Thursday, June 27, 2013

Column A and Column B



Can’t We “Housers” Just Get Along?
I Have a Plan for It, But “Shots” First


Lot of news about the Corker-Warner “do away with Fannie and Freddie” legislation, which will not move in the Congress this year. It will garner attention, lots of speculation, and media exposure because it represents a bipartisan effort to think “strategically” about how the nation finances home mortgage loans.

The scheme may look “strategic,” but it also may be a little vacuous, if not disingenuous (don’t forget they’re Senators and that goes with their turf!).

In introducing his legislation to kill Fannie and Freddie—as well as all of the systemic good they provide--and  create a new Federal Mortgage Insurance Corporation (FMIC) to provide back up mbs loss protection, after other investors, including the originating lenders and mortgage insurers pony up, Senator Bob Corker (R-Tenn.) claimed,

"It brings discipline back into the housing finance sector where you don't have private gains and public losses," Corker said on CNBC.

On that, I call “Bull Shit!”

Corker’s loses my goodwill when he hurls this faded distorting Right Wing  buzz bomb at Fannie and Freddie to further con a public that already little understands the two and how they operate now or before.

Corker obfuscates and tries to twist the reality that for almost 40 years Congress mandated that Fannie—and later Freddie—earn their own way, borrow their working capital in national and international debt markets, cover any business losses—and as a public company have shareholders and have their stocks traded on the New York Stock Exchange-- which they did until the Bush Admin put them into conservatorship in 2008. 

There never was one federal penny put into either until the 2008 wipeout. 

My memories of 2008 include Fannie Mae shareholders seeing their once $62 per share stock drop to less than a dollar and then see their company taken over by the Bush Administration under dubious circumstances, actions now the subject of a major lawsuit.
Where was Fannie Mae’s private gain in those moves?
Let me challenge Senator Corker and/or his top Financial Services staffer to explain and justify his “private gains and public losses” statement with facts, not political hyperbole?

Any time guys are ready, since I know there are a legion of very smart folks waiting to hear your answers and then obliterate them faster than you would put down F&F.

And, since the cerebral Senator is putting almost everything in his bill “on budget,” with the federal government, i.e. the taxpayer, as the ultimate guarantor, is there any chance that the “private firms” Corker claims will invest in the nation’s mortgage finance system will enjoy any “private gains” because of Uncle Sugar’s presence?

As I hope Johnny Depp says, “You betchum Kemo Sabe!”

I won’t say anything about the inherent hypocrisy in the Corker rhetoric but I prefer to think that Senator’s comments betray that he and many of his allies just don’t understand the mortgage finance system, its players, and how profits are made?


Two Big Winners

The proposed Corker-Warner mortgage structure is a big bank boon (new federal bond loss insurance) and heavenly manna for the mortgage insurance industry (MI’s). The latter group has seldom graced anyone’s “good guy” list and, historically, has been barely trusted by lower income borrowers or mortgage investors which often have to fight the MI's to repay legitimate losses on which MI products provided “loss protection.”

I wonder how quickly the inevitable MI industry and large bank political financial support will show up in the Senator’s campaign finance reports?

I am a bit dubious about Corker key stoning his plan with the MI industry. 

If this is such a solid industry, why—except for AIG through its United Guaranty sub and GE which no longer owns  GEMICO, an MI company now devolved  into Genworth --has it been “peopled” (the current SCOTUS believes corporations are people) by a handful of thinly capitalized companies? 

AIG’s woes still are front page news and the best that can be said for GE is that the Hudson River barely has survived their affiliate’s 20 year poisoning of that waterway, but millions and millions of fish haven’t.

Didn’t the Consumer Finance Protection Board (CFPB) just charge four of the largest MI companies--and is seeking $15 million in fines from them--for giving kickbacks to lenders who steered business to them? Of course four companies is about half the current industry.

Somehow, I am sure the clueless mortgagors, paying MI policy premiums on those kick backed loans, didn’t get the best insurance deal available. The industry perps have to generate that payoff cash somehow.

Oh and wasn’t it the same MI industry that slow walked or even ignored the anniversaries when mortgagor home equity surpassed the 20’s threshold, requiring the cancellation of those monthly MI payments for borrowers? Sure was!

The nation might prepare for a lot more of that kind of action—and likely worse--if Corker-Warner ever sees the light of day unchanged.

