Sunday, December 12, 2010

Tax Deals and Oinks!


The Obama GOP Tax Deal


I am disappointed, but will withhold my final opinion of the President Obama’s willingness to extend all the Bush tax cuts, which at least he packaged with additional unemployment compensation for the jobless.

Barack Obama might be a seer, but he easily could be a GOP foil who was snookered.

No, it doesn’t make sense during a recession with high unemployment to take money out of the middle class’s hands, but the highest earning US tax payers don’t need greater tax benefits.

Therefore, the key for me in evaluating how good this deal is for the nation won’t come until next year, when we see—in return for the President’s tax package endorsement-- how much the GOP works with the Democrats in 2011 on deficit reduction involving historic GOP sacred cows, i.e. agriculture subsidies, business tax breaks, Pentagon weapons systems, etc. etc.

I am politically uncomfortable with how quiet the GOP has been since President Obama announced his acquiescence to the extension package, which White House and some D’s call an “economic simulative.”

But, anyone who ever has negotiated, played cards or figured out the answer to a difficult puzzle--before anyone else--knows how much you want to announce your good fortune on your own terms.

I think the GOP has been flabbergasted how easy and how much they came away with in its negotiations with the White House: a two year across the board delay in tax cuts; a large estate tax “safe harbor” and a reduction in the estate tax rate; and other enhancements to business tax breaks.

If the R’s said anything now, it would sound like a victor’s chortle. That’s the stuff NFL referees call “excess celebration” and throw a yellow flag.

A round of GOP high fives also will encourage opposing Democrats to dig in their heels and stop final action, which still is needed before the end of 2010.

But for now, despite the Administration rhetoric, President Obama continues to look directionless and in need of a backbone, which is not what most of us who campaigned and voted for him in 2008 thought would be the issue two years after he was elected.

What’s Up with Wells??

“Oink, oink,” said the big bank, “Oink, oink.”

In public comments on proposed federal regulations, Wells Fargo Bank is out to get rid of consumer loving low down payment loans (and the MI industry which exists to support those small money down arrangements) and—separately--suggest that Uncle Sam create a new secondary mortgage market structure which would—despite all the banking industry’s talk about returning “private capital to the mortgage market”—still has the federal government on the hook for risky mortgage finance, which I assume the big banks will provide.

“Oink, oink,” said the bank……

Wells has taken an extreme position on what it believes is a lower risk “qualified residential mortgage” (QRM). Federal regulators need to define this term in the context of what constitutes riskier mortgage loans, as per this year’s Dodd/Frank bill.

The idea is the riskier the loan the more capital needed or more of the loan itself, lenders would have to keep on their books. The still-to-be-defined criteria will constitute the elusive “skin in the game” element regulators believe lenders must have to make them safer and more responsible.

The industry agrees on the general point, but Wells is freelancing away from the herd and hoping that a “QRM” should have at least a hefty 30% of the sales price as a down payment.


Many smaller lenders believe—if Wells convinces the Administration on this large a down payment--middle income borrowers and their mortgages will be left behind, while Wells and other lending behemoths skate on capital and risk because they made “jumbo” loans to people who usually can and do put down more than 30%.


It also hasn’t escaped most of the smaller lenders—which compete against Wells-- that those higher down payments are not uncommon on large “jumbo loans” where borrowers generally move out of expensive houses into more expensive houses, thereby making it much easier to come up with a major down payment lowering the effective loan to value ratio (LTV) of the mortgage and—in Wells view—making additional (and costly) bank insurance/protection unnecessary.

“Oink, oink, oink……!”


Wells, Again

Several weeks ago, Wells Fargo also weighed in on what the successor national mortgage finance system should look like, if Congress decides to limit, diminish, or totally disassemble Fannie and Freddie.

It was Wells idea, which they then submitted to the Obama folks, but it also was advocated by the Financial Services Roundtable and its Vice Chairman John Dalton.

I critiqued the Dalton (and Wells position) in October, noting that their scheme still relies on “federal reinsurance,” which means Uncle Sam still is on the financial hook, no matter how much the banks claim their plan will attract “private capital” (which banks' FDIC deposits is not!).

The proposal also may be redundant, because it looks mirrors powers banks have now to issue “private label mortgage backed securities,” which—in my October review--I reminded all was the major element in the 2008 financial meltdown.

Another day, another oink at the trough!


FHA Versus FHFA (Fannie and Freddie)

News broke this week of an internecine struggle between Fannie’s regulator, the Federal Housing Finance Agency (FHFA), and HUD’s Federal Housing Administration (FHA).

The dispute is over whether Fannie and Freddie should join in the FHA’s new underwater mortgage restructuring program, which would rewrite “performing” conventional F&F loans—coming from F&F--where the principal is higher than the home’s value but the mortgagor is paying their note. These formally non-government insured mortgages would then be turned into new government insured FHA mortgages with lower interest rates and principal amounts.

Normally that would make sense and show inter-government cooperation but—like it or not—the federal government is running the former GSEs in a “conservatorship” mode, which means nobody should knowingly leap into an arrangement guaranteed to produce losses on restructured conventional mortgages, meaning more guaranteed red ink for Fannie and Freddie.

The losses can’t be hidden, the ‘hot potato” has to rest somewhere.

That is not “conserving” corporate assets and likely would open the companies’ conservator to legal actions from somebody, if not the existing common and preferred shareholders.

The FHA push, which must be coming with the blessing of the Treasury shows that a near term positive for mortgagors could hold long term financial damage for the former GSEs, with Uncle picking up that tab. I hope soon to be Senate-approved FHFA Director Smith realizes that conserving Fannie and Freddie assets is one of his core objectives.
The frustrating thing here is that I believe that F&F can do a much better job than others in the general restructuring of underwater loans, but to help the FHA they would be sacrificing themselves.

(Also, see Gretchen Morgenson’s Fannie-Freddie column in yesterday’s NYT Business section.)

GSE Cutbacks

BTW, the rumor of thousands of jobs leaving the former GSEs is more about how contract employees have been classified as “Full Time Equivalents (FTEs).” So, when it is reported that Fannie and Freddie will shed thousands of positions, that news gets means losing lots of recently added “contract” FTEs.

It may be a distinction without a difference, but both companies, after 2008—especially Fannie—ballooned their ranks with contract employees and most of the early 2011 departures will be these superfluous jobs. But, they won’t be the last, as both managements try and save major overhead costs.

Sr Championship Post Script to Last Week

Here is why we are lucky that FIFA chose Qatar and the Russians to host the next two world cup soccer championships.

http://news.blogs.cnn.com/2010/12/11/memorials-for-slain-soccer-fan-turn-violent-in-russia/

Too Delicious to Ignore

"But obviously, we've got to stand with our North Korean allies." --Sarah Palin, after being asked how she would handle the current hostilities between the two Koreas, interview on Glenn Beck's radio show, Nov. 24, 2010.


Maloni, 12-13-10

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