Sunday, January 2, 2011

Some Thoughtful New Year Non-Legislating?

Happy New Year to all and my best wishes to you and yours for a healthy, happy and successful coming twelve months (which—just like 2008--could see the Pittsburgh Steelers and the Pittsburgh Penguins, once again, reach their respective championships in the Super Bowl and Stanley Cup).

That’s the way, uh huh, uh huh, I like it, uh huh, uh huh!!!

A Fresh New Perspective?

The 112th Congress gets sworn in on Wednesday and it might have some pleasant surprises for the “housers” among us.

Waiter, put a hold on that order to abolish the former GSEs, recently put in by Barney Frank (D-Mass) and others.

It seems the “new GSE sheriff in town,” among the Republican leadership on the House Financial Services committee, believes it is impractical to push major mortgage structural changes, until the current real estate market settles down and is given a chance to return to some historical normalcy.

That might not occur for two years or so, acknowledged New Jersey Republican Scott Garrett, the incoming chair of the Financial Services Committee Fannie/Freddie subcommittee. (Months ago when discussing the possible GOP recapture of the House, I noted that Garrett was the smartest of his House committee colleagues re GSE issues.)

Obviously, if the market returns in that time frame providing the desirable foundation, we will be in the middle or have had the 2012 presidential and congressional elections.

IMO, Garrett already has indicated a more thoughtful approach to legislating than many of each colleague on both sides of the aisle.

More Dramatic Action?

Two years of “peace”-- while both political parties and the Obama team accommodate themselves with Fannie and Freddie in their “conservatorship” prison and with the strengths and foibles that arrangement offers--could be the interlude necessary for the Congress and policy makers to examine what they have in Fannie and Freddie and get practical.

Stated simply, as I have tried to do for two years, I believe the nation is better served by a better regulated Fannie and Freddie—with some low/mod financing mandate—than any other secondary mortgage structure Congress could create.

Once you get by all of the blame and finger pointing produced by the 2008 trauma, you see a smoothly running system which brought benefits near identical standards across the nation to consumers, lenders, mortgage investors, and yes, to Fannie and Freddie, but hardly egregiously so to the latter, given the responsibilities Republican and Democratic congresses and administrations put on both companies.

For a moment, policy makers should set aside the GSE subprime action, i.e. large purchases of Wall Street issued private label securities (PLS) most of which failed, since that occurred to hundred of mortgage investors and securities companies throughout the world.

Because of the disastrous nature of poorly underwritten first mortgages and corporate guarantees which did not provide investor protection—in part because of specious “ratings,” handed out with no real analysis—new rules have been or will be in place throughout the federal financial services regulatory world to insure that won’t happen again (at least we hope)!

GSE Myths Beyond Subprime

But, it is unique secondary mortgage market issues beyond subprime origination or acquisition that need to be examined.

First off, let’s try abolishing some myths to make the policy making terrain more even, like “the GSEs made profits and had a public mission.” The suggestion being that for 20 years or more Fannie and Freddie used their implied government status—not made explicit until the Bush takeover in 2008—to make profits.

That mechanism—blessed for 40 years by Democrats and Republicans alike is what kept the two companies off the federal budget and paying for themselves, until Hank Paulson’s takeover in 2008.

Hello, why is those critics fail to apply the same “making profits” standard to banks which benefit hugely from the government’s federal deposit insurance subsidy that brings trillions of dollars in low cost working capital (what are you receive on your checking and savings account) into commercial banks coffers?

The banks’ cost of funds—because of FDIC insurance, which has never been fully paid for by banks—give banks a much lower cost of fund (thanks to Uncle Sam) than Fannie and Freddie ever enjoyed. But, one never hears a peep about that, except for the bank defenders who insist of calling those banks “private” despite their hulking federal subsidy benefits.

Goose and gander. At least in F&F, the public got a huge amount of middle income families getting mortgage finance and enjoying the benefits of home ownership.

The latter came about because banks and other lenders refused to do massive low income/minority lending and the federal government, via statutory housing production goals, required Fannie and Freddie to use market forces to mandate that desired lending.

A World Without the GSEs

Some D’s and R’s would just do away or “abolish” Fannie and Freddie and let “the private market” pick up the pieces.

What would that look like? Well, we have a handy living example of that situation, it is called the conventional “jumbo” mortgage market, where Fannie and Freddie cannot compete for that product. For those still learning the rudiments, the “conforming and non-conforming mortgages” (the latter being “jumbos”) refer to the federal law which establishes which loans the former GSEs can acquire or securitize and which are the exclusive province of banks.

That “jumbo” world, with no GSE competition largely becomes an adjustable rate mortgage (ARM) world, exclusively, with fixed rate mortgages generally carrying higher cost to borrowers.

Banks don’t like to originate and hold fixed rate mortgages (FRM), because of the additional interest rate risk, unless they can sell them to Fannie and Freddie.

In a world without the two government-related mortgage investors, what would the banks do? They likely would offer only ARMs on the public or charge outrageously for FRM.

Think about it.

More Fannie and Freddie

In a brief continuation of last week’s pushback against the “FIRC Four,” the GOP Financial Commission members who claimed all things bad in 2008 were the fault of Fannie and Freddie, here’s another column about perfidy for your consideration.

While I am at it, I also want to add a link to the Washington Post’s review of the McLean-Nocera book, “All the Devils are Here,” in which any suggestion that the former GSEs were the cause of the 2008 financial meltdown is thoroughly rebuked (although they do not find Fannie and Freddie blameless.)

Maloni, 1-3-11


Anonymous said...

what are your thoughts on the BAC settlement with the GSEs?

Thank you for a great blog!

Bill Maloni said...

Looks great for the bank and--while Fannie still can come back at them--it looks like Fannie settled cheap.

I still look for Fannie and Freddie to be profitable 18 months to two years from now, if they can get Treasury to remove that 10% dividend albatross from their necks and just make it the same 5% the big banks paid.