Nobody tell Senator Corker he just opened a huge can of federal subsidy for the unworthy MI’s, it could ruin his reservoir of  one liners, essential to misleading people about legislative intent.

And, if any Senator pontificates, “Well, we want/expect new companies to enter the business!”

First, sell that Senator any underwater land in Florida you still own. Then tell him/her history suggests any new MI’s will be driven by the old MI ethics, which don’t run very deep in the industry which went bankrupt during the Great Depression and then was revived at the state level in the mid 1950’s.

Once Congress—as it affirms, again, in Corker-Warner--decided that borrowers didn’t have to put down a 20% cash to qualify for a mortgage but could substitute a mortgage insurance policy for the part of the down payment they didn’t have or couldn’t afford to borrow, the MI industry was super-sized from its former minor complementary insurance role.

Senator Bob, I can’t believe that a good old Tennessee country boy like you can fail to understand that whenever Uncle Sam is involved someone will try—and likely succeed—to pick his pocket.


Here’s A Maybe “Get Out of Jail Free” Card For Corker


For all of Corker-Warner’s marketing faults—the most significant of which is their need to abuse and then  destroy Fannie and Freddie before you can do anything positive--let me offer a thoughtful and constructive classic “Washington solution” or at least something that might make your deal more palatable. 

Senator Bob, it means looking across the aisle and the Hill to admire a cogent and concise idea being pushed by House Financial Services Committee Rep. Mike Capuano (D-Mass), which could be a perfect addition to your approach. 

Your legislation contemplates a 5 year transition for your FMIC to take over from Fannie and Freddie. Capuano suggests that F&F be allowed to “repay” the principal invested in them by the Treasury (which likely could occur by next year, if everyone agreed to the logic) and then be considered for future roles.

In the interest of “Houser comity,” let me take a little from Corker (his five year transition) and a little from Capuano (principal repayment) and suggest that with Capuano’s proposed return of Treasury’s investment,  Congress  could let F&F hold onto future earnings—net of Treasury repayment, capital, taxes and overhead--so that in  “five years” Fannie and Freddie can be free to participate in the FMIC mortgage market just like any other company once helped by the federal government. 

What’s the urge/need to destroy them first, along with all of that experience, mortgage securitization network, executive expertise, positive history (save the subprime debacle which struck every mortgage investor), and the F&F goodwill and desire to make the mortgage market work better?

In the 60 month Corker-Warner legislative time frame, Fannie and Freddie will have done “federal time,” paid back the government with a financial sweetener to extinguish all of their Treasury debts (plus extra cash which Treasury now would just sweep after $186 billion was returned), done yeoman work holding up the nation’s residential mortgage market for five solid years while in encased in figurative regulatory handcuffs, and have earned the right to the same treatment as GM, AIG and every other financial services company helped—but not destroyed--by the government!

Makes great policy and political sense to me—if you are going to try and rally folks to C-W. Just make it Corker-Warner-Capuano!

You might even get a Jim Millstein buy in.


Maloni, 6-27-2013
























Anonymous said...

Bill, you are the man! This is such a great idea and somehow needs to be heard by Congress

Bill Maloni said...

Someone bigger and more important than me needs to suggest this or explore why it would make sense for Senators/Congressmen to run with it.

But if C-W is a not starter for the GOP, then C-W-C wouldn't change anything.

I'm trying to get someone to explain to me why the destruction of F&F is key to creating FMIC, but I am not getting good answers.

Having thrown out this suggestion, I also could give you a half dozen or more reasons why Senators might reject it.

Qualified Observer said...

Awfully refreshing to read cogent to-the-point writing by someone unafraid to call BS. Please keep it up.

Anonymous said...

I would prefer they leave F&F as is but if this is option B (with option A being the current C-W plan), I would take it.

Seems like a win-win for everyone....especially to the Treasury's coffers and fairness to shareholders.

Why might Senators reject? Can you offer a few examples?

Anonymous said...

Mr. Maloni, wait until there is a Jack Reed's bill (a Millstein style of reform) and then you have the winner C-W-Capuano-Reed in there.

Can't get any better.

With FF's clean slate, stripped off their guarantee business and playing in the sandbox together with everyone else.

Even Watt/DeMarco could have their single securitization platform running in the background!

C'mn, can't we all get along?

Bill Maloni said...

Let me combine answers to two comment/questions.

