Tuesday, May 28, 2013

Sorry for the lengthy AEI broadside, but sometimes heft is required!


5-28 PM Update on the Corker (R-Tenn) bill.

Reportedly it took only a few hours this morning, when Hill folks got back from their Memorial Day holiday, for House GOP sources to send Senator Bob Corker (R-Tenn) a message that the House wasn't interested in working on any legislation which set up new federal housing responsibilities, no matter what fate Corker proposes for Fannie and Freddie. No comment on Corker's idea of nationalizing F&F's financial obligations and adding a bazillion dollars to the national debt.


Wallison to the World: FICO You!!
Maloni to Wallison: No, FICO You!!

Peter Wallison, he of GOP lineage, AEI paycheck, and co-author with Ed Pinto of a subprime mortgage theory shot down more then stunt men in a Sergio Leone western, decided last week to jump all over resident hero, David Fiderer, when Fiderer wrote in the American Banker—with copious detailed research—that the AEI, Wallison and Pinto theory of Fannie Mae buying voluminous amounts subprime mortgages in the 1990's was so much poppycock.

Fiderer's conclusions hardly were unique, since the same specific rejections were produced by the Federal Reserve, the President's Financial Inquiry Commission Commission and dozens of top columnists and media, but Wallison wrote to the American Banker anyway dumping on Fiderer's analysis.

I told Wallison he was substantively off base when he blasted Fiderer's work and pointed out how many times the AEI's arguments about Fannie buying tons of subprime in the 1990's have been publicly rebuked.

But those institutional refutations haven't stopped Ed and Peter, with their Al Queda like zealotry, they just keep repeating the same lies and hope the WSJ editors and other acolytes will provide air cover for them.

I asked Peter--when the AEI and its minions discuss F&F mortgage activities precipitating the 2008 financial meltdown-- why they never mention the causal effects of Wall Street creating and selling worldwide almost a trillion dollars in worthless subprime securities and synthetic CDOs. (Why is it hard for the conservatives to admit the big GOP campaign contributors made mistakes?)

Here's what Peter told me when I questioned his anti-Fiderer efforts.

Bill: You’re full of misinformation because you live in the left’s echo chamber. It’s time you guys stopped saying that Ed Pinto’s characterization of subprime loans as those under 660 FICO is silly, or a lie, or disproved, or some other nonsense. You can’t get away with that if you’re communicating with someone who is not your ideological bedfellow. The 660 dividing line was established by the bank regulators in 1999, and in their statement they said that it does not matter what other characteristics a mortgage has, it is subprime if the FICO score is less than 660. When you are ready to deal with facts rather than the wild statements you, Fiderer and others throw around we’ll have a real discussion.

Regards, Peter

Thank you,  Peter (and Ed, the AEI, and the WSJ editorial staff); once more I'll venture into the your Valley, but I will fear no Evil--in this instance—because my FICO truth makes me one of the toughest Mothers in the Valley.

Misrepresenting FICO

First, FICO scores are a credit measure created several years ago by the Fair Isaac Company, ergo the acronym FICO. They are not linear, so a 625 score is a lower and presumably a lot more damnign than a 660 score.

Contrary to Peter's emailed allegations to me, I doubt any major balance sheet lender anywhere relied exclusively on FICO scores, other than as one element of a lending decision. Fannie and Freddie both expressly stated that hey did not rely on FICO scores to make credit decisions.

Further in challenging Peter/AEI, while bank regulators might have cogitated on a FICO 660 being a threshold, none of them ever followed through to make that measurement an operative rule in the mortgage world, prohibiting loans to those with lesser scores.

Since no federal regulator ever promulgated such a binding regulation, I expect that millions of loans—which never defaulted and were deemed viable--ere made to people with credit scores below Peter's “thou shall not be below 660.”

Peter and Ed say they are correct, but the following evidence suggests how FICO scores were viewed in the everyday/real world of mortgage lending, as opposed to Peter's and Ed's ivory tower AEI ideal..

Here's what others in the credit and mortgage loan universe say about the AEI's 660 FICO score being the “God above, Devil below “ demarcation line between good and bad credit.

Entities Defining a 620 FICO Score as the Dividing Line
Between Prime and Non-Prime Mortgages

Charles Calomiris and Joseph Mason, American Enterprise Institute[1]
The market generally considers any borrower with a credit score above 620 as a prime candidate for a mortgage” (Calomiris is a Wallison colleague.)
America’s Community Banker[2]
Six hundred twenty is the marker between prime and subprime.”
LISC (Local Initiatives Support Corporation)[3]
adverse credit (usually defined as credit (FICO) scores below 620).”
Associated Press[4]
620, considered the dividing line between good and bad credit.”
Money Magazine[5]
620 and above are considered good.”
62 percent of consumers do not realize that a score of 620 or better means you can become eligible for getting the best possible mortgage rate.”
Credit scores in the range of 620-650 indicate basically good credit.”
Business Week[8]
nearly 20% of the U.S. population has a credit score under 620, generally the cutoff for a prime-rate loan.”
LA Times[9]
But a score of 620 doesn't mean you're going to qualify for the best rate, [Craig Watts, FICO spokesman] says. It means you ‘qualify for a standardized rate, or a prime rate.’”
St. Petersburg Times[10]
Each company using scores sets its own standards, with a score of 620 often used as a cutoff point. Fall below that and you are likely to be labeled a high risk.”
A borrower with an A grade typically has a credit score of at least 620.”

