Monday, September 2, 2013

Syria, Fannie and Freddie


Syria and the Suddenly Far Away World of the US Mortgage Market

I feel for President Obama as he faces the “Syria” conundrum.

I thought Secretary of State John Kerry did an excellent job laying out the case against Bashar Assad’s chemical weapons use killing civilians and children and why that should matter to Americans and others. 
But now it is Obama who must, figuratively, “pull the trigger.” 

Most of us watching this quagmire realize that the President’s options all are bad, with undeniable pitfalls owing to warring non-US friendly extremists’ on both sides (and that includes some in the GOP). Naturally, the duplicitous, ever lurking, phony and opportunistic Russians, acting out their historic best “courve and goniff” roles (Yiddish for “whores” and “thieves”) are screwing resolution efforts. 

We know the President is in a “no win” situation, which means the United States is in that same dilemma. 

The Republicans—now that Obama is going to the Hill for congressional blessing—either have to go along or, itself, look indecisive or at least fractured. 

Wolf Not Mutton 

My only advice for the President--since his political opponents and some in the media will pillory him no matter what he does—is get condemned for being a wolf not a sheep. 

Be a predator not mutton; you’re more feared as a marauder than a lamb chop.  

Oh, and drop one or two of those Tomahawk cruise missiles where Assad sleeps, while warning Syria’s friends to back off and don’t play harassing guerrilla games with the US and its allies. The last time I checked, Iran, Russia, China, and even Hezbollah have cyber networks, too, which can be exploited and disrupted. 

Whatever the near term Syria decision, the next few months politically will be a very ugly period for our nation.

Fannie, Freddie, and “Turn Blue”

Even before the possible Syria actions provided fresh meat for the congressional crazies to do nothing, the Congress will return to “work,” which means bitch at one another, froth a great deal, and produce little. 

The betting here is no event, including lengthy debates about Syrian actions, change that dysfunctional partisan pattern. Some just will don their tri-cornered hats when they engage. 

With Labor Day a faint memory, college and professional football in the air, folks still will wail, “What do we do about Fannie and Freddie?”   

Before the Kerry speech-- and whatever the Congress lets the President to do in Syria--the short F&F answer is nothing, as it is for most unresolved contentious issues at this time of the year. 

In addition, it will be interesting to see how the coming dogfight over Syria manifests itself when Congress engages in its September--end of the current federal fiscal year--circular firing squad exercise called “negotiating a budget extension.” 

Let me save you time, the GOP will bellow,  burp, rant, rave, bloviate and then—near October 1--agree to some face-saving budget resolution which  prevents the Grand Old Party from losing dozens of seats in the next congressional elections when it could be labeled “the party that shut down the government, again.” 

Democrats are salivating at the prospect that the GOP will hold its breath, turn blue (pun intended) and shut down the federal government, delaying those SS checks, military and veteran’s funds from rolling out. 

The Republicans will try and obfuscate and point to other issues, but resolving federal budget matters will be the catalyst for another major partisan conflict over bread and butter issues. 

Fannie and Freddie=Budget Grease

Not that this is a deal stopper, since Congress can get very creative when it wants, but remember that Fannie and Freddie provide some $10 Billion quarterly to the Treasury, which provides the Obama Admin some additional flexibility in the too frequent budget/debt limit fights. (Note: That number could be higher in 2013—doubled or more--if Freddie applies it Deferred Tax Account to its current earnings.) 

I talk with folks regularly about the future of Fannie and Freddie and a few factors emerge. 

What Problem? 

Except for “Inside the Beltway,” most people don’t see this as a gripping problem.

There are a growing number of thoughtful articles decrying destruction when the two have been so valuable since the meltdown, are tightly regulated, currently hold up the conventional mortgage market, and pepper the Treasury with billions of dollars every three months.

Fannie and Freddie should be changed, as I have written and advocated.

But, the required fixes are minimal and should contribute to an efficient, fair national mortgage market, where F&F are participants and consumers don’t face crap shoot mortgage standards and lender manipulation. (And, yes, that still happens, which is why bank lenders still are being sued and fined by Fannie’s regulator, the Federal Housing Finance Agency (FHFA).)

