Sunday, March 17, 2013

Fannie Earnings

Lots of Fannie Mae Stuff Last Week;
Earnings, plus Mel Watt in, ED Out?

To the surprise of absolutely nobody, Congressman Paul Ryan's new budget contains very little that's is new, regarding fiscal or spending policies. It does contain the predictable  attack on “Obamacare;” proposes massive individual tax cuts for the wealthy; and seeks the end to Fannie Mae and Freddie Mac.

Ho hum!

If Ryan thinks this weightless document is going to give him 2016 GOP presidential nod, I can say with little fear, Paul Ryan will not be the next President when Barack Obama finishes his second term.

That belief has nothing to do with his desire to rid the world of Fannie and Freddie—the most predictable of the predictable GOP positions--but more about his philosophy, which easily is discerned in straining though his FY2014 budget document. It's the same positions and platform which buried Mitt Romney. Did Ryan learn nothign abotu the American people in that exercise?

It's is last November's losing manifesto, minus some explicit reference to “47%.”.

I've harped about one element of his platform but he repeats it in his current offering, no thoughtful
or creative aproach to restructuring the nation's mortageg finance system.

The GOP—whether it's Ryan, his AEI fellow travelers, or others starboard siders--has no viable plan to replace Fannie Mae and Freddie Mac with a market mechanism which works better, is more fair, more transparent, more consumer friendly, and more market acceptable (for mortgagors, lenders, investors, etc. etc).

The Grand Old Party can scream “private capital” and “get the federal government out, and let the banks do more,”but until there is any evidence that a new Republican mortgage finance policy amalgam could work, Ryan, Hensarling, et al are mouthing platitudes and fueling partisan anger not offering policy.

Maloni Speculation: Fannie Earnings and the Big Mystery

Last Thursday was to have been when Fannie Mae announced (substantial!) year end 2012 earnings-with a ton of signals from the market that the earnings would have been frothy and rich.

But, at the last minute the announcement was pulled and instead, the company issued a reassuring press statement that the earnings announcement was being delayed until the company could review related matters.

BOOM, the rumors then flew all around Washington and the conjecture began.

The best of them (maybe not the most accurate, but certainly the juiciest) was that Fannie had intended to take advantage of tax and accounting laws--specifically, it's deferred tax asset (DFA) account --and report a accrued $60 Billion item, which would have turned upside down all of the current thinking about the company's limited viability and capacity to repay money to the Treasury. (Some variation on the latter, involving $70 Billion in Fannie loan loss reserves also was brooded about.)

Utilizing that approach--for calendar year 2012-- also would have triggered a major “10% dividend payment” to the US Treasury, since for 2013 and beyond there is no dividend payments, just total a total sweep of all F&F revenue to Treasury, save a tiny margin for capital.

Even though, under a bizarre accounting arrangement reportedly hatched by Hank Paulson in 2008, nothing which Fannie (and Freddie) repays, reportedly, can reduce on Uncle Sam's books the amount the two “borrowed” borrowed from the Treasury.

But, observers were quick to point out that this possible one time $60 Billion matter, when added to Fannie's projected 2013 and 2014 earnings could be spun by some (many?) as wiping out the company’s Treasury debt in two years or justification for viewing F&F more positively.

Reportedly, last week's “skunk at the picnic” who stopped all things, was FHFA  Director Ed DeMarco. But no reason was given why DeMarco would want Fannie NOT to ship big dollars to Treasury's General Fund?

More will come out on this tantalizing mystery soon. (Tom Lawler, my former Fannie Mae colleague, produced a comprehensive and well written--meaning we laymen can understand it-- explanation of what policy matters may have caused Fannie to hold up.)

Unfortunately, Tom's work--in his Friday, March 13 daily newsletter--is a “for sale publication” and not on the Internet. But, if you find Tom’s work, read it and you'll be smarter for doing so.

FHFA Stops Fannie From Trying to Cut Borrower Costs

Speaking of Ed DeMarco, he's lost some lustre in my eyes when--a few weeks ago--he put a spike into a Fannie/Freddie plan to permit a consortium of insurance companies offer a new form of down payment protection, which most reports said would save consumers $600 or more annually.