[1] http://www.aei.org/docLib/20021130_71252.pdf. Note that Charles Calomiris often joins Peter Wallison in critiquing the GSEs. (http://www.aei.org/scholar/9)

[2] The Almighty 620 Credit Score, Vanessa Bush, America’s Community Banker, Oct. 1998 at 24. America’s Community Banker was the official trade publication for the thrift industry.

Worth repeating: FICO scores are not linear, so a 625 score is way below AEI's 660 standard.


§ Peter Wallison himself: “There is no universally accepted definition of either subprime or Alt-A loans, except that neither of them is considered a prime loan. … The term ‘subprime,’ accordingly, generally refers to the financial capabilities of the borrower, while Alt-A loans generally refer to the quality of the loan terms.”[1] (To say that a loan is subprime if it is not prime is a bit tautological.)

§ Federal Reserve staff: “There is no generally-accepted definition of prime and subprime mortgages.”[2]
§ Federal Reserve staff: “A subprime mortgage is one made to a borrower with a poor credit history (erg., a FICO score below 620) and/or with a high leverage as measured by either the debt-to-income ratio or the loan-to-value ratio).”[3]
§ Federal Reserve Bank of St. Louis: “A precise characterization of subprime lending is elusive.”[4]
§ GAO: “There is no uniform definition across the lending industry for what characterizes a loan as subprime or Alt-A.” http://www.gao.gov/new.items/d0878r.pdf page 15.
§ Federal Reserve Board, in an official commentary, describes: “a somewhat loosely defined segment known as the Alt-A market, the precise boundaries of which are not clear.”[5]
§ Finally, as shown in the table in the Appendix to this section on page 7, many sources (including a colleague and frequent collaborator of PW at the AEI) regard a FICO score of 620 rather than 660 as the dividing line between prime and non-prime loans. In fact, a web site on credit scores shows considerable more support for 620 rather than 660 as the prime/non-prime boundary.[6]
§ [1] Cause and Effect: Government policies and the financial Crisis, Peter Wallison, at 5. Available at: http://www.aei.org/docLib/20081203_1123724NovFSOg.pdf.
§ [2] An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on U.S. Mortgage Rates and Mortgage Securitization, Diana Hancock, Andreas Lehnert, Wayne Passmore, and Shane Sherlund at http://www.frbatlanta.org/news/conferen/housing2005/hancock.pdf, at 10
§ [3] A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance, Scott Frame, Atlanta Federal Reserve Bank, Andreas Lehnert, Federal Reserve Board, Ned Prescott, Richmond Federal Reserve Bank, August 27, 2008 at 2. Available at: http://federalreserveonline.org/pdf/MF_Knowledge_Snapshot-082708.pdf.
§ [4] What is Subprime lending, Rajdeep Sengupta and William Emmons at http://research.stlouisfed.org/publications/mt/20070601/cover.pdf
§ [5] Regulation Z Truth in Lending, Board of Governors of the Federal Reserve System. Final rule; official staff commentary, 73 Fed. Reg. 44,522-01, 44,533-01 at http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?position=all&page=44533&dbname=2008_register.
§ [6] http://www.creditscoring.com/pages/bar.htm.

Peter, you've wrote that I live in a left wing echo chamber, but given how the AEI (you and Ed) and your propaganda are so heavily dependent, and precariously positioned, on this “above 660 is good, below 660 is bad” argument--with apologies to Matt Damon--how do you respond to all these echo chamber “disagreeing apples”?

Worse for you—again, despite your protestations--when your theory was measured against Fannie Mae business in the 1990's---very, very, very few of those loans you claimed were subprime failed, indeed, most succeeded at mind boggling levels, meaning no losses. Bye-bye theory.

Your “Aha moment” bit you in the behind, because throughout the 1990's and for the first three or four years into this new century, Fannie's loan loss rate was infinitesimal because they didn't enagge in what you and Ed insisted.

So, what practical good then is your 660 FICO versus 620 assault on Fannie and others?

You suggest it was designed to prove Fannie failed to separate the credit haves from the have nots, the good from the bad, the trustworthy from the dross, the those we want from those we don't want, but when applied to more than 15 years worth of Fannie business, it looks like it only would have kept from home ownership many responsible borrowers who met their Fannie financial obligations.

You can and have shrilly proclaimed that a 660 FICO is the mortgage market's good/bad tipping point. But where does that put you, Ed, and AEI, if most in the mortgage finance world used 620 for that standard?

