Sunday, August 18, 2013

Keep Them Working for Us



What I Think and Why?


My last blog about the President's speech stirred up a lot of static, which was my hope, plus generated a challenge from a long time industry observer whose opinion I value. 

I’ll shorthand his comment—and throw in something he didn’t say but I suspect he thought—and that was, “Why all of this talk of Fannie/Freddie history?  People want to know what you think about Fannie and Freddie going forward, since nobody believes they can be resurrected as they were and, frankly, few want that.” 

Fair enough, although I’ll just say “maybe” to his last point. 
My complete response is to remind readers that to understand what you want to build in the future, you need to comprehend what happened in the past.  

In the past few months, I’ve described my mortgage market of the future and what a revived F&F might look like and do. But, it never hurts to repeat it.

Let me start with something which should be obvious to those who read my blog.

Concentrated commercial bank power, no matter what the market endeavor, sets off my alarms, because I don’t think anyone—or certainly any US regulatory agency—can stop the banks when they choose aberrance. 

The PLS debacle--only a few years ago--proves that, as do the more recent violations which I noted last week, manipulating LIBOR, laundering Mexican drug cartel funds, cornering commodities to inflate prices, and having financial dealings with sworn US enemies in the Muslim Middle East. 

Control the Banks 

Banks exist to make money, nothing more. We need them, they are near indispensable in a democracy. 

But, as long as our nation and its public officials lack true governors to control industry excesses, bank behavior requires vigilance and scrutiny. 

The US doesn’t have quality financial services regulation. It may never have because the banks are too nimble, the regulatory process too plodding, and some bank regulatory staff just act as industry cheer leaders and guardians. 

I don’t want to get rid of bank home mortgage lending, I just want it well policed. 

So, the trick—for the “get rid of Fannie and Freddie, at all costs, and let the banks control the market” crowd--is to put in place something which the large commercial banks must fear/respect to engage in the mortgage lending game. 

Because of their secondary mortgage market position, the “old” and even current Fannie and Freddie had/have that mortgage monitor’s role, setting primary market underwriting standards, creating acceptable mortgage products, improving operational delivery systems, helping create and pricing mbs (mortgage backed securities) and therefore the underlying mortgages, etc.

That’s why they worked well pre-2005 and why they have worked fabulously post-2008.
Few Appreciate the Good News

Not many mortgage market observers regularly acknowledge that the major “problems”--most critics attribute to Fannie’s and Freddie’s operations/existence--have been stamped out or are proscribed by their current regulation, which is why the two have performed so well financially.

Wake up Congress! Congratulate yourselves.

The FHFA regulatory regime has solved much of the “GSE dilemma” and you just don’t realize it. You are fighting issues which haven’t been in place for years. 

Post 2008 Improvements 

Since 2008, the Federal Housing Finance Office (FHFA), F&F’s current regulator has:

--- prohibited F&F from securitizing or dealing in below market quality mortgages=no possible subprime investments:

---ordered F&F to reduce their existing portfolios by 5% annually=shutting down their riskier business activities and pushing them into safer mortgage securitization;

---overhauled and reduced the onerous and confusing housing goals  (which at one time required each to invest 55% of their business in mortgages serving “low, moderate and middle income families, or those living in underserved areas”)= removing the role which few policy makers understood or appreciated but which acted as a lightning rod for critics and enemies;

--- Required Fannie and Freddie to increase their guaranty fees charged lenders (and ultimately consumers) and the two now must hold higher capital, ironically which may be too high given their tiny loss rates=more loss protection on their books to deal with any business problems, which seep through stricter regulation, and create more financial space for other mortgage investors. 

These important operational changes are the reason for F&F’s solid financial performance (ironically, with commercial banks employing them happily and heavily) and F&F now sending billions of dollars to the US Treasury. 

--Even the old Democrats and political activists--who once twisted GOP panties in a bunch--have long since moved from Fannie (and didn’t exist at Freddie). Upwards of 60% of current staff are new since 2008.

And, I certainly haven’t heard complaints that there isn’t plenty of fixed rate financing available for mortgagors from any lender which does business with F&F. 

How I Would Remake F&F 

To give the two entities and the nation’s home buying public what will work for each, I would separate F&F from the federal government and “reprivatize” them.

--Disjoin them from the federal government, over some reasonable time period, and allow them to stand on their own (much like a bank or insurance company), employing their own capital. 

--Let Fannie and Freddie truly repay Treasury whatever they owe, a mechanism which Treasury Secretary Jack’s Lew can approve on his own. 

