, often asserting that most of civilization’s problems begin with the existence and practices of the two companies. (Hmm. “Gadfly.” Proof that I am mellowing? I am sure that in my “warrior years,” I called Wallison much worse.)

To his credit, Wallison’s writings were an asset to the “hog tie the GSEs” crowd, although his musings never were truth filled.

Wallison’s Reagan Treasury and Reagan White House experiences give him a veneer of credibility with conservatives and he still is peddling snake oil, most recently in Bloomberg, where he suggested that—after chopping off Fannie’s and Freddie’s head-- the nation could replace them with a system that featured a combination of private mortgage securitization (private label securities), covered bonds, and employing the “Danish system” of refinance, which is not about pastries.

PW now is working out of the American Enterprise Institute (AEI).

Will/Can it Work?

There are no “bad ideas” about our future when it comes to new ways to finance mortgages, even Peter’s. I just don’t think his suggestions will improve or even equal the current system, which would run more efficiently if the Administration took its foot off Fannie’s and Freddie’s necks.

As noted, I don’t think Wallison’s scheme could match the secondary mortgage market systemic benefits which F&F continue to offer, even in their weakened state.

For success, the Wallison plan would need instantaneous and total acceptance from the public as well increasingly skeptical institutional investors. Whether they are amendable or not, it’s the institutional buyers who Wallison would have purchase copious amounts of bank issued “covered bonds” and private label mortgage backed securities to finance tomorrow’s consumer mortgage lending.

Let me start with the most obvious “private label securitization,” which has been around for 30 years and the development of which Peter says has been squelched by the presence of F&F’s own securitization of prime mortgages, turning those into mortgage backed bonds for efficient sale.

Peter, good Lord man, where have you been for the past five years?

Your “private label” friends on Wall Street introduced nearly a trillion dollars of private label securities (PLS)—which you believe should be encouraged and enhanced—and it nearly brought down the world’s financial systems and ushered in another Great Depression.

It’s not that we don’t have enough PLS, we’ve had far too much and most of that worthless.

From 2005 through 2007, mega billions in “subprime” private label securities were hatched by the big investment banks and large commercial bankers, rubber stamped by the rating agencies, festooned with worthless corporate guarantees, sliced, diced and sliced and diced, again, as wall Street figured out ways to sell and re-sell the same bonds and their hedges.

After the recent avalanche of PLS failures, IMO, the device Wallison wants to be the rampart of his three legged Fannie Mae and Freddie Mac replacement, would be a shaky foundation on which to rest our nation’s mortgage finance system.

Can Americans Trust those on Whom Wallison Would Rely?

The losses from “private securitizations” still are coursing through our national and international markets and Wallison says “Do more.”

“Fool me once, shame on…..” Will the Congress and the public trust or have faith again in the investment banks, large commercial banks, and rating agencies which were most responsible for the horrendous 2007-2008 financial meltdown?

I don’t think that big dog will hunt on its own for a while, Pete. Dressing it up, in some red, white and blue would help.

Good luck on selling the American people on the “Danish system,” which allows borrowers to buy back their mortgage debt-- once they have 20% equity in their homes—if rates move in an advantageous direction for homeowners.

Homeowners’ equity indeed has risen but it’s more because of changes in the measurement’s components than appreciating property values.

For success, try changing the name and calling it the “Michigan Plan” or the ”Pennsylvania Payoff.”

Americans like their own institutions and although not totally xenophobic, they believe that “Made in America”—not Denmark--is the right way to go in mortgage finance, including the all important 30 year loan.

But keep pushing the “Danish system,” since I am sure the House Republicans would welcome with open arms a dash of overseas financial gusto for their “Pledge” manifesto.

(I just can see Jed Hensearling (R-Tex) telling John Boehner (R-Ohio): “Sorry Leader Boehner, I can go for the Pledge's public flogging, trial by fire, and the branding stuff for deficit spending, but to hell with this Danish financing. 'Daneland', isn’t that close to France? And you know all about them Frenchies, don’t you?”)

Peter’s last suggestion, as a way to get rid of Fannie and Freddie and keep the government out of housing finance, is to give the banks still another chance to “help” the American people with “covered bonds.”