“We Have Nothing to Fear, But Fear Itself” 

What surprises me the most, however, is the obverse number—in Congress, the media, and elsewhere—who insist that any legislative mortgage market steps must include abolishing Fannie and Freddie? 

There have no answers “why,” just some grumbling about things they believe Fannie and Freddie did in the past.

First off, understand that—no matter what the Corker (R-Tenn.)-Warner (D-Va.) advocates say and ditto those who like the Jeb Hensarling (R-Texas) approach--nobody reliably can predict how a newly structured national mortgage market will operate and what its many players will demand, if Fannie and Freddie are gone.

In a market, absent F&F--the current standard setters--establishing credit risk standards, underwriting guidelines, delivery systems, and users--savants only can “guesstimate” what a mortgage will cost; the availability fixed rate financing; the cost of the new required “MI,” if there is a Federal Mortgage Insurance Corporation (FMIC); what happens if there is insufficient capital for the US’s $11 Trillion mortgage market with an FMIC; and what lenders will demand from mortgagors if a new legislative broom sweeps F&F clean away.

I’ve argued that leaving F&F in place, after they repay the Treasury, are allowed to generate some capital from their excess earnings, regulated as they are today, and with no unique or special ties—financial or otherwise to the US Treasury--means most of those issues never would blossom. 

But, we continue to have the crowd demanding, “No, they must be atomized before we can move forward.”

And that stubbornness forced me to think something else. 

Can’t Legislate Away TBTF

Policy makers should spend time weighing my latest thinking, because if I am right, it will affect anything this or a future Congress may approve as a replacement for the two national mortgage investors. 

So many call for the destruction of Fannie and Freddie because of they are confused and afraid. 

They see F&F and our entire mortgage system performing well, they know the banks are unreliable, they think they dislike F&F but frankly aren’t sure why, and they are being asked to uproot market keystones without some guarantee of the result. 

They understand the limits of legislative draftsman writing statute that can compel the public and the markets to ignore or forget previous government actions. 

These policy makers fear a revived Fannie and Freddie, no matter how small, how limited, how cautiously regulated, or how narrow their mission or commercial role, because they can’t force markets to believe the Treasury/Fed won’t stand behind F&F, no matter what the law says, if systemic problems occur, since that was the exact situation in 2008.

In that construct, even a mini-F&F becomes “Too Big to Fail” or joins the new select new “systemically significant financial institutions” (which likely are TBTF). 

Ockham’s Razor (Mortgage Version)


Some in Congress, seemingly incapable of solving this Ockham's razor mortgage puzzle, are inclined to make up a justification and legally obliterate Fannie and Freddie, throwing into history’s scrap pile two extremely efficient and currently house-trained staples to affordable mortgage finance for most Americans. 

As my three year old grandson, Rocco, might say, “Only a ‘Dupidhead’ would do that!” 

Unless the same “Dupidheads” decide to bust up the major TBTF banks and reinstate Glass-Steagall, separating vanilla commercial banking from investment banking, which ain’t happening soon despite the great need to do so.

What little Rocco doesn’t grasp—joining most on Capitol Hill--is that same 2008 lesson almost certainly will apply to anything Congress creates in F&F’s wake which is big enough to do the job. (See Sloan link in the next segment.)

We are back to the fundamental question. Why do it? 

F&F produce positive mortgage results; they should be tweaked not destroyed.
A mammoth legislative project--aimed at dispelling hovering vapors, not real problems, and shutting down effective mortgage entities--won’t do away with whatever moves markets. A reminder to the big banks and their Capitol Hill flunkies, the banks will do just fine financially (see their past years’ mortgage revenues), even with Fannie and Freddie overseeing a gerrymandered conventional mortgage market.  

What Others Say 


Maloni, 9-1-2013





Qualified Observer said...

More supporting commentary from a surprising source:

Bill Maloni said...

Unless you are a "Financial Times member," I think that link poses some access problems.

I agree, it's a valuable article and adds to the skepticism I noted.

Any way that you can create another link that will open it for everyone??

Anonymous said...