What was that all about Ed? The only losers could have been one set of mortgage insurers losing some income to another set, who would have charged mortgagors less??
How does that weaken the entities you regulate?

It's almost as if some folks do not want to promote anything which makes Fannie Mae or Freddie Mac look too good in the eyes of the world. And behind that fear could be policy/partisan concerns about their resurrection.

But, let's be clear.

Fannie and Freddie, per se, are not what their opponents fear the most, in fact most could find an accomodative way to work with the two (as they do now).
The "fearful's" paramount fear would be the broad recognition for the federal government to play an active role in the nation's mortgage finance system.
That's what gives the bad guys “shpilkis” (Yiddish for nervous stomach or nerves.)

Is DeMarco Headed Out as FHFA Director?

Also at week's end, a viable story emerged—which was not denied by the Obama Administration--that the White House might be looking to replace “acting FHFA Director” Ed DeMarco with 20 year congressional veteran Rep. Mel Watt (D-NC), a long time House Financial Services Committee member.
Watt has enjoys a reputation as a good guy and smart Congressman, but has never been known as a mortgage finance solon or someone with a regulatory bent.

While the White House, before, has run names past Congress as DeMarco successors, Senate resistance generally has doomed those candidacies, since the Senate R's like Ed, while the WH would like to see him elsewhere in a different job or agency.

As someone pointed out to me, DeMarco is “acting” and he has civil service status. If Watt somehow got the big job, Ed might just slide down to become FHFA's #2, which I believe would be intolerable for any new Director but which would keep DeMarco laboring still at FHFA, where the GOP wants him.

Not Dick Cheney, Who Would Have Thought It?

According to  George W. Bush senior speech writer David Frum's new book, before the Saddam Hussein war 10 years ago, Vice President Dick Cheney “had his eye” on all that Iraqi oil.

Does anyone think the outsized role Cheney played in agitating for that 2003 Iraq war may have anything to do with Cheney's business/heritage/cultural ties with the US oil industry, including the latter's beneficiaries and benefactors?

Maybe some AEI  foreign policy types could review that Cheney's personality component and see how it fit with that useless Iraqi war that Cheney and his neo-Con friends helped start?
You remember the one which cost so much in lost American lives, national treasure and international integrity?

Could Dick Cheney's Middle Eastern oil fascination have driven the Bush Administration to start a phony war?

IMO, that investigation/research would be an excellent use of AEI's resources.

Maloni, 3-18-2013

Sunday, March 10, 2013

Fannie, Freddie, Fiderer

What Next after Fannie and Freddie?

The recent mega housing report issued by the Bipartisan Policy Center (BPC) proposed replacing Fannie Mae and Freddie Mac with a less robust government entity that would provide investors with catastrophic insurance on conventional mortgage backed securities (MBS), much like Ginnie Mae does today for government guaranteed mortgage loans.

Federal payments only would come into play in an extreme loss situation, after private mortgage insurers and lenders exhausted their financial responsibilities to the MBS investors. Commission report executive summary link follows.

That's a good place to start when/if the Congress begin to restructure the secondary mortgage market, hop[efully after it fully understands the role that segment plays in our extremely dynamic mortgage finance system.

Many Senators and Congressmen--charged with deciding the new mortgage system architecture-- couldn’t comprehensively/intelligently describe today's Fannie-Freddie dominated model,
without staff notes, let alone discuss trade offs, winners and losers, .

So, if the Commission recommendations force the Congress to toil contemplating  market realities, it will be time well spent.

Many Hill conservatives--despite the fact that Commission had two prominent former GOP Senators as Chairmen, including one of whom was the Secretary of Housing and Urban Development—will initially reject this idea because it still contains a seminal federal participation and they think they want the US government out of mortgage finance and that job shaped and managed by the nation's largest bank behemoths, at least that's what the R's think they want.