That functional crossover event will occur naturally in the next few quarters, but Hank Paulson’s takeover deal prohibits GSE repayment.   

--Have F&F pay back more than they were given. so Treasury has additional revenue and can argue that the American taxpayer made money from the F&F fix, especially since most observers have failed or won’t monetizing all of the systemic pluses  F&F provided the nation for the past 6 years. 

--After repaying the Treasury some agreed upon figure ($200 Billion?) and--after paying taxes and allotting capital--permit Fannie and Freddie to keep excess earnings as a capital base for the future 

--In reprivatizing F&F, keep their current regulatory structure to insure the sufficiency of their capital formation and maintain current limitation on the types (quality) of mortgages they can securitize;

--Finally, permit F&F to re-enter the mortgage market—WITH NO FINANCIAL TIES TO THE FEDERAL GOVERNMENT-- to perform whatever roles the market demands from them.

Despite fears to the contrary, that’s all Congress can do, boldly make a statement that this Fannie/Freddie are different from the old ones. The Congress can’t legislate away historical memories.

Why Demolish a Valuable Asset?

Which Wall Street investment bank or major TBTF bank—with their DNA all over the 2008 financial meltdown—did the Congress or any Administration abolish?

The answer is “not one.”

Why should the Congress (especially the Democrats in each chamber) destroy the two facilities which by law were put in place to provide mortgage liquidity to low, moderate, and income families and have performed that mission quite well?

F&F have succeeded in the past, they work now, and can continue to work well in the future.

I noted that major steps already have been taken to reduce whatever systemic risk their critics see or allege. 

There is no need to do away with Fannie and Freddie, save the Conservatives’ desire to produce a scalp to wave around and satisfy some bizarre partisan political bloodlust.

The misguided Fannie/Freddie hostility is based on a tranche of political lies and distortions so deep that the Congress, the media and parts of the public never will be able to wade through and reach the truth. Although more and more attention has been given in the past two years to exposing those spurious political attacks which helped bring down the former GSEs. 

If you read the NYT and Washington Post—including today’s (Sunday) NYT editorial—you’ll see how much campaign money the financial services industries heaps on Senate and House Financial Services Committee members, especially the latter. 

I worked at Fannie for 21 years and before that another 15 on Capitol Hill and in federal financial regulatory agencies. I know how and why the various banks, investment banks, MI’s and insurance companies do what they do. I know what Fannie did and  more importantly, I know what the company accomplished—given the congressional mission it was given to spur homeownership—which many knuckleheads now try to paint as tawdry and phony. 

Reminder to all rushing to enshrine our nation’s banks as the overseers of the primary and secondary mortgage markets: F&F were given the “low income housing mission” in 1992 because the primary market lenders balked at making those loans.

The 1992 statute put F&F at the “choke point” of the mortgage delivery system. Congress wanted Fannie and Freddie to use their market pressure to force banks, mortgage and savings banks and other lenders which were “reluctant” (that’s the kindest interpretation) to make mortgage loans to poor and minority families.

It worked, since before that law, all the fair lending and liberal bleating failed to make that lending happen.

 Fannie then was an industry leader and a ball buster, at a time when that behavior was needed (and welcomed by many in Congress on both sides of the aisle). 

It still is needed and I have no idea if my “new Fannie” can perform that function. But if future execs run it properly, Fannie still can be a standard setter and market eyes which won’t allow lenders to cut corners, discriminate, cheat, and take advantage of mortgagors.

Congress should give them a chance to reprise that role, as many people start to wake up to the systemic implications of the various proposals to do away with Fannie and Freddie.


Let the Dogs Out

Abolishing Fannie and Freddie only serves the Conservatives’ desire to produce a scalp to wave around and justify some bizarre partisan political lust.

These now friendly house trained, pets haven’t bitten anybody in 6 years. They are fenced in, hardly ever bark, fetch the paper, guard the house, and are very productive.
Why kill them? 

Hedgies and Preferred Investors Take Notice, the Adults Are Here 

Everyone knows about the Corker-Warner and Hensarling bills, but two fresh F&F proposals—reportedly—are somewhere between the conjuring and drafting stages.

One is from Sen. Jack Reed (D-RI.) and was   recently week discussed last Friday in Inside Mortgage Finance.

The second—according my poker group sources, quoting senior committee staff--will be a “Tim Johnson (D-SD) and Mike Crapo (R-Idaho) bill which  will be “the only F&F bill the Senate Banking Committee considers this year.”

Who knows what all of that means, save Reed is a more potent committee player than either Senators Corker or Warner and, at the end of the day, Committee Chairman Johnson and  ranking member Crapo can control almost any agenda.

