Sunday, March 13, 2011

Five to Seven Years

Okay, so a Middle Eastern foreign policy wonk I’m not. But, at the end of last week, I had to get myself on the record with my views about Libya and our President’s caviling. Maureen Dowd’s column in Sunday’s Times kind of put me in my place and settled me down.

I have a more traditional comment about another overseas development. All hopes and prayers go to the Japanese people and government trying to manage the horrible results of the massive earthquake and Tsunami which hit their nation.

The words “fortunate” and “Japan” don’t easily go together. But, had the earthquake been closer to Tokyo—with the resultant Tsunami--the death toll and massive destruction would have been greater just because of the more dense population and supporting infrastructure systems.

As it is, I am sure the current estimated 10,000 casualties will grow much higher in coming days.

There also is a tragic irony Japan being the first nation struck in war by an atomic bomb now facing additional tragedy from radiation leaks caused by damaged nuclear power facilities, which the island nation employed to make their lives easier.

Fannie and Freddie

Some months ago, writing about the former GSEs and possible legislative changes, I speculated that-despite all of the angry “abolish them” rhetoric from both parties—it would take Congress five to seven years to complete any structural transition to a new national mortgage finance system.

Now I see the same “guesstimate” in articles and commentary, everywhere.

I’d like to think that I first identified and coined that epoch but I suspect I wasn’t.

Nonetheless, whether I am a seer or I’m one (of many) who better understands the difficulties facing policy makers and Congress, I thought I might try and establish a case for why it might take 60 to 84 months for this odyssey to end.

The Congress

First off, the Congress never does anything quickly, especially if the issue is complex, has lots of moving parts, and involves something beyond mumbling the buzz words du jour.

If there is a shift away from Fannie and Freddie, public officials and the media will need to confront—hopefully fairly—most of the following major issues and build a political consensus to remake the nation’s mortgage finance system and infrastructure. (Again, the following is not an exhaustive list, so I invite readers to share your own with me, in the “Comments” section or elsewhere.)

Politics, 30 year fixed rate mortgage, fair lending, lower income families, securities market, monetary policy, Wall Street, “Too Big to Fail,” billions in overseas investment, “the American Dream,” 2012 congressional and presidential elections, rating agencies, the SEC, “the economy,” bank structural problems, control of Congress, bank mortgage lending history, Republicans control the House, Democrats have the Senate majority, interest rate and credit risk, industry competition, conservatives in Congress, New York Times, systemic efficiency, liberal/progressives in Congress, simple answers to complex problems, community investments, do homeowners do more civically?, lies and distortions, marginal congressional mortgage finance comprehension, ideological opponents, the Fed, systemic risk, dog and pony show hearings, federal subsidies, bloviation, convincing experts on both sides of an issue, Tim Geithner and the Treasury, jobs, powerful big bank lobbyists offering big campaign contributions, AEI, congressional minority caucuses, congressional legislative bias to “leave it to the regulators,” media attention, paucity of credible congressional experts, middle class aspirations, the “Angelides Commission,” a major chunk of GDP, Wall Street Journal, minority homeownership aspirations, rental housing, Aegean stables, federal deficits, can’t call a halt while fix is debated, small lenders, the subprime debacle, previous regulatory indifference, deposit insurance, mortgage interest deduction, property tax deductions, “If it ain’t broker, don’t…..,” and more politics.

Skeleton Music

Think of the old song, “Dem Bones,” as in the “toe bone connected to the foot bone, the foot bone connected to the ankle bone…”--and look at the list, again--also the fact that Congress doesn’t do "disassembly" well or sometimes, at all.

Historically, Congress tends to leave institutions around or functions alive to be reinvigorated if the need is there.

Need proof? You can cite all of the reasons you wish, but the much abused Fannie and Freddie (maligned incorrectly I need to repeat) not only still are around, but still do about 90% of all the “conventional loan” financing and, it appears, that both could start generating positive earnings soon, if the Treasury and FHFA removed their boots from the former GSEs necks.

What I tried to explain with the long list above--plus all of the similar elements about which you will remind me—is that they are related in substance or certainly politically (which is why politics gets mentioned twice!) and hardly can be examined for a congressional “fix” in isolation.

You can’t talk about getting rid of Fannie and Freddie, without dealing with the fate of the 30 year fixed rate loan. You can’t address GSE successors or replacement institutions without looking at what large commercial banks and the Wall Street investment banks (many of which now are own by the big depositories)—the obvious successor candidates--did when they controlled a large swath of the mortgage market, i.e. see “subprime.”

Tell Me, Again, Why We Are Angry?

We have a Congress and many in the nation upset over Fannie and Freddie but not sure why. This was the result of an effective campaign—run by their political and business enemies and helped by their own subprime follies-- that demonized both companies and took advantage of how little was known and understood about the two.

I see the Obama Administration seeking mightily to both endear itself to the large commercial banks and voters, but unsure just how to do that and still pass a Democratic political “smell test”

Most D’s know the big banks abandoned them in the 2010 campaign but now see Tim Geithner trying to smother the banks in new federal revenues and subsidies. Instinctively, that bothers the D’s but since so few spent time understanding the whys and wherefores of the financial meltdown; they’ll keep their heads down and play “follow the leader.”