Someone earlier this week asked me about the Reed bill, but I just haven't seen it or read much about the idea. I look forward to doing so, because I think Jack Reed is a solid Senator with a good mind.


Why would Senators reject something which is an amalgam of C-W and Capuano? So many reasons, including ego and ignorance and that's before you get to party affiliations.

In general, Senators and Members--even of the same party--don't always respect each other, mainly because of disdain for the other chamber's rules and actions.

In this instance, there also is the C-W predicate--as I have been trying to establish and understand--of abololishing F&F? If C-W fans believe the two need to go to make room for their FMIC, they are not thinking broadly, or may be full of the "Fannie is poison" crap that has been around for years and has dissipated only slightly in the past year with Fannie favorable court decisions and other positive commentary, as well as the recent F&F business results.

But the dislike and doubt about F&F is real and it clouds the thinking of most public officials who really have no complete understanding of the mortgage finance system and the positive systemic role F&F played and continues to play today.

Note, too, yesterday there was a letter signed my 20 or more low income and affordable housing groups who had a whole list of issues with C-W, after offering obligatory, "the undersigned support your bill, but.....!"

This will slow support from moderate and liberal Democrats who don't want to PO the "little folks."

But, it also through goo into the process wheels.

That letter just is a microcosm of what will hit if there is any real movement on this--which I don't think there will be.

Robert Mae said...

"I'm trying to get someone to explain to me why the destruction of F&F is key"

I maintain that it isn't the destruction of FnF that is the principle goal, but the division of state and housing. As long as FnF exist - in present form, anyway - HUD and other govt housing initiatives will pray upon them, leading to govt guarantees to those who in no way deserve them, or will respect them under adverse conditions.

Read more Wallison and you may agree.

Bill Maloni said...

That may be the GOP's objective and that of other conservatives, but C-W would seem to grow the federal government's role in the conventional mortgage market not shut it down.

Ironically, I emailed Pinto and Wallison this evening to ask why they haven't commented on the C-W bill?

EP says, "It's coming."

HUD isn't a player in the F&F world, not with the FHFA and Treasury presence.

The only subsidies being discussed are those for the bank MBS issuers and the flood of cash headed for the MIs, under C-W.

Robert Mae said...

Maybe not HUD - today - because the recent crisis is still fresh, but they want Demarco out specifically because he won't forgive debt and today's qualification standards are too high.

So they push through another man who will play ball.

That's the problem. As long as FnF (or other; I agree that Corker is introducing the same. Another reason his bill is dead on arrival) remain as quasi-govt entities, they can be bullied into lowering their standards. WILL be bullied into lowering their standards.

I'd like to see Donovan walk into Fargo's offices and demand they offer zero down mortgages to 600 scores. He'd be thrown out.

Bill Maloni said...

I know what you're saying and appreciate your umbrage, but think about one thing.

By law, F&F could not originate any loan, including the ones you castigate.
Those mortgages (many of which performed beautifully, see F&F loss data pre-2005), all acme from some US lender somewhere.

So, F&F cajoled, paid up, or otherwise convinced those lenders to make loans to "people"--lower credit and often minorities--whom they wouldn't normally touch. But, it succeeded. Loans were made, lenders made money and got regulatory credit, those borrowers met their financial obligations, equity grew and households were solidified.

That was the 1992 genius of using the GSEs to force ("encourage") the primary market lenders to do the business which Congress claimed it wanted.

Again, by any measure, those are not the loans which failed by the boatload pre-2008, although some did do poorly.

It was the PLS which foundered in a spectacular way.

Matt Hill said...

"Sen. Corker said he would "put us all" in the category of people not qualified."

Why would someone who is not qualified on FHFA matters be qualified to write a bill to redesign the agency this agency ovesrees from the ground up?

Bill Maloni said...

Just more patronizing congressional hot air.

Public officials--at all levels--get carried away with their presumed intelligence and savvy.

Most have little idea about the interstices of the issues before their major committees and get by on the "buzz words" for a few years before learning anything?

Corker has no financial services/mortgage financing track record.

Unfortunately, neither does Mel Watt, whom I've noted before is a very good guy, smart and well meaning, but unless he's a superb manager, learns quickly, and attracts excellent talent, he'll flounder in the FHFA details and that's before the WH weighs in and seeks certain policy calls.

DeMarco has the experience and skill sets, as does Zandi, plus the R's really like DeMarco.

