Sunday, July 28, 2013

Washington Post Goes "Mortgage Tea Party"

Post Still on Fannie's and Freddie's Case;
Hensarling's "Other World" Bill Gets OK


The Washington Post last week took a double barreled shot at Fannie Mae (and Freddie) cheering on the House Financial Services Committee’s narrow (30-27) passage of the bill its Chairman, Jeb Hensarling (R-Tex), drafted to dismantle Fannie Mae and Freddie Mac and turn over the nation’s mortgage finance system to the large commercial banks. The newspaper also ran an op-ed piece cheering on the Bob Corker (R-Tenn.)-Mark Warner (D-Va.) Senate bill which does the same but would add a new federal entity to play some of F&F mortgage role. 

I sent the Post the following letter on its cheers for Hensarling.

Supporting the dissolution of Fannie and Freddie is not a surprising position for the Post, which has consistently been against the two. But endorsing a Tea Party solution to mortgage finance seems to be a shocker. 

Is your institutional memory so short that you forget what occurred just a few years ago, when the large commercial banks and investment banks--went around the Fannie/Freddie systems, unimpeded by clueless and compliant Bush financial regulators--and produced and foisted on the nation almost a trillion dollars in in poorly underwritten subprime securities, which soon failed? 

The big financial institutions sold those worthless bonds throughout the world and helped make the US real estate implosion an international financial debacle. 

And please don't forget this new "private capital" which you seek mostly would come from the large banks which enjoy numerous federal subsidies for their working capital. 

Your back of the hand to the nation's preference for fixed rate loans by using the "jumbo market" (large dollar loans which Fannie and Freddie by law cannot securitize) as an example, fails, too.

"Jumbo" loans inevitably carry a higher interest rate, have far less liquidity, and tend to support far wealthier individuals than those in the middle class for whom those rates and terms would be too much for their budgets. The Post would leave them the adjustable rate (ARM) option into which banks would love to push all borrowers.

Was the writer wearing a tri cornered hat while preparing this editorial?

I know the Post won’t print my letter or most anything else which challenges their smug attitude toward the GSEs. (As I keep noting, I still am waiting for this national newspaper to print its first word—repeat—first word about last fall’s federal court decision which declared “summary judgment” in the cases of Frank Raines, Tim Howard, and Leanne Spencer, Fannie officials who were falsely accused nine years ago of engaging in securities fraud and then hounded from their corporate positions.

Last fall, Federal Judge Richard Leon, 8 years after the fact, threw out those charges based on specious but venial allegations made in a report by Fannie’s former regulator, the Office of Financial Housing Enterprise Oversight (OFHEO), which are the same folks down there, today, but using a different agency name, the Federal Housing Finance Agency (FHFA).


Hensarling Committee’s Questionnaire

The aforementioned House Financial Services Committee has sent out a survey to a variety of media sources, including the folks who run “Restore Fannie Mae,” the new website ( 

The Committee is asking responders a variation of, “What is positive about Fannie Mae and Freddie Mac?” 

In trying to answer this myself, I started with the following approach. 

I wanted to capture the trillions of dollars each has invested in the nation’s mortgage markets since the beginning of this century, the millions of families helped and to note—as Congress pretends there are plenty of other options just waiting to the F&F rubble to be cleared out so they can jump in and try and serve the American public as well—that Fannie and Freddie have done more for US housing and families than any two other US companies combined. 

I thought that was a pretty good place to focus until I talked it over with a very intelligent friend. He sent the following to me and I will defer and bow because his work is so much more specific and savages some of the illusions which most anti-Fannie folks still hold close. 

Here is my very smart friend’s (pithy) response. 



I agree with the observation that nobody else has helped provide mortgages to the extent that the GSEs have. But I don't think bludgeoning with large numbers is the way to go (apart from the fact that some people say that the large numbers show that the GSEs dominate the market too much).  

Rather than raw volumes, I would be inclined to emphasize particular benefits the GSEs bring -- and they are legion but include: adequate supply of FRMs, liquidity in the MBS market, TBA, document and other standards in the market, providing safe products to moderate income households, etc., etc.

And consider what happened when the GSEs were put in the penalty box (post 2004) on the eve of the biggest catastrophe in modern housing finance:


"Fannie and Freddie only bought mortgages of homeowners who were likely to make their monthly payment. That kept a lot of people locked out of their dream. Some couldn’t afford a down payment. Others had lousy credit."  

"But the new mortgage lenders in California wanted to change all that. They wanted a chance to offer anyone a mortgage."   

"They saw their opportunity when Fannie and Freddie became entangled in an accounting scandal and lost their dominance of the mortgage markets."   

'When you look at an industry that was driven by Fannie Mae and Freddie Mac for almost two decades, suddenly you don’t have the leaders of the industry even around. They are in the penalty box."   

'We thought that was a huge opportunity to do some of the things we wanted to do, which is change the rules." 

"All Bill Dallas needed was someone to take Fannie and Freddie’s place, someone with huge amounts of cash who would be more willing to bend the rules."

"Who took over?  Wall Street."

 (Source: CNBC, A House of Cards, 2009)


One of the biggest benefits of the GSEs was tied up with what is called, in shorthand, the taxpayer bailout (although, of course, the GSEs were not bailed out -- as I am too painfully aware as a shareholder).  

It might seem counter-intuitive to say it (particularly, to a Tea-Bagger) but believe it or not, the benefit of the GSE model may have been seen most clearly in their failure. If one thinks about it, this should not be too surprising since it shows the benefit of a catastrophic government backstop. 

The government only stepped in when the GSEs had lost their capital -- $60 to $85 or so billion in market cap for Fannie Mae, depending on where one makes the measurement. It took a market catastrophe for the government to get involved but when the catastrophe happened the GSEs were a convenient and efficient focused mechanism for the government to limit the damage of the general catastrophe. 

