Monday, March 7, 2011

Kindergarten and the GSEs

Something bad happens to many individuals when they become Members of Congress or United States Senators, they lose their common sense.

Most get carried away in some ego trip rants about “their district or state” and the federal laws they plan to change, when all they should do--in the two decade old words of author/poet Robert Fulgham—is remember “what they learned in kindergarten.”

I started thinking about this because of the many positive things I’ve been reading and hearing lately about the current mortgage finance system still with Fannie Mae and Freddie Mac, playing their historic roles as national mortgage investors.

Yet, there persists this ongoing debate, from people who presumably attended kindergarten, about why and how we should change our national mortgage finance system and scramble many of the institutions and business relationships that have allowed our nation to become so well housed. This systemic revamping could also might cost us many of the societal benefits which go with homeownership as some disdainfully would treat all existing home finance structures as just so much economic flotsam and jetsam.

Not Right or Wrong; What Works and What Hasn’t

Nobody is suggesting that Fannie and Freddie were always correct and everyone else wrong. Far from it, the errors of commission both made in choosing to buy copious amount of subprime mortgage backed securities--with high yields and hints of enormous finance returns to the two companies—never should be forgotten and never should happen again and likely won’t.

It happened and the GSE people responsible for those subprime decisions were identified and removed when the federal government took over both companies in 2008.

But that is history and today the Obama Administration and a very conservative Congress grapple over a replacement “system” for Fannie and Freddie, sharing far less common ground than folks like to think.

Good Bye 30 Year FRM?

Indeed, as the New York Times editorialized last week (link below), the very fate of the 30 year fixed rate mortgage, the choice of most Americans, may hang in the balance as this legislative odyssey plays out and the world learns if some version of the former GSEs get s to survive..

But, back to the simple things these bright men and women in Congress learned early in their lives and need to apply as they consider what the Congress should do with Fannie and Freddie and the system for which they are the keystones and continue to dominate.

After listing many of his life lessons, Fulgham reminded us, “
”Everything you need to know is in there somewhere.
The Golden Rule and love and basic sanitation.
Ecology and politics and equality and sane living.”

How should today’s Washington solons apply Fulghum’s wisdom to this to the GSE debate?

Future Do’s and Don’ts

One is Fannie and Freddie was not the cause of the 2008 debacle and before the introduction of massive subprime balanced many of the corrosive interests in the market and produced a very efficient and consumer friendly mortgage market place, pretty much as Congress deigned.

That model, with minor variations, has value and can be sustained, as long as national mortgage investors never engage in any business activity which involves trading in subprime mortgages. (That likely already has been addressed through regulations which followed the 2008 financial meltdown.)

Fannie and Freddie—if perpetuated--should not have federally imposed low income housing goals and targets, which might cause them to succumb to some well meaning but na├»ve financing for people who don’t have the wherewithal to afford the mortgage, i.e. those closest to needing the flexible underwriting that characterized subprime financing. It looks like that federal government already has solved that problem, with its major expansion of the Federal Housing Administration (FHA) primary single family loan program, which allows virtually any family or individual with five percent down to qualify for a federally insured mortgage loan.

Three, Fannie and Freddie shouldn’t finance risky conventional loans which structurally could encourage defaults. To wit, “Uncle Sam” is in the process of defining the minimum equity and capital of a “qualified residential mortgage” (QRM), so lenders selling loans to Fannie or Freddie would retain some “skin in the game” regarding that mortgage’s long term health.

The point of all of this is that rather than posture, bloviate and gas bag for months (years?) about Fannie’s and Freddie’s past subprime sins, the Congress can—and should--quickly return strength and normalcy to the nation’s mortgage markets.

It’s Ready to Go, Just Add Political Guts

The foundation already is in place to move forward with minimal GSE enhancements, starting with better regulation, which will maintain standardization, efficiency, and mortgage market competition, the latter being essential

Congress and the Administration might have to admit that the GSE “sins” were not so grievous given how many financial institutions, both domestic and foreign made the same mistakes; that future aberrant subprime investing has now been euthanized by regulations; and the fact that the two still, still are financing 9 of 10 US conventional mortgages, while being run by a bunch of bureaucrats.

The nation’s mortgage finance system works now and can work better. Congress doesn’t have to risk turning everything upside down and bringing in new names and institutional faces, which may not execute the job most Americans want accomplished.

Understand the New York Times editorial above and why many thoughtful individuals have warned about the possible loss of future fixed rate financing, as Tim Geithner seems willing to risk. Understand the structural and systemic shortcomings of banks holding mortgage loans in their portfolio, which makes the Times’ concern relevant.

Geithner, who should know better (bad kindergarten experience?), wants to turn the entire mortgage finance system over the large commercial banks and bank holding companies, the lenders which refuse to hold fixed rate loans on their books, unless they first have been securitized by Fannie or Freddie or they receive new federal securities reinsurance subsidies.

It may be that Speaker John Boehner’s “new Congress” is ready to pay back last year’s banking industry campaign favors, or the White House with an eye on 2012 has forgotten its “kindergarten experience,” and the Treasury Department leadership wants to hand the nation’s daily commerce over to the big financial guys. All are acting as if the right public policy is to establish few controls over big bank authority to conduct almost all of the nation’s commercial and consumer business.

Didn’t that fail, disastrously, once already?

Even when Mr. Geithner and others testify to Congress or to the Angelides Commission that it will take years to wean the mortgage finance system from Fannie and Freddie and then reconfigure it in some new structure, elected officials and media need to ask why and then question the wisdom of doing it compared with risks and benefits.

Homeownership Has Myriad Values and Matters

I hope that some of the recent discussion questioning the continued appeal or desirability of homeownership is just a witless carryover from the financial shock of three years ago and not some fundamental review of one of the elements which made this nation great and which acts as an aspiration for so many young families.

Right now, the D’s get to kick Fannie’s butt, while still getting mortgage finance, and the R’s get to scream about the GSEs while proposing but not producing any real legislation. And the banks get to sit on the sidelines and contemplate future earnings—with few systemic responsibilities—and near term take full advantage of F&F Fannie still being forced to take all of the loans the banking industry can generate.

I have no idea if there is any truth to the rumor about t-shirts showing up in money centers stenciled, “I am a now a ‘GSE bank’ and there’s nothing you can do about it!”

As Fulgham suggested our world would be a better place if “...all governments had a basic policy to always put things back where
they found them and to clean up their own mess.”

Last Week in the Baltimore Sun,0,1799402.story

Maloni, 3-7-2011

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