Again, someone last week told me the WH may be warming up to DeMarco, but I can't figure out why?

Anonymous said...

Bill, help me understand. if the 59 billion DTA sent over to the Treasury does not count toward repayment, why would Fannie do it? was it mandatory? or maybe it does count as repayment?

wouldn't it have made more sense to hang onto it for loan loss reserves?

Bill Maloni said...

Yes and no.

It's politics and bookkeeping, not real, but tha'st Washington and politics.

Somewhat complicated, but the bottom line is that the "accounting arrangement" Paulson's Treasury mandated in the takeover and future repayment dictated that anything sent from F&F to the Treasury did not reduce outstanding debt. (The WSJ's Nick Timiraos has described this arrangement several times in his work.)

I've speculated that Paulson--not knowing what might happen after he left office--wanted to have F&F pictured as in permanent penury.

Yes, I know it counterintuitive but it is what it is.

The deal could be "amended" through regulations via Treasury and FHFA so that any revenue--including the amounts to date--serve in that manner.

However, since most people understand paying back money owed or borrowed, the F&F repayments to date have been netted by media to suggest actual repayment.

Which is why Fannie still owes @$20 million, but should repay it within a year, if allowed.

From Timiraos article on the C-W bill:

When the government took over Fannie and Freddie in 2008, it agreed to inject huge amounts of cash to keep them solvent. In exchange, the government has taken $188 billion in shares of "senior preferred" stock, and it also has warrants to acquire 79.9% of the firms' common stock.

The terms of Fannie and Freddie's bailout don't allow them to pay off any of the $188 billion that they owe, even though they will have returned $132 billion in dividends by the end of this month. All of their profits are sent to the Treasury as dividends, making it impossible for them to rebuild capital. Nonetheless, investors have bet that the firms will become so profitable that Congress and the administration will have little choice but to let some value flow back to shareholders.

Bill Maloni said...

My Bad!!!

The last two paragraphs in the previous answer should have been quoted since they are verbatim from the Timiraos article in the WSJ.

Bryndon Fisher said...

You know what else Nick wrote?

"Some legal experts . . . have argued that Fannie and Freddie's regulator may have violated its responsibility to conserve and preserve the companies' assets when it agreed to the amendments last summer, which do not allow the companies to rebuild capital or exit conservatorship."

This is an issue that will become more prominent as the two companies get closer to repaying their entire debt to the U.S. Treasury. Mark my words, there's going to be showdown over this.

Bill Maloni said...

Repeat, ad infinitum, I am not a lawyer but I suspect this matter comes up in the current lawsuit challenging Paulson's F&F takeover.

Robert Mae said...

I'm betting it is resolved long before then. Given FnF's outstanding fiscal health, this is clearly a 'taking' which is clearly wrong. People are not going to stand for it. Not the media, not the majority of America having had enough of Obama, not the other majority distrusting of govt, not MoC.

Bill Maloni said...

From your lips...., but--trust me on this--the rules are different when it comes to F&F.

It took 8 years for the courts to decide just last year that top Fannie execs did not commit securities fraud in 2004, as the Bushies alleged.

Robert Mae said...

Look at it another way, Bill:

Most conscious Americans believe FnF exist only as govt entities today. So, that govt has made mortgages harder to procure and is reaping huge profits - $100b/yr - at the expense of those struggling to get by.

It will not continue. And when I say that, I'm not implying that diminutive Corker has or will effect change.

I think you're right that FnF are different. I also think you're wrong things won't change greatly once the taxpayers have been fully reimbursed.

Anonymous said...

Hello Mr. Maloni.

Just in case you yourself or any of your readers would like to support or comment on Rep. Capuano's bill, now referred to committee, here is a way to do so:

Comments and support will be forwarded directly to Rep. Capuano. Any support is greatly appreciated.

Bill Maloni said...

In my next blog, I'll link a column by someone who agrees, implicitly, with the Capuano approach, although he doesn't announce his explicit support, he just discusses keeping F&F alive.

I think closer examination of C-W will expose its flaws and political mumbling/fear--not stated outwardly--about what would happen to this bill when its sponsors try and move it through the legislative process.

It would be quite ugly, fertile ground for no-nothing amendments offered to pacify financial service political contributors who don't like the core bill.

Capuano makes more sense and procedurally is easier to achieve, but faces an uphill political climb because of all off the F&F disinformation.