Sunday, April 14, 2013

We're In The Money

Now that the Obama Administration has weighed in adding its heft and knowledge to support what I've been saying for months about Fannie’s and Freddie's ability to generate income (although I told a reporter that the Admin is low balling its estimate that the two will pay @$185 billion over 10 years to the Treasury), watch for some in Congress to try and aggrandize that income for congressional piggy bank purposes.
It's the nature of the beast.

House Financial Service's Committee senior Democrat, Maxine Waters (D-Cal), hosted a conference last week on ways forward to insure adequate and fairly priced housing for the nation. Her staff subtitled the meeting “discussion about GSE reform.”

The discussants included, a number of my former colleagues and friends.

I guess my invitation got lost in the mail, but no worries I can replicate here much of what I would have said.

Trying not to be pedantic with Ms Waters and the half dozen or so Committee members who attended, I would have reminded them that any recommendation they make, ultimately, will take one of three forms: a mortgage finance system (primary and secondary markets) run the nation's large commercial banks, which seems to be the preference of the GOP; a mortgage finance system, where Uncle Sam plays the principal role guaranteeing various players, which is what we have today and everyone claims they want to replace; or a system which blends the strengths of banks and the government, which makes the most sense but screams “compromise,” which isn't done often on the Hill.

The Generic Choices

There really is nothing more beyond those choices and its crucial for Ms. Waters and her peers, as well as the balance of the Congress, to understand the benefits and pitfalls of the options.

BTW, even though there are other lenders in the market, I shorthand “lenders” to “banks,” since the large commercial banks and their smaller regional competitors either originate a majority of today's residential mortgage loans or own subsidiaries which do.

Let me deal quickly with the three options and why I believe two of them are DOA.

Government Only Option

Not even I want the federal government controlling such a huge percentage of the lending decisions as it does today, which is a historical accident generated by both political parties. While things may look rosy now, that could change and “Uncle Sugar” would be on the hook, so ending that arrangement sooner rather than later is desirable.

Banks Only

Most people who've read my blog know I don't think the banks are wholly “private,” because they enjoy major federal subsidies. But, for this review, we'll pretend they don't rely on the federal government for their working capital. (Coincidentally, the House Financial will hold hearings this week on bringing more “private capital” into mortgage finance. I wonder which Member will have the nerve to raise the issue of the deep federal bank subsidies.)

The GOP mortgage market ideal of total bank control without the presence of the federal government is a poor option, with chaos and consumer gouging waiting to happen.

The Great Depression

We have two major episodes in recent history when commercial banks and other lenders-- not tied to the government--controlled the mortgage market, when bank supervision either was inadequate or didn't exist.

The first was the “Great Depression,” when understandably risk-adverse mostly state chartered banks denied credit to people they deemed not credit worthy and the real estate market collapsed.

Ironically that experience gave birth President Franklin Roosevelt’s creation of the Federal Housing Administration (FHA), the long term fixed rate mortgage insured by the government, and Fannie Mae to buy those new mortgages and provide necessary market liquidity.

It took the Roosevelt action plus the huge economic stimulus of the WWII to get the nation back on it's feet.


The more recent era was 10 years ago, when large commercial banks and their investment banking

clients or subsidiaries, unleashed the subprime investing wave—going around the Fannie Mae and Freddie Mac systems—and created, packaged and sold throughout the world close to a $ trillion in garbage mortgage backed securities.

Those agents assumed that real estate values never would go down and that rising a equity tide would cover all of errors they made in creating the valueless securities.

Fannie and Freddie didn't make those loans but they bought a ton of them from Wall Street and they bled, too.

While the banks and the investment banks had nominal federal oversight, not one federal regulator in the buildup to this most recent financial debacle blew the whistle on the rampant speculation or stopped the hemorrhaging until it was too late. So, in essence, the banks were free to impose on the market whatever standards and discipline they chose. And, as history has shown, they applied very little.