Maloni, 5-28-2013

Saturday, May 25, 2013

If The GOP Doesn't Want Uncle Sam in the Mortgage Market,
Apparently Sen. Bob Corker (R-Tenn) Didn't Get The Memo

Unhappy Senate GOP sources leak provisions of draft Corker Bill to transfer Fannie and Freddie liabilities to Treasury and create new federal government re-insurer in their place

A veteran mortgage analyst, declaring his information "comes right from a dismayed Senate Republican source," told me Sen. Bob Corker (R-Tenn), senior Banking Committee Republican, is drafting a bill to replace Fannie and Freddie with a new federal mortgage insurer mainly to serve mortgage origination from the TBTF large commercial banks.
The Corker proposal also would direct "all existing single-family mortgage guaranty operations of each enterprise (F&F) transferred to the United States Treasury."
Further,the source says Corker's proposal declares that, "The full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty obligation assumed by the US Treasury pursuant to the transfer above.">
In a nutshell the report says, Corker, a conservative member of the Senate minority--which argues it wants Uncle Sam out of the mortgage market— plans to disassemble Fannie and Freddie, have Treasury put all of F&F's mortgage loan liability on the federal budget
and pick up the tab for any mortgage losses the big banks incur under Corker's new federal insurance/reinsurance arrangement.
What was not reported tot he individual who contacted me is the time frame for tearing down the old and constructing the new.
Does that sound to anyone like an infusion of private capital? If accurate, it appears to me that Corker's new private capital infusion has Uncle Sam's DNA all over it.
But, I wish I was a big bank!
Wait until the Tea Party gets hold of this news or the small community lenders, the Homebuilders, the Realtors and anyone else who thinks the nation's primary and secondary mortgage markets should not be controlled by the big banks who would receive additional federal subsidies.
Is Corker Betraying GOP Principles and Policy??

I have no idea, somebody should ask him him or his staff.

Corker might also be asked about all of those professed GOP skinflints? What became of that Republican outrage over bailouts for the wealthy Wall Street banks and investment banks?
If all of this surprising info holds true and the wing nuts start saying “Aha” to Corker, will he do a head fake, try and preempt the sputtering right wing anger, and say, “This is nothing but a discussion draft. My long term goal really is to..blah, blah, blah, blah, blah, blah.”
Oh, yeah!!!

Let me repeat, this is a report from an excellent source, hearing from disgruntled GOP interests in the Senate, who claim Senator Corker (R-Tenn), who has been talking for weeks with Democrats and other Republicans proposing legislation to demolish Fannie and Freddie, is near to finalizing his draft bill and expects to carve out a significant role for the federal government in it.
Stay tuned!!
(Anyone reading the blog and having questions this matter, don’t call me since everything I know is spelled out above. Check with the congressional office mentioned and the lobbyists around town.)

Maloni, 5-26-2013

Sunday, May 19, 2013

Mortgages and Stuff

When in Doubt, Whack Federal Housing Programs
No Matter How Hypocritical that Makes You Look

And the Return of the Hebrew Hammer, Blasting Away!!

I don't know David Stevens, President/CEO of the Mortgage Banker's Association MBA); don't believe I ever met him.

But all reports are that he's a smart guy and good guy (not all trade heads are). So with those two qualities in mind, it was both ironic and sad that he made the case for “more private capital in the mortgage market” at the expense of hobbling of Fannie, Freddie, the FHA and ultimately ultimately consumers.

The MBA once was hip joined with Fannie and Freddie, as well as the FHA and its securitizer Ginnie Mae. But then the group got greedy had and has conflicting interests among big and small companies about  surviving and making money.

A few years ago, the MBA overreached and bought a new Washington headquarters within spitting distance of the White House. But—most embarrassingly—had to unload it under financial duress and become..oh perish the thought...a commercial renter!

They Only Are Mortgage Companies

MBA's members are not commercial banks—despite their love of the generic “bank” name-- they are mortgage companies, which exclusively make mortgage loans, nothing more, and sell every loan they make to some investor somewhere.

They made their historical mark, almost 75 years ago, in 1939, when they leaped to originate the newly created Federal Housing Administration (FHA) 30 fixed rate, government insured mortgages, created by Franklin Roosevelt in the same legislation which gave bith to the original Fannie Mae as a government agency mode.

The old Fannie Mae—little changed until 1970-- bought those new loans (mostly from the mortgage companies), replenishing lender capital to make additional mortgages and held the mortgage loans in its government funded portfolio.

Mortgage banking flourished, especially after two and a half million servicemen and women returned after WWII and used their GI benefits on FHA and VA loans—then sold to Fannie Mae-- since those were easy tickets to homeownership.

It hard to argue that the MBA and its members owe their business lives to the federal government and continue to thrive from it.

(Prior to that Fannie execution, the mortgage companies would travel to New England selling their mortgages--with the back up docs--to insurance companies whose cash flow needs aligned with the monthly mortgage payments they bought from the lenders.)

Stevens Decides to Scorch Federal Supporters

Now David Stevens comes along, bemoans that Fannie and Freddie are crowding out the ”private capital” (presumably from those federally subsidized banks......think about that descriptor?) and sending tons of money to the Treasury.

Except, David, who/what is bringing that business to Fannie and Freddie...um commercial banks and their mortgage banking subs, since the two mortgage investors can't originate their own loans. Some lender, somewhere is making mortgage loans with their own “private capital” and seeking F&F help to securitize them.