What Others Say



And, listen to these entertaining real estate guys for facts and laughs. 


Maloni, 8-18-2013


Qualified Observer said...

Complements and thanks to the author for so eloquently stating what I have long felt but was never able to clearly articulate:
"There is no need to do away with Fannie and Freddie, save the Conservatives’ desire to produce a scalp to wave around and satisfy some bizarre partisan political bloodlust."

Robert Mae said...

I like that Crapo is involved with one. Any additional insight on what these two newer proposals might... propose?

Bill Maloni said...


I was proud of this one (more than most) because I managed to get out a number of my thoughts and I think they hang together, make sense, and reveal stuff most people probably don't realize.

Nothing on Johnson-Crapo or even Jack Reed effort, which has been rumored for a whole. But, the first want means the Senate professional Committee staff (I use the term loosely), as opposed to personal staff, will work on the drafting and shepherding any bill the Chairman and Ranking Republican produce.

I haven't heard a solid reason articulated by the C-W sponsors why that destructive action is necessary and hope they see utility in some of my suggestions.

I left out that senior House GOP sources claims that Jeb Hensarling doesn't have enough R votes to get his bill on the floor, which is positive news..

Anonymous said...

I checked the ticker today at $1.31 lot of room for earnings. Could you share more information on these proposals? Blue Agent.

Bill Maloni said...

Happy to once I get any.

Just reliable rumors at this stage.

Don't bet your butter and egg money on any of this because things have a long way to go, but both peaks and valleys are ahead.

As I wrote, there is a mountain of lies, half truths, and political hatred stacked against these two entities and that won't go away easily.

As I remind people, I still am waiting for the Washington Post to report that the three Fannie execs falsely accused in 2004 of securities fraud were cleared of same last year by Federal Judge Richard Leon in three separate "summary judgment" opinions.

Anonymous said...

Hey Bill it also should be considered that the 117 billion dollars that Fannie Mae is close to paying back does contain a profit for the taxpayer.

The 10 percent dividend amount that they owed on the outstanding balance was rolled over into the total amount as it was calculated. So it needs to be determined how much in dividends were rolled into the liquidation preference before the "Third Amendment" Profit Sweep Agreement happened in August 2012.

The taxpayers might already be in profit on their investment at this point overall.

Bill Maloni said...

You likely are absolutely correct but try explaining that concept to the media or the Congress.

Some of them still think you pronounce the "t" in mortgage!

Many reporters Monday night and Tuesday, wrote about a letter from the FHFA IG to Director Ed DeMarco--bitching at FHFA to taking too long to insist F&F implement a FHFA-changed accounting rule--and turned it into a "Fannie and Freddie underreport loan losses" news story.

This was a internecine cat fight between two segments of FHFA, but the letter/report became a F&F failure which never was the case.

It was a ludicrous/haphazard media performance with one or two exceptions, but that's the story which went out to the world and that's what a lot of people will think.

"The lie races around the world, while the truth slowly is putting on its shoes in the morning!"

Robert Mae said...

Anonymous, if I understand your point correctly FnF includes all dividends paid since conservatorship.

For example, Freddie paid $23.7b before the sweep, $41b total to date

Bill, why is this advisory bulletin even an issue? Besides the Post getting it wrong, of what impact would even a total loan loss of 2.77% of Fannie's $2.7t portfolio have, which is in no way realistic since they then own - and therefore can sell - the asset? Isn't that relatively chump change given its earnings?

Bill Maloni said...

As noted, it seems that Nick Timiraos, writing in the WSJ, had the story correct and it's not an issue. (Link below.)

Don't know why it was overwritten and headlined by the media.

I'm told the new "bank like" reporting system, which both F&F are implementing, won't change the number or earnings impact.

The real "story"--if there is one--is the cage rattling that the FHFA IG is doing at the expense of the FHFA staff and why Steve Linick is doing it.

One reporter, before she went on vacation after writing her article--which I questioned--said there is a "back story" here, which she couldn't get into.

All that i do know is that Linick, who reportedly is on the move to elsewhere in the federal government, has been jabbing DeMarco's FHFA (and DeMarco) continually with IG reports suggesting FHFA shortcomings.

Linick has been accused of "empire building" and wants to add hundreds of new lawyers to the IG staff. I already reported, months ago, about Linick's desire to have them "armed," as in carry guns!!

Matt Hill said...

Calculated Risk had a good article on this.

Lawler: The Washington Post (and Reuters) get it wrong again on the GSEs:

Bill Maloni said...