Banks are the financial institutions from which the the famous Dodd-Frank financial reform bill hoped to strip and erase forever the “Too Big to Fail” identity.

However, it may have done nothing of the kind since--according to last week's testimony from Attorney General Eric Holder--those banks may be both too big to fail but also too big to prosecute.

Oh well, I guess the best laid plans of mice and men, let along Chris Dodd and Barney' FRank sometimes go astray.

Brief Mortgage Tutorial

If House Republicans seem so bent on blowing up Fannie and Freddie, possibly ignoring the Commission, and giving the big banks the keys to the mortgage kingdom, it behooves those officials to ponder if their constituents like the idea of having access to long term fixed rate mortgage financing, i.e. 15 and 30 year fixed rate loans, which provide borrowers monthly payment certainty over the loan's term.

If that answer is “yes”--as I suspect would be the case in most of the congressional districts and states, the question then becomes--then Congress also would have to ask how much more money their voters would be willing to pay—compared to what they pay today—for future access to tho same mortgage types, if Uncle Sam really is out of the picture?

Simply stated, absent some federal guarantee or risk outlet, commercials banks may not choose to originate long term fixed rate loans or only make them at exorbitant prices.

By educating themselves about how our national mortgage market actually works, the Congress will understand why—absent a role for the federal government in mortgage finance—FRM could disappear completely or be available only at relatively high rates.

It's no secret that banks don’t want to hold the interest rate risk inherent in FRM, since banks' cost of funds could rise while that mortgage's yield is static, whether it's for five years or 30 years (which seldom is the case).

That trend to sell loans into the secodnary market--not hold them--has been in place for more than 30 years, not just since our recent financial catastrophe.

Without a F/F or the equivalent, the only way the banks can manage to originate or hold mortgages is not to offer fixed rate mortgages—only adjustable rate loans (ARMs)--or to significantly overprice FRMs. (This point is made in the Commission's report as well.)

Uncle Sam Keeps FRM Available

It's the federal government's implicit/explicit existence in the market that assures fixed rate financing and its availability at reasonable rates.

Today, the fact that Fannie and Freddie are in the market (securitizing virtually every mortgage brought tot hem by banker lenders), is why the FRM exists at attractive rates.

If Fannie and Freddie are gone and nothing with federal ties is there acting as a dedicated investor in mortgage securities, holding them until the underlying loans are retired through borrower amortization and payoffs, then they just might not be made.
Most banks don't want to carry the FRM's interest rate risk, which is why they now offload it on Fannie and Freddie.
Future rates, therefore bank borrowing rates, are unknowable. Unless an investor function is offered by some future market player future--allowing lenders to transfer that concern to others--a bank seeking to offer and hold onto a FRM would have to premium price it.

Only Big Banks as an Alternative to Fannie and Freddie??

It's been suggested by mortgage market observers that an gaggle of large banks—presumably working collectively--might be able to do the job, in place of F&F, but that raises lost of questions.

That arrangement might work in “Oz” but not in our real beggar thy neighbor business world.

Would those banks sublimate their greed and control instincts to work together, since most banks don't play well with others in the same business?

Will those banks have common underwriting platforms—to facilitate standardization and easy trading--or would each want their own flavor?

Is there any antitrust issue here, anywhere?

And, what happens when Bank A decides it wants some of Bank B's market share or all five participating institutions go cannibal on the others?

Will Congress protect consumers interests over the financial institutions, when their constituents seldom match financial institutions'  campaign giving?

Many of those sidebar concerns just don't exist when you have a F&F or possibly something like the Commission’s ideal solution, since any preferred federal entity will play a keystone presence, make most of those rules and maintain consistency.

F&F Income Force Questions for Congress
And that doesn't include how you replace all of that attractive revenue which Freddie's 2012 earnings announced last week foreshadowed for both the former GSEs in 2013 and beyond.

Those earnings are “cooked” going forward, meaning they only will get better (and larger).