Most mortgage bankers are subsidiaries of large banks, having been vacuumed up by the depository institutions, leaving a miniscule number of “independent mortgage bankers/companies” in existence.

That's in part why the MBA is riven.

The MBA now parrots the big banks and want less Fannie and Freddie and “more private capital,” as if F&F somehow are stopping mortgage companies and their bank parents from originating mortgage loans.

Twenty years ago, with F&F flourishing, it was a foot dragging MBA which railed against automated underwriting—because it squeezed cost from the system—cost which the mortgage companies used to extract from uninformed borrowers.

"Bright Line"

The MBA, for years, also argued for a “bright line” separating Fannie and Freddie in their limited secondary mortgage market space from the MBA members in the primary market space, from which F&F were barred by law.

This absurd campaign, again about money, was ludicrous because F&F never wanted or gave signals that it was hot to originate mortgages. They had squadrons of mortgage bankers doing it for them.
Mortgage loans require prioritization, ie. turning individual loans into mortgage backed bonds to make easy for investors to purchase and trade them. Creating those securities is what Fannie and Freddie now do.

But They Created and Sold Subprime, Unleashing Poison!!

Stevens calls for a common or single securities system and for using the “private sector’s systems development” expertise to shape the common platform, not exclusively using Fannie and Freddie technical skills.

David, most mortgage investors can remember back 7 or so years, which was the last bout of big time private label mortgage securitization (meaning banks skipping F&F involvement)--that was called the subprime era—and many investors still bear the scars and losses from broken bank promises, bank deceit and misrepresentation.

Fix that David, as in “Physician heal....”, and your other arguments might get traction.

But thundering against the federal government when virtually all of your industry's revenue comes from Fannie, Freddie, and the Federal Housing Administration robs you of credibility.

Also, blaming F&F for raising their G-fees is silly, when you know all of those decisions are made by their regulator or the US Treasury. If you don't realize that, maybe the MBA settled short on exec talent?

But the hoariest (word chosen carefully) explanation of Stevens rant is his bitching about the element which allowed his industry to thrive--federal housing support—he calls for reducing Uncle Sam's presence (it's all mortgage banker code) so the big banks and their commercial kids can charge consumers more.

What chutzpah!
Despite his talk Stevens displays a disregard for the home buying public, who are his members' customers.

The standardization, efficiency, transparency, and accessibility—which still exists in Fannie/Freddie operations—isn't there when big banks do their own thing, nor is the competitive pricing that benefits borrowers.

The good news is that most smart mortgage market observers see through the Stevens charade and realize that the MBA is just a version of “Big Bank Lite.”

The bad news for Mr. Stevens and the MBA is that some of his membership might not like where he wants to lead his group and could seek a more useful organization elsewhere.

The Hebrew Hammer Goes “Yard,” Twice This Past Week

In baseball parlance, “going yard,” means hammering a home run, that most glorious of batting efforts.

Well, my friend David Fiderer “went yard” twice last week, putting welts on the bodies of Fannie/Freddie critics, dissecting the “agreement” reached by “”Fannie Mae (not really, just the Federal Hostage Finance Agency on behalf of Fannie Mae), KPMG, Fannie's former auditor, and Judge Richard Leon.

Fiderer, a researcher supreme, whose pen is sharp, cuts into the agreement” (which still needs the Judge's blessing) and finds some fascinating linkages to prior Fannie/Freddie's regulatory office miscreants.

That link is below and is a tantalizing morsel of Fiderer's skills. Those individuals mentioned in his work might want to add to their insurance coverage or buy a protective helmet.

Last Friday, a more button downed Fiderer work appeared in the American Banker. This was a three decade clinical review of Fannie Mae mortgage lending, about which more lies have been than Wilt Chamberlain’s sex life. (A refresher: Wilt reportedly slept with more than 20,000 different women).

Fiderer cites Fannie lending data for three decades and sources it, pointing out who out there has misrepresenting the data to whip up political anger and why that spurious effort should be ignored unless you regularly wear a tiny tri-corner hat or are in the Tea Party.

Some Bank....

I received a bank notice and, promptly, two days later a check, from the large domestic bank on the east coast, which includes “bank” and “America” in its corporate title.

That bank—just like in the game Monopoly—had ”made an error in my favor” card, when it screwed up my refi some time ago (since refied, again, with another bank, which already has sold my loan to another servicer. And I would be the beneficiary of some of that bank's cash.

Thank you Mr. Bank and the federal government for making that happen.

(Bought some milk, bagels, and fruit, with the proceeds from that “error.”)

Bill's Book Corner

I want to tout two new books to you, written by people I like greatly.

John Buckley

Veteran novelist John Buckley and I bonded at Fannie Mae, years ago, when he ran Communications and I oversaw Government Relations. John's latest book is “The Geography Lesson.”

The Geography Lesson” tells the story of a botched 1968 expedition in which a National Geographic writer and photographer discover a magnificent Anasazi ruin in Southern Utah. Yet between the moment they make their discovery and their return some weeks later with U.S. government officials, the site is ransacked, and all its most valuable artifacts looted, creating a Washington kerfuffle that brings shame on the National Geographic Society.