Yes, Lawler "was" a fabulous Fannie quant and now writes a daily newsletter, which I tried to link, but--excuse this non-techie--it had one of those little green boxes containing his newsletter, which I don't know how to "link."

But, Tom Lawler called out the Post for lousy reporting (ongoing) and noted specifically why (ditto Reuters whose wire service story the Post used) was way off.

Calculated Risk then picked up Tom's newsletter.

When the truth behind this inside FHFA "pissing contest" comes out, some reporters should have red faces.

If someone has it, please post a link to "Calculated Risk." (And I'll try and find one, too.)

Qualified Observer said...

Calculated Risk:

Bill Maloni said...

Wow, that was quick.

Let's see if I can do it again, "24year old, former Swedish airline stewardess, who loves old American men!"

If any of you have.......!

Robert Mae said...

'Weathered' Bill. We're weathered

Robert Mae said...
This comment has been removed by the author.
Bill Maloni said...

Do you remember the great scene in "The Directors," where "Inga" (Uma Thurman) comes to interview for the secretarial job?

I'm still holding out hope for "Inga!"

"Bialischtok and Bloom, Biali......."

Robert Mae said...

Is that her last name?

Robert Mae said...


Bill Maloni said...

The stupid kerfluffle over the IG's letter already has spawned the first of "Are F&F as profitable as they claim?" articles.

What %$#@%& idiots, some people are.

After internal and external auditor review for accuracy and GAAP compliance, the companies issue their reports quarterly to the FHFA, which re-review them before they go out tot he SEC and the public.

With FHFA blessings and White House gobbling up and using the revenues in their debt squabbles, suddenly because of a wussy internal letter--reflecting some other agenda--people ask, "Are the companions really financially successful."

It's an indication what F&F advocates have to do working with a really dumb media.

Qualified Observer said...

"Wow, that was quick." Just trying to add value to found value. Matt beat me to it.

"What %$#@%& idiots, some people are.

It's an indication what F&F advocates have to do working with a really dumb media."

Do you doubt there are strong hands actively working all channels against FnF? Where's the press coverage of Capuano?

I can only hope that rational heads will insist on a fact-based accounting before decisions are made; if gridlock assists in this, so be it!

jwnoblethree said...

Great write up Bill. Have you heard anything from the ICBA in DC re:GSE reform? I would have thought they would have some clout on both sides of the aisle (although not as much $$ as the TBTF banksters).

Their 2013 GSE reform priorities seem to largely support reform only. Link-

Bill Maloni said...

Two responses to the last two questions.

Media only responds to what's out there; Capuano (D-Mass) has not done much touting of his won legislation, making me wonder if someone or something scared him off (reportedly a powerful former MoC from Massachusetts was making calls to former colleagues dampening their interest in F&F).

Possibly, Capuano if he's just gotten on to other issues.

Historically, the ICBA has been a positive force for Fannie and Freddie, and remain so because its membership is so concerned about being consumed by the TBTF banks and their large regional peers.

F&F give the community banks a "seat at the table" with the equal access they provide the small lenders.

I never am sure where Cam Fine, the ICBA current exec, is on most issues or if he has the congressional respect enjoyed by his predecessors.

But, Capitol Hill listens to the community lenders.

jwnoblethree said...

Thanks again for the insight Bill.

Anonymous said...

Bill, why not recruit Ken Guenther to your cause? He is probably still the voice of community bankers.

Bill Maloni said...

Good idea and I've tried.

Very smart guy, excellent skills, email regularly with him, but .....

The next time you see him or talk to him, ask why he refuses all of Maloni importuning to put his name of GSE broadsides.

He did write a blog for a while after he left ICBA. But no longer.

Robert Mae said...

I'll take a stab at that. Smaller Community banks are having a hard time producing profits with all the costly new rules and regulations so he's doing them a favor in not badmouthing their acquirers.

Bill Maloni said...

Unless I am wrong, most small bankers don't want to sell out and they cant' be preserved then we are back to only the very large and TBTF banks controlling the whole shooting match.

Congress always has tried to preserve a niche for the little depositories, because they reflect "home town and the little guy."

Congress will be loathe to approve anything which facilitates their demise; ditto the Congress' and ditto the Treasury via regs.

Robert, someone told me that you might be passing the hat in the shale oil fields to fund Bradley Manning's desired surgery. Do you have a website?? :-

Anonymous said...

Remember the scene from the end of Dr. Strangelove in which Slim Pickens rides an ICBM down to Armageddon? That is how the community banks like mine feel about our investments in Fannie and Freddie preferred.