These debt instruments are a little like a mortgage backed security and a little like a straight corporate IOU, in that a bank raises money with a security backed by assets (the mortgages), sells shares in it and keeps some on their books as their “skin in the game.”

These are popular in Europe and were very popular a few years ago with the Washington Mutual Bank or WAMU, another major financial casualty of the subprime mess (the failure of which didn’t relate to “covered bonds.”).

How Much $$$$ Can They Raise?

A covered bond might draw some money into banks, but how much and from whom? These aren’t Mom and Pop “Christmas Club” accounts. Getting ready acceptance from that same frightened and squirrelly bunch of institutional investors, who you also want to buy PLS, may not be easy.

The amount of money that a bank lends for housing finance largely will be influenced by how much they raise in bond proceeds.

As with any new structure, there might not be enough investor interest in covered bonds—not a uniquely American product either and somewhat ‘clunky”—to finance $1.5-$2 trillion in mortgages?

That is a modest total compared to what mortgage demand might be when the economy and jobs comeback and the financial markets heat up.

Can our secondary mortgage market rely on unproven products which may have inherent limits or are so star-crossed that they may never appeal to funders?

Banks Are Private, Aren’t They??

Peter is one of the American Enterprise Institute’s in house warriors, with limitless faith in the “private sector.” He’s convinced that the nation doesn’t need the federal government in housing and the sooner Uncle gets out, the better for all right thinking Americans.

I wonder if Peter and his AEI soul mates ever will address the fact that his “private sector banks” aren’t really private and are heavily subsidized by Uncle Sam with deposit insurance—for which they never have paid enough and for 10 years didn’t pay anything—and enjoy access to low cost federal funds at the Federal Reserve window or the Home Loan Bank Office of Finance?

Given what they pay for us deposits, how many banks could raise $100 million, if they didn’t have that Federal Deposit Insurance Corporation (FDIC) seal on the door? My answer is very few, without setting off a rate war reminiscent of the 1970’s and money market mutual funds vying for bank deposits.

As blog readers know, I think Congress needs to reconsider extending Fannie and Freddie, because of all of the strengths they bring to the system, its professional users and the public.

This example best was demonstrated before Fannie and Freddie engaged heavily in acquiring private label subprime loans and Alt A mortgages.

The 2011 legislative atmosphere looks poisonous: a still recovering economy, with high unemployment; commercial bank reluctance to make or book mortgage loans which aren't F&F securities; the national political parties—not to mention the Tea Party--creating a bloody political terrain for the 2012 elections; and the possibility that next month’s congressional elections could bring a GOP majority to House or Senate (both?).

If the two parties really want to achieve a legislative national mortgage finance "fix," the proposal needs to be simply constructed, easy to understand and effective.

Kick the Tires Again on the GSEs

A bipartisan agreement on new regulation of F&F--with limits on their growth (and profits), and insures no more subprime dalliances--saves valuable time and would allow Congress to get back to policies which improve the national jobs picture so the country can move forward again.

Before throwing the GSE babies out with the bathwater, Congress needs to examine the basis for its Fannie/Freddie hostility and what it owes the American people regarding mortgage finance. The GSEs work, still financing more than 90% of US conventional mortgages, while wrapped in their Treasury Department “conservatorship” chains.

Even Hank Paulson, who drove the 2008 Fannie/Freddie takeover, would keep them alive as “well regulated” utilities.

Peter Wallison and other GSE critics might be more successful, if their proposals for a new mortgage finance system looked to the GSEs for what they did well and build on that, rather than coming up with a de novo mortgage financing scheme—which by definition—will require a long slow and choppy break in period.

The American people can have and deserve better.

Rick Sanchez

I feel sorry for CNN’s Rick Sanchez. I can’t countenance his “perceived” anti-Semitism (I don’t know him so I can’t affirm it either), but to be a network anchor and still carry around the neurotic lack of self confidence which made him strike out at Jon Stewart and Stephen Colbert is what’s sad.

Sanchez would have been better responding in kind and sending up the Comedy Central duo—much as they did him--than going off on Jews controlling all media.

I expect that Sanchez will land at another network and hopefully be wiser for this experience.

Rand Paul, Meg Whitman and Carl Palandrino

Three people for whom I don’t feel sorry!

Maloni, 10-4-2010


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Bill Maloni said...

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