Now, flash forward 40 years when Tim Prescott sees an artifact he last saw 4 decades previously and...you are into “The Geography Lesson.”

Anthony Marra

Anthony “Hal” Marra (Jr.), not only is the son of my neighbor and former Fannie Mae colleagues (Tony Sr.) and  his wife Mary, but I also was Hal’s street hockey coach, clearly seeing in his rugged play a talented young man headed for the Iowa Writers Workshop and with a well received and hot selling first book, likely—as I assured myself--because I took him under my wing and showed him how to throw a hip check on a tennis court street hockey pitch!

A Constellation of Vital Phenomena” is a love story set in war ravaged Chechnya and is a deep tome and riveting for such a yougn author.

Hal's book, just out, already has earned excellent reviews in the Washington Post and New York Times, with the latter calling him a “young Joseph Heller.” (I didn’t know Heller played street hockey.)

My wife and about 225 others showed up last week to DC's Politics and Prose book store to listen Hal's discuss his book  and to buy copies of  “A Constellation of Vital Phenomena.

Get both books, sit back and enjoy them.

Maloni, 5-20-2013

Monday, May 13, 2013

Analyze The Reports

Now the Rampant Speculation Should Begin

I received the email below from a financially/economically bright , colorful, and creative friend, who shipped it  following Fannie's announcement last week that it will send $59.5 Billion in cash to the Treasury.

If one adds fairly minimum amounts for the three quarters of the rest of the year, (Fannie will send Treasury) north of $75 billion for the year. In fact, (Fannie now is) paying so much to Treasury in dividends that it will push back the date that the whole country hits the debt ceiling and Obama has to lock horns with congressional Republicans again.”

Of course, the way that Henry Paulson arranged the deal in 2008, it's like being in hock to the Mafia; (Fannie) can pay and pay but never get free.”

Or, as the song “Hotel California” goes”:

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "

That's a Lot of Money, Jeb, What Should We Do Now??

Fannie/Freddie, each reporting record earnings this past week, have created quite a buzz among those who understand the stakes and are aware that some Congress heavyweights—notably the Chairman of the House Financial Services Committee, Jeb Hensarling (R-Tex)--see the two as twin cancers requiring legislative eradication. And Jeb controls the agenda in the House committee.

It could be that Hensarling understands all too well that the income F&F are generating—and projecting--could influence his peers and colleagues to think Fannie and Freddie would be helpful to the nation (remember those people, guys?) and a more productive way to deal with Fannie Mae and Freddie Mac exists rather then Hensarling's desired evisceration.

For those who despise Fannie because they somehow manifest the federal government—and got bailed out by the same--or that the two encouraged homeownership back in the day (and God forbid once –at least at Fannie--had prominent Democrats working there), your complaints could become transitory.

A closer review shows that Fannie’s and Freddie's “mortgage sins” were the same that every major “PRIVATE” financial institution in the nation committed (with each benefiting from their own federal subsidies).

F&F bought Wall Street private label subprime (PLS) mortgage securities--not because they were encouraged by the federal government to make mortgage funds money available to low, moderate and middle income Americans—but because they faced revenue and market share losses and hoped to recoup.

Opponents like to conflate those separate matters because they want to blur the systemic benefits that the “old” Fannie and Freddie brought to the nation and, in some sense, still do.

Lots of Good News Embedded in F&F Earnings

Let me suggest to those on the Hill, not already wedded to the Tea Party ideology, the good news-- despite the reactionary chants from Hensarling and others—is that you have time to digest just what these positive earnings represent. Maybe look closely at why Bush Treasury Secretary Hank Paulson structured his F&F “take over deal” the way he did, so Fannie and Freddie never would appear to pay back the governmental (unlike GM, AIG and others). And, also, while the Federal Housing Finance Agency (FHFA), F&F's current regulator is too hands-on, it successfully has made it impossible for the two to finance any form of subprime mortgage, which deals with legitimate concerns over future financial taxpayer risk.

As my lyrical friend notes above--and I will add the Freddie perspective-- between the two of them, conservatively, Fannie could pay back an additional $25-$35 Billion this year and Freddie $20 to $25 Billion, with an emphasis on conservative.
The revenue opportunities go on.

I am not counting any Deferred Tax Account (DTA) Freddie could employ, as Fannie just did, which could send even more to the taxpayers or future financial damages received by both from several active lawsuits they have against major banks for fraudulent bad mortgage loan deliveries.

A additional F&F revenue wild card is—as large banks already have begun to do—Fannie and Freddie could reduce their loan loss reserves and convert them to bottom line income, increasing their profitability and expand what they plan to send the big money house at the corner of Pennsylvania Avenue and 15th Street.

Someone suggested that F&F—at current loss rates—already have 10 to 12 years worth of loss reserves on their books, which their regulator soon will have to agree to allow them to move down and then give it to the Treasury.

The Full Financial Return to Treasury Could Be Real Soon!

Play with those variables and, in any sense of the “paying back” concept, Fannie and Freddie could pay back the government in two years or less and be financially viable and a systemic asset to the nation.