Consider what happened: Taxpayers put $187 billion into the companies -- admittedly a big "Ouch" figure. But by June of this year, the net cost was down to $56 billion as a result of $132 billion in dividend payments. The net taxpayer cost is likely heading to zero and maybe into positive territory -- the taxpayer could make a profit on the deal (so much for the charge on Hensarling's website that the GSEs are the biggest bailout in history particularly when one remembers the totally un-recouped $200 billion S&L disaster). 

What is never considered is what the taxpayer (and the nation and the world) got in return in addition to the money being paid back.  

By being able to support the GSEs' MBS, the Treasury was able to isolate a large part of the fallout from the mortgage finance meltdown. By its support of GSE MBS, Treasury was able to quarantine a virulent disease spread by Wall Street so that it did not infect the larger market (though it certainly crippled that which it infected). 

Thanks to the support of the taxpayer (whose support is now being paid back), not a single penny, not a red cent, was lost by investors in GSE MBS by investors in Fish Bay, Wisconsin, or in the village of Narvik, Norway.  

These were disparate (and, eventually, desperate) towns, along with thousands like them. devastated by Wall Street sharpies, as documented by the wonderful CNBC 2009 documentary, A House of Cards, which  squarely laid the blame for the mortgage meltdown where it belonged -- on Wall Street, the rating agencies and the criminal lending outfits concentrated in Orange County, CA, one of the conservative bastions of the country and adopted home to the chicken-hawk icons, John Wayne and Ronald Reagan. 

Yes, the epicenter of the subprime contagion was not the two GSEs on the banks of the Potomac but the market fundamentalists of Orange County ("This was the pulse of the subprime industry, the nerve center." -- CNBC). Needless to say, Orange County did not gain this primacy in subprime lending through some do-gooder CRA or goals mandate imposed by Barney Frank and friends.  

That this was an incubator of the subprime virus should not be a surprise since it was also a locus of the S&L crisis a generation earlier (along with, on that occasion, the great states of Texas, Florida, Oklahoma and Arizona -- surprise, surprise). 

Treasury was able to limit the contagion by supporting the GSEs' MBS. Imagine, in the alternative, trying to do this through the country's top banks -- JPM, Citi, Wells, BAC, Goldman, Morgan Stanley, etc., -- with operations spread throughout the world and God knows what sorts of investments on (or off) their books and intricate relationships with global counter-parties.  

It was bad enough that these players (throwing in, also, failed Bear Stearns, Lehman, WAMU and Countrywide) shit in the somewhat-circumscribed sandlot in which they were confined to play (by GSE prowess rather than the regulations that had been lifted in GLBA in 1999); it would have been infinitely worse if the sandlot in which they crapped had been the overall market rather than a confined space within it. If Hensarling and company had their way the whole market would become shitable. 


I hope some of the people who voted for the Hensarling bill or will be asked to support it if the House Republican leadership brings this mess to the floor remember the views of my very smart friend!


I’ll paraphrase something I said in my last blog, “Can the House be this $#*&^%$ dumb” and not recognize the asininity and thoughtless ennui represented by the Hensarling bill?

Are the nation’s largest banks and financial institutions—which can’t seem to control themselves from breaking laws and regulations--really the best stewards for the nation’s mortgage finance system?


Maloni, 7-28-2013







Robert Mae said...

“What is positive about Fannie Mae and Freddie Mac?”

The same thing that is negative about everything else the govt puts its grubby paws on: efficiency, effectiveness, profitable.

How dare these arrogant bastards believe they can build a better model. Where, pray tell, is the precedent?

Qualified Observer said...

"...the whole market would become shitable."

That's a keeper.

Bill Maloni said...

I haven't been able to find out what they plan to do with the responses.

Maybe some enterprising media person will ask the Hensarling committee staff?

Thomas Goddard, who runs the "Restore Fannie" site, said that he posted his answers to the questionnaire on the site.

I read a news story today which suggests the tight committee vote (30-27) reflects some House GOP unhappiness with the Hensarling bill and, implied, his colleagues wanted to boost the Chairman but would not necessarily vote for the bill on the floor because of "concerns."

Bill Maloni said...

Hey Robert--Look what the President is proposing.

Do you think somebody was reading our exchange last week?

Robert Mae said...

Did you note all the whining by our president in that column? Bipartisanship is a two-way street, bucko.

Bill Maloni said...

He does good "whine."

The Republicans already have rejected his (and my advice) on the wisdom of creating jobs, rehabbing old bridges and roads, and constructing new infrastructure facilities.

I wonder if their construction company voters/funders members agree with them on that??

And who do they think is going to do all of that work, using what money?

Robert Mae said...

America should just move down here to the Permean Basin. Plenty of work for everyone. Because of the shortage of willing workers, guess how much McD's is offering per hour.


Of course housing is a bitch.

Bill Maloni said...

Why not just keep going to Australia with its reported $20 Trillion of shale oil (those numbers always go higher).

Probably double that hourly figure, open your own Mickey D's--with "Roo Burgers"-- and make your millions in the fast food industry feeding all of the field hands, oil and gas monkeys.

Gives new meaning to "Tie Me Kangaroo Down, Jack!"

Seriously, why aren't development companies trying to find worker/laborers and people who can be taught those skills and bringing them to the work sites, no matter where the discoveries are??

Robert Mae said...

Probably because hotel space in the areas in question goes about $750-$1000/week, and no one's willing to buy housing instead because of the boom/bust nature of the industry.

Bill Maloni said...

Dormitory construction or too many social problems concentrated in one place?

Thomas Adams said...

I think they can do it by themselves. I thin or maybe they can build a better model.