Wednesday, June 12, 2013

Part 2 Mostly for You Senator/Congressman



Nitty Gritty Issues for the Congress

Part 1 of this two part blog was a general message about the Corker-Warner proposal to kill and replace Fannie Mae and Freddie Mac. I challenged the Senators and their allies to stop using bogus arguments to derogate and insult Fannie and Freddie, as a way to rally their troops and build support for their expected legislation.

In Part 2, I offer some specific suggestions to MoC’s (and the media which duly reports their daily utterings) hearing the siren call (seeing campaign contributions and political success) in lending their name to legislation. 

---Walk before you run to sign up for Corker-Warner or anything else you don’t fully comprehend. Before you sign onto any proposal as a sponsor or co-sponsor, totally understand that plan’s consequences. A public official hoping to get re-elected in 2014 or 2016 better truly understand “the Devil you don’t know for the Devil you do.”

As someone who’s closely watched the Congress perform for 45 years (not the same as achieving anything), my experience is that every major legislative “solution” has dozens of unintended consequences which you have to justify because you are supporting the scheme.

Can you see what will happen to this bill (or any complex or multifaceted legislation) after the disparate Senate interests get done applying their wisdom, which will occur before the less than thoughtful House gets in its licks, if the latter deigns to do so at all. (I suggest you look at the new Senate immigration or agriculture bills as guides.) 

---Your F&F replacement mortgage finance system must be more efficient, better, cheaper, more understandable, offer more readily available mortgage products to consumers (your constituents), as well as be a better deal for the taxpayers (also your constituents) than the F&F system now in place—or else why destroy the current working pair? Remember, the F&F subsystem has systemically produced in the past and only a few legislative tweaks can make it better.
--Understand that one percentage point equals “100 basis points” (BP). So when you are told that some new mortgage execution only/may/could/will add 50 basis points (my example not the Senators’) to the cost of a mortgage, remember that’s ½% added to the interest rate over the life of the loan.
I realize that few MoC’s have a strategic horizon, or one which extends to their next election, but cost estimates generally only go one way in Washington—up!!

After the five or more years it takes to bring about and implement these major structural changes (and that doesn’t count the lengthy, contentious .torturous debate and mind numbing. eye glazing hearings which most “busy” Senators and Members will duck), the new plans  likely will generate higher cost mortgages than lower.

--Do yourself a favor and learn or have one of your staffers learn the role and significance of the “TBA market” and how/if these “to be announced” mortgage backed securities can work in any new plan you develop and how that will impact mortgage prices. This is the very efficient process where mortgage loan packages are priced before they even exist, and impact the mortgage rates your constituents/consumers pay.

Also, realize that a few dollars more per month in mortgage payments knock some people out of the affordability game. So monthly cost is important to the people who send you to Washington. 


How Much Help Are F&F Providing in Your District or State?

Ask F&F officials how many of your constituents rely on them for their mortgage loan. They will have that information by zip code, so you’ll be able to see what now is happening in your own congressional district because of F&F mortgage support. You will be surprised at how much primary lenders and F&F—their only viable secondary market partner--have invested in your favored communities, town, cities, and counties.

The large banks—who get a fresh new federal subsidy to cover any PLS losses are the primary beneficiaries of the C-W plan.  

Banker business acumen and creative investment executions are leagues ahead of the regulators who oversee them—think tortoise and hare, but with the rabbit always winning--and most federal regulators never catch up, except to respond after something bad has happened.

The last time the big banks controlled the mortgage finance spigot—which only was a few years ago--the world reaped a trillion dollars in subprime grief. And nothing in the C-W proposed bill changes any of the regulatory landscape which missed all of that subprime creation and sales. 

---You owe it to yourself and your voters to learn all about Fannie and Freddie; don’t automatically think everything you’re read and heard is true (even my stuff); take time and ask the questions; don’t hide behind your colleagues who say, “Trust me, hang with me on this; we are going to kill them.”