Are these the types of institutions a majority in Congress should vote to disassemble or otherwise destroy because in the past they were cheerleaders for homeownership, as both parties demanded, or initially spawned by the Roosevelt Administration?

And, finally, what is the mortgage investing substitute?
Rampantly speculate on a Fannie/Freddie successor, since that's what Washington has been doing since 2008--when Paulson first bollixed the two--and explain why that mortgage model would be an improvement.
I've made my case against the big banks exclusively owning the nation's mortgage finance systems and I don't need to repeat it.

The big 7 or 8 Too Big Too Fail Banks (see link below to Barry Ritholz column) are not reliable partners to mortgage seeking consumers, as least when they don't have a Fannie or Freddie on which to layoff their mortgage risks.
I've also written often, I think the large banks enjoy having F&F in their current mortgage investor roles, because it makes it easier for banks to manage their mortgage business. But the big guys are “commercial banks” and recent reports suggest they are ramped up to do more of that needed lending and bless them for it....if it is true. I am betting keeping some form of Fannie and Freddie in place helps the big banks.
Use The Time Wisely to Consider and Understand

So, policy makers, their staffs, think tanks, media, and all who propound politically on new designs for the nation's mortgage finance system, take a timeout offered by the Fannie/Freddie earnings flow and try and understand and ask why many feel need dramatic changes when statutory and regulatory changes may already have created most of the future market structure the nation needs.

Two recent articles, one in Barron's, and one in “The Hill” discussing matters in today's blog are worth reading.

Again, nobody is suggesting that F&F, if used in some future capacity, never be altered. I suggest that people understand how these very productive institutions achieved success in the past and to consider, with several operational regulatory changes already made, how they can do it again.

Congress needs that review before they get swayed by those in power who, thoughtlessly, would pitch Fannie and Freddie out with the bath water.

(BTW. Kudos to my old friend—not the author of the opening email—Rob Zimmer, a former Fannie colleague before going to be one of Freddie's top lobbyists, who now has his own financial government relations practice. Someone called my attention to my Feb. 26, 2011 blog, in which Rob essentially predicted the F&F turnaround, two years ago, which the world recently has seen.)

Maloni, 5-13-2013

Thursday, May 9, 2013

Swami Bill

I Hate Being a Seer; So Many People Ask You Questions!!

Now watch the frenetic craziness on the Hill.

Maloni, 5-9-2013

Tuesday, May 7, 2013

The AEI and me

Unrequited Love??

I am quite jealous. I admit it.

Ed Pinto of the American Enterprise Institute (AEI) has been in the mortgage news a lot recently (when isn't he?). Recently, he worried that demands to loosen underwriting standards on federally related montages will lead to a return of major housing finance problems, additional government losses, and God forbid, possible resurrection of Fannie Mae and Freddie Mac, the two mortgage entities which suddenly have become valuable national and Treasury cash cows.

Ed has a huge audience and a well honed PR machine, which includes the AEI's communications apparatus and his own blog, so recently I politely asked him—in an email—if he would consider putting some of my prose on the AEI blog, just to give his posse another perspective.

I haven’t heard back from Ed, but I am assuming that means his answer is “no.”

If Ed had accepted my offer, here is much of what I would tell his AEI audience (and him).

Maloni to Ed and Peter's AEI audience

If the AEI, Ed Pinto and Peter Wallison succeed in convincing Congress to excise the federal government totally from the nation's mortgage finance system. I am not as confident as they are that the surviving mortgage market would be as fair, efficient, and accessible to most Americans as is the current one.

Let's be honest, if there were no Fannie Mae, Freddie Mac, and FHA, the mortgage market would be controlled by the nation's largest banks and their investment banking subsidiaries. There might be a few other survivors but none of any size or clout to compete with the big six or seven bank holding companies.

Great for the banks, but bad for consumers.

When left to their own devices, large banks lie, cheat, bully, and obfuscate. For proof, see $10.5 billion of bank regulatory fines paid in 2012; $9 billion in mortgage settlements made with Fannie and Freddie, with much more of the latter still pending in 2013; none of latter includes New York state now taking out after two large banks for mortgage misfeasance.

That’s a ton of bank law breaking and fine paying in a fairly compressed period. And most seasoned observers understand that's just leakage from dodgy operations.

If you can remember back less than 10 years, you can get a glimpse of what the Pinto-Wallison ideal future mortgage lending machine looks like.

That was when most large banks--largely left to their own devices by the “hear no evil/see no evil” George W. Bush financial regulatory brigade--ignored sound but exacting Fannie and Freddie automated underwriting systems, and originated mortgage loans through bank-owned brokerage systems, which employed lackluster bank underwriting standards, and produced nearly a trillion dollars of worthless private label mortgage backed securities” (PLS) and synthetic derivatives based on the same PLS.

The banks and their minions—attaching inflated ratings from overworked and conflicted rating agencies-- sold those worthless mortgage backed bonds all over the world, infecting mortgage investors in every nation.

That simply is why the 2008 financial debacle was international, as a majority of those minimally underwritten mortgages soon failed producing record losses across the globe.