ICBA is seemingly on the sideline.
Is there any real or even potential prospect that that anything in the potential Reed/Johnson/Crapo legislation will benefit those of us who have not dumped and are still riding the GSE ICBM?

Robert Mae said...

I'm sure new pals will oblige on the first part of her metamorphosis. Oh, so happily.

Robert Mae said...

To be realistic, Anounymous, that shit done already blowed up. I am curious to know how many preferreds are still owned by banks, though. I'd guess very little, but I don't know, either.

Records on holdings are unreliable, and there was a thing called 'TARP' which would have moved the banks to sell. I mean, that was its specific purpose. But that would mean the treasury owns the majority of juniors, or at least a good chunk of them.

Bill Maloni said...

One man's perspective.

Becauyse of how Paulson manipulated then screwed the community bankers with the investments in preferred and then pulled the #$@&%* rug out from under them with the F&F takeover, I always felt the GOP owed the small banks something.

How the ICBA chooses to ask for that debt to be repaid is up to them.

But, I also believe that--for those holding the junior preferred--there will be peaks and valley, not with the former getting you $25 a share but with something more than it is today, because that price will rise and fall as the discussion about "what to do with F&F" gets closer to fruition.

Robert Mae said...

With all due respect, what 'they' decide to do with FnF is immaterial. They don't own the two. If 'they' prefer to purchase the assets I own I would consider it as long as full redemption and an apology is given, but no less.

Don't believe the hype, Bill. And I'd say 14.9% of value is valleyish enough, thank you.

Full redemption or the stigma of the first corporate taking in US history. I'm sure Obama could live with that. Don't know about the others though.

Bill Maloni said...

"First corporate taking" only will occur to some "policy makers" if and if the courts find for one or more of the four plaintiffs in the current pending cases.

Inside the Beltway people--and lots of media--never recognized them as companies and believe they were bad actors which deserved anything/everything which happened.

Robert Mae said...

I like their arrogance. While they're at squashing the 1st govt taking of a private enterprise maybe they can squash other sordid events in America's past.

Hiroshima? never happened
Slavery? never happened
Native Americans? "we have determined that this never happened"

Bill, history books won't give a rat's ass what MoC thinks is justified.

Robert Mae said...

Nor will concerned capitalists, btw

Bill Maloni said...

Robert--We share much.

History is written by the winners and unless some of things I've been writing about and on which you and others have commented
are changed in the near term (mostly by the Congress and then the media), then the F&F epoch will stay inaccurate and incomplete.

Funny, a national journalist--whose name you would recognize--suggested, in my doggedness, I reminded him of one of those loyal but forgotten Japanese soldiers, hiding and still fighting on a Pacific island, years after the war had ended.

In the past few weeks, my emails to him originate "from my unnamed atoll."

But, I don't plan to be that old soldier he described.

Robert Mae said...

To a shill....

This is interesting. I have read Wiki's 'Fannie Mae' topic page many times in full, but this morning is the first time I noticed the following edit:

"The Administration PR effort was not enough, by itself, to save the GSEs. Their government directive to purchase bad loans from private banks, in order to prevent these banks from failing, as well as the 20 top banks falsely classifying loans as AAA, caused instability. Paulson knew that Lehman Brothers and other banks were in trouble and would soon require Fannie Mae and Freddie Mac to purchase their toxic debt; this meant that he would need a fast method to bailout the banks, so he devised a method to use Fannie and Freddie as a backstop. Paulson's plan was to go in swiftly and seize the two GSEs, rather than provide loans as he did for AIG and the major banks; he told president Bush that "the first sound they hear will be their heads hitting the floor", in a reference to the French revolution, and the taking (fifth amendment) of their assets -- without compensation:.[39] The major banks have since been sued by the Feds for a sum of $200,000,000, and some of the major banks have already settled: . In addition, a lawsuit has been filed against the federal government by the shareholders of Fannie Mae and Freddie Mac, for a) creating an environment by which Fannie and Freddie would be unable to meet their financial obligations b) forcing the executive management to sign over the companies to the conservator by (a), and c) the gross violation of the (fifth amendment) taking clause"

History being written....

Bill Maloni said...

Thanks, Robert, excellent find.

Now, if we could get everyone on "inside the Beltway" to read an believe Wiki, we'd be half way there to some support for the "GOEs", Government Owned Enterprises, my new name for F&F.

I've said if the plaintiffs get some headway, legally, I think a lot of embarrassing material could be exposed about Paulson cutting legal corners to do the deed, which also served a major GOP partisan objective.