It’s your ass that will be voted out of office if you screw up and poison the mortgage well, making inefficient, costly and not transparent, important family financial matters which now are largely open and available. (Remember buying that house is the largest financial transaction most of your voters ever will undertake.)
---As I’ve written in my blog before, when told that “We need to get rid of F&F,” ask why?  

--“Won’t we have similar or greater problems with what you want as replacements, if Uncle Sam still is behind them?”

---“Aren’t F&F working now and very efficiently?”

---“Isn’t it conceivable that once Fannie and Freddie ”repay” and reorganize—and with the same strong regulation--they, could work better with large amounts of capital available to them, not lost in some federal accounting time warp, cloaked by Hank Paulson’s desire to penalize the Democrats, reward the Right, and do away with Fannie Mae and Freddie Mac?”

I think that some of those seeking to end Fannie and Freddie, using the misguided but remaining public anger for the two, hope nobody pushes them to answer the questions, “Why should the Congress do away with them” and “Why is your mousetrap better.” 
If the only answer offered is some vague rant about “history” or “getting the federal government out of the housing finance market then you are being lied to, major league! 

I understand the political need to demonize F&F as bad guys, but that’s been done before with sad results. 

Mortgage McCarthyism?

If our straw men creating Batman and Robin require a Fannie/Freddie to abuse, do their distortions make them the equivalent of US officials who forcibly collected thousands of US citizens of Japanese descent at the outbreak of WWII and put them in California internment camps (and did nothing similar to east coast families of German heritage) fearing collaboration with the “enemy?” 

Japanese Americans—with little evidence to justify it--were those unfortunate politically cast bogeymen.

It was a desperate Midwestern US Senator, claiming that he had a list with the names of “206 Communist sympathizers who worked in the US State Department,” who tried to whip up the nation to fight global Communism by demeaning men and women who were hired at State, following their education at elite eastern colleges or universities. State Department employees, many of whom were Ivy League educated, were those pilloried bogeymen.

Is the current hectoring the same when the same US Senator, manipulating conservative Americans’ anger/jealousy over Hollywood life styles, declared many in the motion picture industry were “Communist sympathizers” and more than 300 actors, writers and directors were fired and “black listed,” making future work almost non-existent—except when they change their names and or gutted it out for years with the “Red” label. Hollywood professionals, a good number of whom were Jewish, were that ugly chapter’s bogeymen. 

How about when a certain GOP presidential candidate spoke of his politically transparent  annoyance, using the phrase “Welfare Queen?” 

“She has eighty names, thirty addresses,” Ronald Reagan warned during his 1976 run for President about the nameless, Cadillac-driving woman who’s conning the social safety net. He added: “She’s got Medicaid, getting food stamps, and she is collecting welfare under each of her names.” In total, Reagan said, “Her tax-free cash income is over $150,000.”

Except that nobody ever could find this elusive member of royalty—she was a creation, a totally made up personality--but that didn’t stop Reagan supporters and those on the Right from applying the term pejoratively to welfare recipients, black women, and other poor people and perpetuating distortions which still persist more than 35 years after the fact.

Let me be clear,  I am not suggesting that either Senators Corker or Warner are racists or culture-baiters, but I am drawing an historical analogy to their political tactics, which have as its beacon abolishing Fannie and Freddie for reasons they have not articulated nor justified. Yet they have opted to excoriate and vilify them before doing the latter. 

Big lies are toxic no matter who floats them and why. 


Maloni, June-12-2013







Anonymous said...

Senator Corker is a bad man with no respect to the Constitution, the legal traditions of the nation and the rule of Law. In a tyrannic fashion with a populist twist he has decided he is righter than right and has devoted a paragraph of flagrant unconstitutional lines that range from "takings without compensation", "nullifying the conservator's mandate -after 5 years no less!-" to disregarding corporate laws pertaining to absolute priority allocation in liquidation.

In a sense, this alone should tell the world about his madness when in attempt to try to hurt shareholders -who are far from being the meat of the problem- he indulges himself with visions of semi-god powers to determine what is right and what is wrong.