Now, Ed and Peter have told their audiences that Fannie and Freddie failures caused the 2008 financial Armageddon, a tale rejected by many credible sources in and out of DC who showed that F&F's loans did not fail them, but their Wall Street PLS investment did.

New managers at Fannie (and others at Freddie)--beginning in 2005—rashly sought to recapture “lost” market share and earnings by putting copious amounts of “private label” mortgage backed securities in their portfolios, composed of mortgage loans their own underwriter systems wouldn't approve.

Ed, Peter, and I will disagree, but what my adversaries can't rebut or ignore—as they try and foist blame on the former GSEs--is that Fannie Mae mortgages (they seem to enjoy railing at Fannie more than Freddie) and mbs, processed through its proprietary underwriting system, enjoyed minimal loan losses, measured in the fractions of a percentage point, from 1990 through 2005.

All of that lending data is public and filed with Fannie's safety and soundness regulator, HUD, the SEC, the Fed, Wall Street investors, and appropriate congressional committees.

I need to repeat for the “government is evil and banks are great” AEI audience, that sophisticated institutional mortgage investors worldwide heavily bought PLS subprime, underwritten, created, and sold by those same banks to which Ed and Peter now want to turn over the entire US mortgage business.

Fannie Mae and Freddie Mac bought the PLS poison, too, with those Wall Street bonds failing up to 10 greater than Fannie's and Freddie's securities of that same period.

Come on Ed and Peter, use your facile minds to conjure a more acceptable alternative than banks only running the US mortgage market.

Alas, obviously, Ed didn't print my mini-tome, above. Maybe, sometime he will relent and let me offer his readers a different point of view.

Until he does, it's your loss AEI.

Common Lending Platform

Fannie's and Freddie's regulator, the Federal Housing Finance Agency (FHFA) has been beavering away on to require to the two entities to give up years of proprietary data, join and produce a common underwriting platform.

I suspect that some F&F officials believe their own system gives them an edge and don't want the other guy to have what they have or know what they know.

But FHFA, either with an eye to merging the two (an idea which may not warm the cockles of whomever succeeds Ed DeMarco, assuming the Senate approves any Democrat) might be missing out on a wonderful opportunity if they pursue this blending project.

The “old Fannie Mae” constantly looked for tangible ways to cut mortgagor expenses, earning broad kudos for reducing the actually cost of getting a mortgage loan.

Well, here is a Maloni suggestion for FHFA that could save most buyers some time and $500 or more, earning your agency some much needed goodwill!

To the common platform with property information, FHFA is looking to integrate all sorts of survey and buyer data.

This new platform would have detailed information on a huge percentage of all existing loans in the nation.

Given that technology can massage/manipulate data and produce very exact results, why couldn't FHFA urge F&F to use that common mortgage finance data--which likely comprises “comparables” from virtually every US neighborhood--and offer consumers a bonafide house appraisal via a F&F seller servicer for $50 or so.

That's a lot cheaper than what borrowers pay now and leaves families with more for a down payment, closing costs, or to pay bills.
There are probably additional overpriced homeownership products/services which constant review of fresh large data stores could uncover.

I am going to duck my head before the appraisers (and the MI's?)  start throwing brick bats at me.

Maybe Mel Watt will like it, along with mortgage principal reduction, too, he could make himself a star.

Maloni, 5-8-2013

Thursday, May 2, 2013

New FHFA Director?

Mel Watt: Respectfully, “Tell the President Obama,
Take that job and shove it (onto somebody else)!”

They lied to you Mel.
Heading up the Federal Housing Finance Agency (FHFA) is not a cakewalk, it's not a sinecure, it's not controversy-light (just the opposite).
Yes, you are a bright guy, head of the Congressional Black Caucus and you worked on Dodd-Frank, plus sat in on about two million (boring) hearings about financial services and mortgage finance matters, but—unless I am gravely mistaken and you are the rare Congressman who knows and understands securities and mortgage matters--none of your prior experiences will ready you for being the titular head of the agency which oversees Fannie and Freddie.

Forget your industry “friends,” people whom you felt over the years with an open ear and votes in the Financial Services Committee and the House; they are not your allies any more.

How about that ringing endorsement the Mortgage Bankers Association just gave you? See it? Oh hard to find in David Stevens BS rhetoric wasn't it? It wasn't even “faint praise” and this is a guy who once was an Obama appointee. How often did MBA lobbyists come to you for help?

Remind your fellow CBC members of the MBA's actions.

(BTW, contrast that with the way the NAR came out for you right away and upfront. The Realtors didn't cavil or hedge their bets. If you get the job, remember them and the MBA.)

But that's the way of this town.

Thanks, But No Thanks BO

Tell the President, "Thanks but no thanks."

Nobody with your experience should sign up for this amount of grief and aggravation, unless you are being paid seven figures and given a cadre of knowledgeable and loyal assistants to help you carry the load, which you are not.

I know the Obama folks are telling you “piece of cake,” but Capitol Hill types already betting you don't have the 60 votes. They're counting noses and coming up short of GOP Senators who might buck their party vote and for you.”

