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


Anonymous said...

Not sure if I agree with increasing FnF's footprint, but your point to AEI is perfect.

Bill Maloni said...

My point--if rational people ever make a decision here--is that something which looks like a Fannie or a Freddie needs to be in the mix for systemic reasons not
for auld lang syne.

Anonymous said...

Some housing economists should calculate the costs to the national economy of the current dysfunctional housing finance system. How many potential borrowers with good credit cannot find housing finance to purchase a home?
How much GNP and how many jobs have we lost because of a depressed housing sector?
Let's calculate the costs of doing nothing to restore a well functioning secondary market.
In other words, measure F&F bailout costs versus opportunity costs.
Have the Homebuilders, the Mortgage Bankers and the Realtors all gone to sleep?

Bill Maloni said...

Excellent idea.

Whose findings would you believe, the CBO, the Fed, Cato, Brookings, Heritage, the Homebuilders,the Realtors, or AEI??

The problem is that "the other side" likely would reject the findings of any of those institutions because of Washington's poisoned partisan atmosphere.

That's why I think it will take one party control of the Administration and both congressional chambers before anything substantive happens on mortgage finance or a myriad of other issues

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Anonymous said...

WOW! Fannie is bailing out the federal government!!!

Bill Maloni said...

Freddie's earnings and now Fannie's, a day later, not "repay" quickly what they were advance but also help the federal government with deficit reduction, as well as providing Treasury flexibility with budget/spending deadlines.

Those represent merely two of the reasons why nobody is quickly going to dispose of them. It make far more sense to figure out a way to re-engage them as privately managed companies and use them to serve the public.

But, when did logic and rationality ever influence partisan policy makers.