"Shareholders", dear Senator Corker, is a minor, inconsequential issue. Focusing on them shows the real you invalidating and making suspect the rest of the 111 pages of your draft.

First rule of business: DO NO EVIL.

But if you choose otherwise may I suggest you remember Mr. Maloni's wise words: it will come back to you and your supporters as... no votes and no job.

We are ALL taxpayers, Senator.

Bill Maloni said...

Unfortunately for many of us who see systemic value in employing some variation of F&F, the two have been so maligned and vilified
that many people believe they should be penalized or atomized.

No sympathy or respect for law or regular order when those two are discussed.

That's what this week's lawsuit against Paulson's takeover s all about.

It took a Federal judge 8 years to rule that OFHEO's allegations of securities fraud--leveled in 2004 shareholders legal action against senior Fannie Mae officials--were without foundation.

This current case may not get decided in God's lifetime!

Robert Mae said...

I stood and put my right hand over my heart halfway through that.

Robert Mae said...

"While shareholders have filed unsuccessful lawsuits challenging aspects of the government's conservatorship of Fannie and Freddie in the past"

Is that true, Bill? I'm aware of busted suits filed against FnF's board but not one against the conservatorship. If true, would you have any insight on the case/s?

Bill Maloni said...

I am not aware of any lawsuits, save this current one, challenging "conservatorship."

The shareholders 2004 lawsuit against former Fannie execs Frank Raines, Tim Howard and Leanne Spencer was dumped last fall by Federal Judge Richard Leon.

I believe there still is an outstanding SEC lawsuit against Raines' Bush-blessed successor, Dan Mudd and two others regarding misrepresenting Fannie's financial/economic health, post

Anonymous said...

Please read the testimony of Professor David Min before the House Financial Services Committee.
The best analysis of the alternatives to a reformed F&F that I have ever read.
Bill, do a piece on this analysis.

Bill Maloni said...

Funny that you should mention Min. I sent an email to Michael Lee--and old family and professional friend--who also testified pointing out Min's testimony and also castigating the other four, including ML, for ignoring the role that the big banks played in the subprime debacle.

Think about it, the system they are advocating is exactly what existed with the large banks leading up to 2008.

There was no F&F competition for the subprime (although the two bought it after the fact) and there was no regulatory opposition from the same agencies which would be in place in a new regime watching the banks--and that episode produced a trillion bonds of PLS bonds and CDO which quickly because near worthless. Yet, in blaming F&F for 2008, the four conservative witmnesses let the big banks skate.

Min is a first rate thinker and has written positively about Fannie in the past.

Matt Hill said...

It's vexing how they say the private market can't compete with the GSE's. They say the 30yr mortgage is just a big subsidy. It's not realistic, yada, yada.
Then, as to not scare off their constituents, they come with their BS about what the post GSE world will look like:
"Oh, look at the jumbo market, there's only 25bps difference. Borrowers won't even notice that the GSEs are gone".
That's all a bunch of BS. They know the bait and switch will happen when the GSEs are snuffed out. Rates are going to go through the roof, just like Mike Capuano pointed out in the hearing when mentioning what UK rates were like when left to the private market. They are conflicting their own primary argument in back-to-back sentences in a national hearing, yet no one in that entire room will look out for their constituents and call them out on it? Pathetic.

Matt Hill said...

This is all really stupid. It took an extraordinary financial crisis for the GSE's to falter. No private insurance is big enough to handle the worst of disasters. Do private insurers cover enough for the worst disasters to avoid federal aid? Katrina? Sandy? And those happen every few years.
Why does everyone think that housing finance recession/disaster insurance should be turned over 100% to private hands? Private entities will never provision enough capital away for events that happen every 30 years. It just doesn't sit well with shareholders. I myself don't like goverment waste. But the GSE's are not an example of that, especially if faintly regulated. I'd rather have my G-fees going toward housing finance disaster insurance, than lining the pockets of bankers...

Bill Maloni said...

Congressional witnesses sometimes lie and some MoC's bullshit about things on which they have no knowledge or information!