Most public officials, including all Members of Congress, will tell that they are wizened and cynical, but that’s not true. Most among them, even the Democrats, want to believe the banks and believe that the banks will do the “right thing” if only the government gets out of their way and permits them.

It won’t take these folks very long to realize that the banks are for the banks and they are whippet fast, faster than those who regulate them, and will take advantage of every opportunity to fill their coffers at the expense of their customers and clients.

Which is a major reason to have secondary mortgage market institutions which the banks don’t control and which operationally can control bank treatment of mortgage products, consumers, and system prices.

The big banks play a game of “catch me if you can” with Washington regulators. Once a regulatory whistle gets blown, there are the inevitable “mea culpas,” exchanges of letters, and written understandings, in which the perpetrating bank will not admit wrongdoing, but agree to stop what angered the federal financial regulator.

Could 5-7 Years Become 7-11 (Aside: What a Great Store Name!)?

These obstacles are only some of why I see Congress needing five to seven years, or more, to resolve “issues,” which might be more gossamer than reality. But, admitting that possibility and dumping the empty fluff is what Congress does worst of all!

To further add to your intellectual please, let me add a few links to articles which suggest atomizing Fannie and Freddie is not the best public policy.

Links to F&F Articles

Maloni, 3-14-11


Anonymous said...

Hi Bill,
I would like to know your opinion on a recent paper published by the Mercatus Center at George Mason University on the future of FNM and FRE. Thanks,

Please follow link to the document:

Bill Maloni said...

Brief comment before I look at the paper.

Mercatus, for the longest time-- and still may--employed Wendy Gramm, former Senator Phil's econommist wife.

She and the Center never were Fannie or GSE friendly.

Anonymous said...

Good evening Bill,

Bruce Krasting, at his blog ( today about former Fannie Mae CEO Daniel Mudd getting a Wells notice from the SEC and the further implications for James Lockhart and the OFHEO, as well as the possiblity of investor lawsuits that could follow. Your comments on his piece would be much appreciated.

Anonymous said...

Oops, Krasting's article, entitled "Oops! Where does this go?" was written on Saturday, March 12.

Bill Maloni said...

I just got a hard copy of the Mercatus paper, assuming I have the correct one (there were five in the package), written by Anthony Sanders and my old friend Michael Lea.

And, I'll look at the Krasting blog.

Bill Maloni said...

I am going to try and comment on the Krasting Blog and the Mercatus paper done by Mike Lea and Tony Sanders.

Krasting is right about the "Wells notice" and the fact that it is not a matter one ignores because it has no consequence.

It has major consequences for the notice's recipients, since it potentially exposes them to negative legal findings that could produce major fines and disgorgement of personal wealth.

So, Dan Mudd and others are going to have to convince the SEC that he/they knew nothing about the deleterious impact on the Fannie portfolio of the subprime and Alt A mortgages and MBS the company had acquired and that those ultimately poor quality mortgage loans did not weaken Fannie Mae's loss profile to the point of materiality.

I am not a lawyer, so I won't comment on the substance. But Krasting may be onto something regarding the fact that Jim Lockhart, the GSE regulator, at that time, approved what corporate disclosures.

Of course, that lackluster outfit also approved F&F buying the PLS subprime poison in the first place.

Dick Syron, Freddie's former CEO, also received his Wells notice, so Syron/Freddie find themselves in a similar situation.

If the finding go against the former GSE CEO's and the others, I am sure some
class action lawyer will find ample "proof" for enhancing existing suits or bringing new ones.

It's not going to be a fun time for the former GSEs and it hardly will facilitate expeditious handling of GSE matters on Capitol Hill.

The Mercatus paper was fine for what it said, save the fact that I don't buy its solutions for a new mortgage finance system.

First off, did you notice there is little reference to the subprime debacle and who perpetrated it?

Yet, these are the same commercial and investment bank interests to which Lea and Sanders would cede the national mortgage market.

Covered bonds don't really seem like the answer or the equal to a securitization secondary mortgage market (just ask Lew Ranieri!)..

Lea and Sanders make the same "private money" claims, yet banks just represent another form of federally subsidized portfolio lender, which can't or won't hold long term mortgage assets on their books.

My large point has been that the F&F flaws and foibles are not so great that the mortgage finance system--of which they are the foundation--needs to be shucked.

And, given the ridiculous effort to give the large commercial banks our entire national consumer credit market, Congress is better off leaving in place some institutional governors on bank behavior, i.e. Fannie and Freddie, since banks cannot and should not be relied on to "do the public's good."

Anonymous said...

Appreciate your reply on the Krasting piece, Bill. I think you and Krasting are on the same page....he wrote today about his switching his business to a small community bank, vs. the majors. I suspect that Treasury may soon drop the 10% dividend charged the GSEs to a more reasonable 5% or maybe even 3% and instruct the GSEs use the difference to resume dividends on the preferreds, to let the market restore their values. All done in the hopes of warding off an embarressing lawsuit against FHFA and the Treasury by defraded investors. As usual, you are on top of the GSE situation. I nominate you to take charge!!

Anonymous said...

P.S. Re previous comment, to clarify, that is just a hunch....but it seems like it may be an easy resolution for a potentially sticky situation.