Monday, October 21, 2013

Mortgage Wars

Former Fannie CFO Tim Howard’s Book


Many months ago, I was fortunate to review early drafts of “Mortgage Wars,” a book by my friend and former Fannie Mae colleague Tim Howard, coming out later next month. 

Publisher McGraw-Hill has been touting it on Amazon and the book is accelerating up the presale list of books in that genre. 

Tim started writing this book long before federal judge Richard Leon, a year ago, threw out “securities fraud” charges against Fannie Mae CEO Frank Raines, Fannie Comptroller Leanne Spencer, and Howard, which were brought by some shareholders who relied on a totally bogus and politically motivated Bush Administration finding that top Fannie officials misapplied new mortgage backed securities accounting rules. Quite the opposite as history showed.

Judge Leon Clears the Decks and the Air


The Leon decisions overtook Tim’s drafting and provided him with a very satisfactory result to the material he penned and story he began to tell, long before the legal victory was certain and unsealed.

Of course, coming eight years after the 2004 charges and lawsuit were lodged, the three principals couldn’t avoid the career setbacks, loss of prestige, diminished respect, and dislocation in their professional and personal lives.


“Lies have traveled around the world while the truth wakes up and brushes its teeth in the morning.”


And, as I’ve written before, the Bush Administration’s ideological decision to force out this top talent allowed new, less reliable execs to take command. (Heavy specifics of that are in Tim’s book, too.)

From 2005 until stopped, the “newbies” deviated heavily from Fannie’s historic conservative approach to mission, gorged and acquired  billions of dollars of worthless Alt A mortgages and Wall Street private label securities (PLS)—seeking yield and market share-- which brought down Fannie (and Freddie, too, which played its own version of that strategy).

Serious followers of this matter will enjoy reading Tim's authentic details, which have never before appeared in public. If they play close attention, they will realize how exacting was the detailed and serious financial services work and analysis conducted at Fannie by the pre-2005 management.

Tim’s Turn

Last week, I asked Tim to describe the final draft sent to McGraw Hill.


One of the most bizarre aspects of the current debate on mortgage finance reform is that the consensus objective for reform-- getting rid of the GSEs and providing a greater role for the private sector-- was the goal of the anti-Fannie Mae cabal in the late 1990s and early 2000s, and pursuing it is what led to the 2008 mortgage crisis!  Why would anyone want to do the same thing again?   We shouldn't, but the major proponents of today’s ideas for mortgage reform are the large banks and their supporters, and they're the ones who control the narrative about what happened during the crisis.  The story they tell about the crisis is completely wrong, but before my book there has been no fact-based alternative view for anyone to consider instead.  That's what "The Mortgage Wars" will offer. It makes clear how and why the crisis evolved-- using actual events and developments in the correct sequence in which they occurred-- and it's told from the perspective of an insider who lived through the events he's relating.


As I've noted before, the mortgage crisis was the result of a fight between the supporters and the opponents of the GSEs over who would control the largest credit market in the world.  Fannie and Freddie always had been controversial, but the controversy got serious in the late 1990s, when two decades of banking deregulation produced giant financial services companies (mostly banks) with national ambitions who viewed Fannie and Freddie's dominant position in the mortgage market as a threat to those ambitions.  They came to Washington to try to convince policymakers and regulators to replace a mortgage finance system based on the GSE with one based on private-market mechanisms and incentives, with very little government involvement or regulation.  Fannie Mae fought back, and what I call "the mortgage wars" began.  The banks and their supporters succeeded in getting control of the mortgage standard-setting process in 2004-- when private label mortgage-backed securities accounted for over half of all new MBS issues for the first time ever-- and that got the bubble going.  Fannie Mae was pulled into it after OFHEO used allegations of accounting fraud-- subsequently shown by Federal District court judge Leon to have been completely invented-- to oust Fannie Mae's top leadership and force the company to change its risk management organization and practices.  But even with that, five years after crisis ended it is clear that Fannie Mae's mortgages performed twice as well as the banks' and four times better than those put into private-label securities.


The GSE-based system was the best and safest in the country's history.  The bank-based private-market system that replaced it in the mid-2000s-- with the support and assistance of the Treasury, the Fed and the Bush administration-- led to a catastrophic failure that ended up killing everybody, including the GSEs.  Anyone with an accurate understanding of what happened during the mortgage crisis, and why it happened, would be highly unlikely to ever again fall for the siren song of basing an $11 trillion market essential to the country's economic health on free-market principles with no government oversight or regulation.

WH and Hill Democrats, Hold the High Fives 

If you are a Democrat, it’s tough not to chortle over the Tea Party setbacks and the GOP’s problems. 

But, someone who once counseled his direct reports to, “Throw one brick too many rather than one too few,” I hope Democrats do not follow that advice. Instead, I would hope the D’s who prevailed in the debt limit skirmish will be mellow, strategic, hold onto that extra stone and reach out to any Republican who will work with them for the remainder of the Obama term. 

Here’s what I predicted in my last blog, on 10-14, about the eruption of the debt limit fight. 

“I still am sticking to what I said will be the near term resolution. It will be some short term “debt limit” extension and a deal to work on some spending issues.” 

The mind jogger for us all—especially those now politically joyous--is last week’s problems weren’t solved, merely greased and slid forward. The same drama and bloviating will occur in February, unless a true majority in Congress, D’s and R’s, stands up for what’s right and works together on mutually satisfying solutions to spending and revenue matters, that means giving to get or compromise. 

Sorry, my D friends, it’s not just about too little federal spending and more revenue. We spend a lot and too much of it wastefully. The federal government needs to tax and spend more thoughtfully. 