Ooops, I just let another Capitol Hill secret out of the bag.

I emailed a reporter who covered the hearing and wrote an "academics say no F&F" and I faulted her for failing to note the four--minus David Min--are all political conservatives and none of them mentioned--nor did she--the subprime debacle which occurred in an environment that likely would be created if F&F were demolished.

Won't be getting any Christmas cards form her!!

Anonymous said...

Matt, sir, you are correct. Capuano is your friend. Heck, he even questioned why the GSEs aren't allowed to pay back the Treasury! Some in there caught the panel's BS, a completely lopsided market vision. Oh, professor Min did not escape the conservative wrath: at one point he said "I agree they have to be abolished".

Bill Maloni said...

Note to self:

Take Min off Christmas card list!!

Robert Mae said...

"This is all really stupid. It took an extraordinary financial crisis for the GSE's to falter"

Yet they didn't. They were put in conservatorship 10/08 because MBS investors threatened to take their bat and ball home, to Paulson. Then Lockhart - basing his decisions on a 6 month RE crash - prodded the two to defer tax assets, probably to rationalize the conservatorship via negative negative equity balance. Then the two, per GAAP and 'fair value', had to write down $120b some-odd of, now, solid assets.

In other words, FnF didn't actually falter, although adjusted decimal points on their balance sheets implied they did.

Robert Mae said...

Shaw too :(

Anonymous said...

As the marketing people will tell you, good products with bad reputations need to be rebranded and remarketed.
F&F essentially need a new name with a few minor adjustments in their regulatory regime.
They then could offer essentially the same services to the marketplace and the consumer.
Rebranding probably requires "abolishing" the current F&F entities to satisfy current political dogma.

Anonymous said...

Either that or abolish those politicians who insist on politicizing dogma.

Bill Maloni said...

RM--I agree and already have suggested "Thing 1" and Thing 2," but not sure it has any cache!

Anonymous said...

Mr. Maloni, if I may... In an older article you informed us that "a source" got word that House republicans communicated Senator Corker the House would not care for bills that entail more housing responsibilities.

In light of Senator Corker's 112 pages bill, do you think the tone from the House has changed?

If I understood the draft correctly it calls for the Treasury to assume one of the guarantee businesses while keeping the corresponding profit. A de facto nationalization with complete and permanent control... Would you say this is DOA? Or Treasury would go out of its way to keep such profits even if it entails embracing the mortgage guarantee business? Thank you.

Bill Maloni said...

Closer to DOA than anything else.

Jeb Hensarling (R-Tex), Chairman of House Financial Services Committee, thinks like the Tea Party and I can't see him endorsing--allowing out of the Committee or full House--any legislation expanding the federal government's mortgage finance role and increasing possible taxpayer liability.

Doesn't mean when C-W finally gets introduced you won't have lots of media attention, noise and likely hearings in the Senate as well as some perfunctory House hearings; but most action, if it comes, with be in the Senate.

The other thing to remember is while a draft has been circulated, people also have been told that virtually nothing in the proposal--save doing away with F&F--is set in concrete, so the final details won't be know until the bill formally gets dropped in the hopper.

Anonymous said...

Thank you, Mr. Maloni. Perhaps the C-W bill is good in that it is a do-or-die moment... if shot down then there may be no other attempt to abolish them. Do you believe Rep. Hensarling ideas are closer to a Millstein's privatization type of exit where Fannie and Freddie become just another -smaller- private mortgage insurers? Excuse me for picking your brain.

Bill Maloni said...

My thinking is not too far away from Millstein's (see coming blog), but it will be quite difficult for F&F to assume junior status if they get free, just because of their respective histories and the long time principal market role they played.

(I think part of that "unknown" scares potential competitors.)

The expectations of other mortgage market participants may drive and shape them, too.

Robert Mae said...

I'd say that 'doing away with FnF' is the least concrete of all. No one on Capitol Hill has the balls to potentially undermine an asset class this country desperately needs to reinflate. Not a one.