I think I know why you want the job, I worked 11 years on Capitol Hill for a senior Democrat on the House Banking Committee (what it was called then), who retired after 20 years because the job got repetitive, boring, too much ass kissing and fund raising. And he was in the majority—a major subcommittee Chair--and had every reason to believe the D's would stay in control, which they did for another dozen years.

After a while, that work is tedious, filled with righteous assholes everywhere.  The job's public service gilt quickly wears off s off.

Running the regulatory agency which oversees Fannie and Freddie probably seems to you like a good and easy job.

It isn't.

Bloody and Venomous F&F History
The history—which cannot be avoided—and you inherit is bloody, ugly, and filled with emotional partisan back alley fights, and extends to the media and business and low income groups today. The House R's don't even mask their contempt, which is based more on Tea Party reasoning than knowledge.

I heard you say that most everyone wants to wind down F&F and bring in more “private capital.”

Well the Republicans do, but there is no such thing—as you should know—since those big banks get as many explicit and implicit federal benefits as did Fannie and Freddie. So don’t kid yourself.

As I've written, copiously, the banks don't want the job, unless you pay them to do it by guaranteeing the losses on failed mortgage back securities they issue.

I know you have big banks in North Carolina, but don't trust them, either (if it is not too late). By now, after 20 years, you should know what banks are about and it isn't consumers or even the voters in your district where the banks live.

It's money! And, for many years, all that drove the big banks and their F&F opposition was getting their hands of the mortgage giants' revenues.

If you have to learn on the job, assuming enough GOP Senators get bought off, you are going to encounter issues where everyone seems right or everyone seems wrong and your instincts tell you not to rely on FHFA people because you don't understand their personal agendas, which most of them have.

FHFA's Work Force

A lot of “evil critters” burrowed into the FHFA policy woodwork and protected themselves with a civil service prophylactic and you can't get rid of them. And I won't even hazard a guess at their IG's real agenda, except that eh wants a gaggle of more lawyers to investigate his own agency.
By many reports, although not on every issue, Ed DeMarco earned the respect of Fannie/Freddie officials as well as the Home Loan Banks execs, those orphans are yours, too.

The Admin truly dislikes DeMarco, ergo your appointment. But, he has a civil service right to return to the agency, somewhere.

Suggest to your Admin friends that they make Ed an offer he can't refuse, Ambassador to France or head of some national security agency, some place—other than FHFA--where he really wants to be.

Send Ed to Camp, Somewhere!

Having DeMarco rejoin FHFA invites trouble and confusion. People on the Hill calling him not you, generating odd staff alliances, people checking with him before carrying our your plans, poor communications and disarray (if not slow walking “your” agenda).

You think your House GOP “colleagues” on Financial Services—led by Jeb Hensarling (R-Tex)--
are horse's exteriors, now, wait until you testify before them?

Temporarily, you can hide your unfamiliarity on substantive issues and history for a few questions and refer back to your prepared statement, but it soon will catch up to you and if you come up short you'll feel embarrassed and angry. And, as in professional sports, your opponents will go for your injured and weak spots.

But, you soon will be responsible for trying to explain Fannie/Freddie/OFHEO/FHFA history which has been so distorted by political opportunism and filled with fear and mistrust, that you might mutter about the most expedient option –which might be the worst one-- entertain dissolving the two entities.

Then, immediately, your friends on the Left weigh in and you begin to hear from the housing industry groups who believe in what Fannie and Freddie do and don't think the large commercial banks can replace them.

Understand What the WH Really Wants, If It Knows

Near term, the Obama Administration doesn't want F&F to go away (let Hillary worry about that), because the two are poised to feed billions (as much as $300 B or more, over the next four years directly to the US Treasury and provide the Obama Administration with greater revenues and added resources to fight congressional budget fights.

Whatever clear and specific orders from President Obama (yes, FHFA is an “independent agency, but.....), you'll have to deal with Senate Republicans—who deeply supported Ed DeMarco and can gum up any legislative action or regulatory proposals, they chose.

Do you think your former GOP colleagues in the House, whom you have experienced up close and personal, can be part of any rational process to utilize Fannie and Freddie in a constructive manner?

I am sure you look forward to this challenge, but this new job—after all of the negative noise which already has started—might be one you'll want to leave or could make you unhappy and someone who needs stomach remedies daily.

Yay, Mel!!

BTW, if you really said to Ralph Nader what has been reported in the press, in his meeting with the CBC, God bless you, Mel Watt. Nader's arrogant egomaniac run for the Presidency in 2000 brought the world George W. Bush.

One last thing, in a bit of self promotion, read as many of my blogs from the past four years as you can.

They contain more political and mortgage industry truth and value than you will find in any WH briefing book.

Remember the post-2004 Fannie--after Frank Raines and Tim Howard were forced out by political hacks masquerading as your FHFA predecessors and different GOP blessed Fannie officials took charge—made huge subprime mortgage acquisition mistakes, but those errors didn’t happen when Raines ran the company, although many Fannie opponents will try and falsely conflate them.

Find out the truth for yourself. Understanding our mortgage finance history is crucial to plotting the nation’s future of mortgage finance system.

Maloni, 5-3-2013