Anyone living in the Washington area can cite his or her favorites wasteful federal spending story and a lot of us can descried departments and massive program waste which like Topsy just keep moving forward.

But Newtown didn’t force us to confront gun violence or easy gun acquisitions and the past several weeks political extremism and antics likely won't change fiscal behavior among Hill D's and R's and downtown. 

Only God knows how venal and crazed the Tehadists and their ilk plan to be. But, setback or not, zealots don’t wither on the vine. 

There still was a boat load of House R’s along with healthy handful of GOP Senators who voted against this short term relief. 

But, their chamber colleagues made that opposition meaningless because enough  stalwarts made clear they would vote for the package and not risk the nation’s credit rating any longer.  

Enough damage already was done by the lead up to the anti-climactic result. I hope Congress and the White House doesn’t just repeat it next February.




Maloni, 10-21-2013






































Anonymous said...

Hi Bill, I checked some bookstores and it seems that "Mortgage Wars" will be available at the end of November, any information on Tim Howard presenting the book? It will be an honor to meet him.

Bill Maloni said...

Yes, he told me that he will be doing "Politics and Prose," the prominent bookstore on upper Connecticut Avenue, in NW, DC, but I don't know exactly when.

I assume there is a regular road show, McGraw Hill does with its new authors. But, Tim hasn't mentioned any other cities to me, yet.

Bill Maloni said...

Anon--I called Tim's attention to your question and he reports that the DC Politics and Prose visit will occur on Jan. 3, 2014, at 7 PM.

When he gets more book store and city visits, I'll let people know.

Anonymous said...

It's my birthdate. Maybe I'll spend it in DC!

Bill Maloni said...

No, order it on Amazon and go out
with your Significant Other--or find one--and party.

That day isn't coming back.

Anonymous said...

Bill, tell us what you hear about GSE reform provisions to be contained in Maxine Waters bill.
It is time for the Dems to wake up and fight for a reformed Freddie and Fannie.
Are the Homebuilders, Mortgage Bankers and Realtors so afraid of Henserling and the Tea Party that they would not address their self-interest in GSE reform?

Anonymous said...

Bill, tell us what you hear about GSE reform provisions to be contained in Maxine Waters bill.
It is time for the Dems to wake up and fight for a reformed Freddie and Fannie.
Are the Homebuilders, Mortgage Bankers and Realtors so afraid of Henserling and the Tea Party that they would not address their self-interest in GSE reform?

Anonymous said...

Bill, tell us what you hear about GSE reform provisions to be contained in Maxine Waters bill.
It is time for the Dems to wake up and fight for a reformed Freddie and Fannie.
Are the Homebuilders, Mortgage Bankers and Realtors so afraid of Henserling and the Tea Party that they would not address their self-interest in GSE reform?

Bill Maloni said...

Wow, you must be a Maxine fan, since you sent the same message three times. (Just teasing, don't worry about it.)

I haven't heard word one about Ms. Waters' plan.

Whatever she produces won't get much exposure in the House, although I am sure that Hensarling will give her a hearing date or two.

Her past comments suggest she sees a major role for the federal government in the mortgage finance system and the Hensarling bill, barely approved by the Committee, goes in the opposite direction--and even what President Obama is seeking calls for less federal and more private support.

She has the title (ranking Member) and the seniority, but she has not made herself a mortgage finance or securities heavyweight in all of her time on the committee and those facts matter, if you hope to drive major legislation.

Anonymous said...

Please give us your views on F/F terminating their pension plans. Are former employees even more screwed than when the USG devalued the stock--yet let AIG survive?

Bill Maloni said...

My view is that it was inevitable, as other big companies, moved in the same direction--and its been rumored for motnhs--but it was poorly handled by all involved.

Short answer is former employees and retirees are no more screwed then they have been once FHFA took charge.

Although there was very little embellishment of the FHFA press release; supposedly detailed letters soon will go out all affected.

But, ompany officials should have sent them first before DeMarco make his "look how tough I am" announcement.

I also thought the W Post and other headlines were a bit misleading, but I suspect they picked up on the theme FHFA and its boss wanted to send. (He could just have said, "G-r-r-r--r!" and we would have gotten the message.)

The deal is done for current employees or new employees. Apparently, they all will be getting annuities--with personal and Fannie contributions--instead of a defined pension plan. Most of them knew this several months ago.

What still is unclear is what options pensioners will have, whether annuities in lieu of their pension or lump sum payments based on life expectancy. They (we) will receive something and a monthly annuity payment could just be a distinction without a difference..

These changes are supposedly going to take about two years, so we'll see.

It would not hurt for the pensioners to organize--not around me, since I don't think FHFA will do much for Maloni, especially after my coming blog--but there is no "pensioner's voice" right now and one is needed to insure the proper sharing of information and sufficient deadlines to critical financial decisions.

Anonymous said...

I trust that someone will send a copy of Howard's book to every member of the House Financial Services Committee and the Senate Banking Committee.
The reaction should be interesting, bet that Howard would be requested to testify.
At minimum, it would sell a lot of books.

Bill Maloni said...

Maybe one of the trade groups would--in the old days--pony up the costs for 100 books (House and Senate committees), but probably not today.

The money on this issue today is with the Hedgies owning the preferred, since a revived F&F-if that was one result--could helps their case.

I also wouldn't expect most Senators or Members to read the book, since they all receive a variety of books (or used to when I worked there) and wouldn't have the time or inclination.

Most Hill denizens get their news from articles, interviews, or TV talk shows, so if the book generates that kind of buzz the chances of its messages getting out are better.