You'll soon hear what Fannie's earnings were (reportedly much higher than Freddie's) and—once you extrapolate--you'll need to decide what should happen to that estimated $120 billion (low)-$160 billion (high), the two could pass on to the Treasury in the next few years.
Do you really think the Obama Administration will cede the entire residential real estate market to those major banks, which—speaking of campaign contributions—went very light when giving to D's last year, but very, very heavy backing Mitt Romney and the GOP in 2012?

Even the Commission's major secondary market recommendation would have/leave the federal government in the picture –albeit not as grandly as it is today--and provide more federal subsidies to the banks to risk their “private capital”on residential real estate.

To those of the House majority who understand money and the markets, please realize that banks rely on and enjoy federal subsidies like many industries, but claim they don't.

Conservatives and their allies are not serving their voters or the broader American public, if their only answer to safe and reasonable mortgage financing is to pacify and pay the banks to perform, giving them exclusive markets (jumbo mortgages); subsidizing their working capital (see FDIC insurance); providing easy money through the Fed discount window and Treasury cash infusions (the latter with no reciprocal responsibility to invest in their communities); friendly federal overseers; and a judicial system which may shrink from prosecuting the banks.

Just think back to the years building up to 2008 for what could be a an ugly preview of the financial rules you seem to want to prevail, again.

Fiderer's Corner!

The man is back and sees a disturbing pattern of attack and equivocation

In his latest contribution to Op Ed News (and the world), the sharp eyed David Fiderer caught some significant “my bad's” (admitted errors) from some Fannie Mae and Freddie Mac critics, who testified last week before the latest House Financial Services Committee Fannie/Freddie witch hunt ,designed to cast major blame on the two for the 2008 financial meltdown.

While nobody could claim it was a F/F love feast, some of the witnesses seemed to recant key positions they've taken in the past when they blamed Fannie and Freddie for perceived, almost exclusively, systemic failures.

I'll let you read  Fiderer the Master's work rather than trying to parse it. But his writings should be required congressional reading, so Congress sees what really occurred in mortgage finance leading up to the 2008 debacle.

Maloni, 3-11-2013

Sunday, March 3, 2013


Fiderer, The “Hebrew Hammer” is Back
Has Blunt Message, Mostly for the GOP
Don't Believe the Pinto/Wallison Whoppers

But first.......

Bob Woodward—of Watergate fame--is the source and, naturally, in the middle of something quite specious.

With the Sequester now kicking in and plenty of people concerned not only about the public policy inherent but their own employment and economic dislocation, Woodward chose to chase the spotlight and remind people it was President Obama who first suggested the “sequestration” option in budget negotiations with the GOP 18 months ago and more recently said he didn't before owning up saying he did?

Good reporting Bob and now you've reminded people that fact was in your book and Obama waffled on his ownership.

Who really cares? Some Americans are facing the possibility of figurative hand and leg amputations and Woodward's geezing about the availability of manicures and pedicures.

Politicians tell tales? It can't be that Woodward just discovered, “There's gambling at Rick's??”

More power to him if Obama's suggested top the Republicans a deadlock breaking way forward, a year and a half ago, when all roads to compromise seemed blocked.

Reminder: Most of us deemed the “sequester” so grievous and monstrous a move that few believed either party would allow it to happen without making some reasonable effort to substitute policy changes.

Or was that when we were naive and thought “bipartisan agreements” were a possibility? Now it seems that many in the GOP think Sequester is preferable to negotiations.

As with most things, it's never too late in the Nation's Capital for a deal.

We'll wait until one side decides it will break the Gordian Knot of political intransigence and offer some thoughtful alternative savings or tax reforms in lieu of exclusive program cuts.

Sure, both sides share some of the blame, but once again I think the “Party of No” will bear the people's unhappiness the most.

For now, the GOP is adhering to their “no new revenues” position and—to my surprise—refused to counter the President's recent offer--of tax reforms and budget cuts in lieu of just the Sequester's mandated domestic and military budget slashes--with a Republican package.

It's one thing to mouth partisan platitudes but quite another to roll up your sleeves and engage in discussions that produce policy through real bargaining, meaning nobody gets all that they want but each side gets something.

