Monday, April 4, 2011
Facts (Mostly Non-Subjective) & Q’s (Mostly Tough) For Those Who Would Kill Fannie and Freddie
Fact: For the past 17 years, since implementation of the 1992 GSE legislation, creating housing goals for the two companies, Fannie Mae and Freddie Mac had to devote an increasing percentage of their busyness to supporting mortgage finance for low, moderate and middle income families. That number was 55%, when the Paulson/Bush takeover occurred in 2008, caused when both companies bought subprime securities generated mammoth losses.
The losses resulted from decisions made by senior managers at both companies—despite internal objections—to invest in Wall Street created private label mortgage backed securities (PLS), which were so poorly underwritten that early stress on borrowers produced unprecedented defaults and losses.
Those GSE managers made major mistakes and paid for it with their jobs, but congressional hearings and government and independent reports point to the subprime and Wall Street’s role as the horrendous catalytic event which bank and investment bank failures in every major country, bringing on international financial chaos.
Question: Since Fannie Mae and Freddie, as most large US and foreign institutional investors invested in those ultimately worthless assets, with no objections from their regulators, what was their particular shortcoming which justifies “abolishing them,” especially when post 2008 asset acquisition already is governed by far more regulatory control, including no subprime acquisitions?
Since they were and still are a major part of the nation’s mortgage finance system, what systemic reason explains substituting untried and uncertain institutions and financing techniques in lieu of the former GSEs?
Fact: In the main, commercial banks don’t have a very good historical record on mortgage lending, given their primary business of lending for business, i.e. “commercial banks,” their role in red lining, their preference for making adjustable rate loans over fixed rate, and their rapid departure from the jumbo mortgage markets (loans which Fannie and Freddie cannot buy), when times got tough.
Question: To the House Republicans, what is the evidence that the large commercial banks will pick up the Fannie/Freddie secondary mortgage market mantle--without demanding large federal subsidies or concessions--and deal fairly with the public and smaller lenders? If your response is vague or vacillating, it begs the question, why make any major structural mortgage market changes whatsoever?
Fact: All commercial banks enjoy the protection of federal deposit insurance, which allows them to attract billions in low cost consumer accounts (checking and savings), while paying very little for the insurance coverage in relation to its value and little interest on the deposits. The banks pay premiums to the FDIC for the coverage but that amount doesn’t cover the full amount of the deposits insured. There also was a recent 10 year period when the banks paid nothing to the federal government for the coverage, underscoring the federal bank benefits.
This represents a major federal subsidy (taxpayer money) to the commercial banks.
The largest banks have major investment banking subsidiaries which enjoy federal privileges, bank access to “easy money” collateralized loans through the Fed and the Home Loan Bank System, federally defined markets where they face no F&F competition (see “jumbo loan market”), and still expect additional federal support, i.e. see new bank requests for federal re-insurance of future mortgage securities issued.
Question for the Administration, the Hill, and the media: In the context of this reality, how can the Administration, the GOP in Congress, allow the banks to refer to them as the “private sector,” when so much of their activities rely on federal support?
Fact: In the Jim Johnson years, when I worked at Fannie Mae, we developed an excellent easily understood tool for explaining to Congress and others, exactly what it is that Fannie did and how we believed that it added value to every congressional district and state.
These boutiqued CD profiles, employed the company’s latest business data (loans financed) Fannie possessed and reported it by census tract, zip code, congressional district and state, highlighting locations and types of loans and special multifamily and elderly mortgage support. The size of the loan and the exact geography (“Are you financing loans in Bad Town?”) could be readily seen and understood by people who were not mortgage finance experts.
Invariably, whether it was the most recent data (three months or a month old) or accumulated data, all loans outstanding which Fannie had financed, the information showed that Fannie Mae was financing thousands of families and had invested hundreds of millions and often several billion dollars in that CD, which then got circulated to businesses throughout.
The fresh data, certainly when added to the accumulated historic data (two or three years old) often proved that Fannie Mae was the largest investor in those congressional districts, out stripping most if not all of the local financial institutions.
Because of the Paulson-Bush takeover, which severely limits the former GSEs from interacting with Congress, I am not sure if Fannie Mae (or Freddie Mac) provides that important perspective to MoCs or their staffs. I suspect that information now open a few closed, eyes, heads, and hearts on the Hill if seen today and put these institutions in a more positive light. (Senators, Congressmen and staffs, try calling the companies and asking for those reports.)
Question for the Congress: Beyond “trust the banks,” what insures that whatever you want to succeed Fannie and Freddie will continue to support mortgage activity in your congressional district and state to the extent the former GSEs did and do?
What, in the Administration’s future mortgage market pronouncements or in the package of GOP legislative proposal on the subject—both of which rewards banks with a ton a ton of new authority and discretion to make mortgage loans—will produce a functioning secondary mortgage market structure, where law dictates that some institution somewhere invests and hold mortgage loans, thereby creating the fabric of a secondary mortgage market?
No mandate, no obligatory lending and purchasing, no guaranteed secondary mortgage market. Pig in a poke?
Fact: Prominently mentioned as an alternative to the mortgage industry’s current use and reliance upon mortgage backed securities is a financial product know as “covered bonds,” which have been used in Europe but not been employed much in the United States. A “covered bond,” collateralized by mortgage assets requires issuers (mostly banks) to keep some piece of the bond on their own books and not sell the entirety.
The US mortgage market, which involves a trillion dollars in annual funding, has relied and still relies on the trading of high quality mortgage backed securities (MBS)—often guaranteed by Fannie Mae or Freddie Mac--to facilitate mortgage investments domestically and internationally, allowing foreign dollars to finance US home US mortgages.
Question for the Congress, mostly the GOP: Why do you think “covered bonds,” which are foreign, literally and figuratively to US markets--can easily substitute or replace the MBS market, which the nation has utilized since the early 1980s?
Fact: By most reports Fannie and Freddie—while being poorly run by the regulator—have both reached the stage where on an operational level they are profitable, but when you apply the 10% “dividend” they must pay the Treasury on their outstanding borrowings, the companies are in the red and have to borrow from the Treasury to pay the Treasury. (Yes, you have it right!)
Various House GOP proposals would have the former GSEs pay only federal level salaries to their employees and stop paying legal fees for former officials, who have been sued by shareholders and others.
Question for the GOP. How does any of that “save:” money for the federal government? Right now, two “getting healthy” companies—still doing 90% of the conventional loan financing in the nation—are on the cusp of repaying their debts and running black ink?
Banning company paid legal fees for former officers certainly exposes the companies financially if those officials could lose their court cases and the Treasury—which now effectively owns F&F—would face billions of dollars in legal losses, because Congress managed to save a few dollars in lawyers’ costs.
Related that is your plan to cut dramatically all F&F compensation to federal levels, daring many of those people to abandon their jobs and seek better wages. These work forces have been abused and demeaned on the Hill and in the media for several years. Penny wise, pound foolish?
If you effort to cut their salaries succeeds, what talent might remain to manage a trillion dollars in mortgage portfolios and why is your approach sound, not punitive?