The banks were in control and left to their own devices and the sorry results have been clear for all to see.

Before I argue for the inevitable blend approach, let me say something positive about banks or at least something pregnant with constructive possibilities. The banks are not going anywhere. They are too big and powerful and they have most of the available mortgage lending capital. The United States needs them for mortgage lending and other purposes, but channeled and appropriately regulated.

Get Serious Bank Input

I've been critical of large banks, based on 45 years experience in this town, as a congressional staffer to someone on the House Banking Committee, as an official at two federal financial regulatory agencies, and my 21 year career at Fannie Mae.

Having said all of that, I believe the banks must be comprehensively engaged and asked for their preference for a national mortgage finance system to truly determine what systemic mortgage model they would like constructed.

I might be unhappily shocked but I am not sure that abolishing Fannie and Freddie—or more importantly doing away with the function the two provide—is what large banks would demand.

Nobody should confuse what I am advocating or my goals.

I don't think the former Fannie and Freddie can be resurrected in their old forms, but I believe their important 24-7 utility of staying in the market at all times as the mortgage investor as last resort must be preserved, if for no other reason than to insure that lenders provide consumers with long term fixed rate financing.

Offer that simple statement and most congressional eyes glaze over or just not understand, because most Congressmen and Senators don't comprehend the interest rate (and credit) risk in long term lending and just assume that if there are lenders, that 30 or 15 year option will be there.

I think many bank managements and boards, after soberly considering what's in their institution's best interests would agree that a third party entity, which can take the loan risk from bankers' books, allowing them to make a profit and then service the loans and earn more income, are good things.

But, understanding basics is crucial before Congress-especially in the House—goes through the inevitable “rip out their throats because they are from the other party” debate about the secondary mortgage market.

Now is the perfect time to ask some of the banks since the American Bankers Association will host a major conference in town this week. Lots of opinionated bank officials will be a cab ride away or likely visiting the Hill on their own.

Congress, when visiting or being visited, should grill the bankers on the question. For the public official engaging your local bankers on this question gives you something to say during their visits which is topical and germane to your work and shows you value what they think.

If the banks might go along with some hybrid public/private model then where will the opposition come from, save the Wall Street Journal’s editorial board and the American Enterprise Institute?


Mark Zandi, who was an economic consultant to the Romney presidential campaign, emerged last week as a possible successor to FHFA's Ed DeMarco.

Zandi's has the intellectual credentials but, if the rumors are legitimate, why take this federal job?

Maloni, 4-15-2013


Bill Maloni said...

Right church, wrong pew.

Thank you to the reader who pointed out that Mark Zandi was an economic advisor to the McCain presidential campaign not Mitt Romney's 2012 effort.

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Anonymous said...

Isn't the answer to "Zandi's has the intellectual credentials but, if the rumors are legitimate, why take this federal job?" with "Zandi was an economic advisor to the McCain presidential campaign"?

Since when do politicians become so for the money? It's the power, baby

Bill Maloni said...

I have heard that answer from others but I am not certain (as some of you appear) that being Fannie's and Freddie's regulator is the surest/smoothest route to being a DC power broker.

If Zandi gets the job, I hope he brings his lunch bag, because he will be at it for a while.

Anonymous said...

The Zandi appointment only makes sense if the WH will use him as their chief mortgage market advisor and direct him to reform and reinvigorate Freddie and Fannie into the "compromise" system you have suggested.
He could mold F/F and the Federal Home Loan Banks into a very effective and workable system, probably without any new legislation.
Then he and the WH would be in a position to deal effectively with the Henserlings of the congress.

Bill Maloni said...

From your lips to you know who's ears.

It will be interesting to see how much the WH--if Zandi is named/approved--seeks to achieve via regulation and not legislation.

He and the Admin will need a lot of industry and thoughtful polticial support, if they plan to work around the two primary committees of jurisdiction.

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