If nothing more, where are the infamous GOP 's “loop hole closer” tax reforms, which the party, since the Romney-Ryan Campaign, claimed could produce major deficit reduction?

Back to my silly pinion.

In the middle of real life—to the extent that anything on the Hill resembles that—leaped a prancing Bob Woodward claiming he now has been threatened by the White House (reportedly by long time friend Gene Sperling) because BW pointed out Obama's Sequester parentage in a W Post op-ed.

There is a bigger problem here, Mr. Woodward, and it's not the one involving your ego. It's “Sequester Anxiety” and some blameless individuals, families, and communities--now just barely keeping their heads above water--are going to get whacked again.

Go write another book, Bob, or set your hair on fire, you'll get your requisite publicity fix.

(It will matter to nobody but me, but this segment was written last Thursday morning, before all of the mainstream media began jumping all over Woodward for his BS commentary about “being

Fiderer Calls Shots Out Wallison & AEI “ Big Whoppers”

In a timely column, linked on Barry Ritholz's blog, “The Big Picture,” David Fiderer warns against against believing the repeated falsehoods coming from the American Enterprise Institute's Peter Wallison and Ed Pinto engage.

Fiderer calls it, “The Big Lie Annotated: An AEI History of the Financial Crisis.

I am providing a link to it (below) because, like most of Fiderer's work it is an eye opener and also revealing of how some conservatives will repeat the same Fannie-Freddie untruths over and over, despite rejections and rebuttals from dozens of credible sources.

Drinking that foul kool-aid prevents many in the GOP from better understanding issues which they claim they want to legislate, reconfigure, or abolish.

I know friend Fiderer has been working on this column for some time and began certainly before House Financial Services committee Chairman Jeb Hensarling announced, last week, a series of hearings into Fannie Mae and Freddie Mac, their regulator, the Federal Housing Finance Agency, and related matters, starting next week.

But, if any of the Committee Members have open minds on the matter, Fiderer's work is prescient, a documented reminder of how some zealots get waylaid, ignore facts, and spout falsehoods long after their message has been trumped.

As the House Committee probes what role Fannie and Freddie had in the 2008 financial meltdown, they should consider Fiderer's observations.

The Committee also might find time to examine the impact of creating and selling more than three quarters of a trillion dollars of failed private label Wall Street created (shorthand “PLS”), which the Street injected into worldwide market.

But gosh, that would be off script and might give the House majority more accurate answers than the ongoing Fannie/Freddie witch hunt.

From what little I've seen of next week's witness lists, not surprisingly the F&F panels will have a decidedly anti-GS E cast.

However, if properly engaged even those individuals would have to admit that F&F have performed admirably since they were put into conservatorship—and continue to buttress the nation's secondary mortgage market, keeping it liquid—while maintaining high quality books of business which improve each year.

Freddie's record earnings last week (see link below), soon to be followed by Fannie's 2012 numbers, suggest the worst is behind them and—if permitted—over a few years, likely could repay whatever the Treasury invested in them.

Is there better testimony of the value of today's mortgage model than the fact that the nation's major lenders--commercial banks and their mortgage banking subsidiaries--still heavily utilize Fannie and Freddie services, swelling the latter's business volumes and earnings.

Banks, which the GOP believes would be excellent alternatives to F&F, certainly have not displayed that through their business actions and—in the past--have insisted on getting additional federal securities guarantees as their price for trying to emulate the Fannie/Freddie dedicated investor role.

If Republicans disdains the current federal presence in single family mortgage finance of direct lending, guaranteeing the securities of others, or second tier insurance of losses, maybe Chairman Hensarling or his colleagues—after looking at that nasty Wall Street “PLS” episode-- can explain how giving banks additional federal guarantees would represents “fresh private capital?”

Fiderer has a blunt message for the House Republicans, (paraphrasing), “Many of your Fannie/Freddie beliefs are the result of believing part/all of 'The AEI Big Lie.'”

Members on both sides of the aisle and their Senate counterparts owe it to themselves to consider that possibility.

Maloni, 3-4-2013