Sunday, December 8, 2013

Ho, Ho, Ho, the CSP Joke is on Us


Lots of FHFA Action This Week 

Some charged developments likely coming this week, including possible Senate approval of Mel Watt to be the new Director of the federal Housing Finance Agency (FHFA), F&F’s regulator. 

Most people believe this now is a baked in concrete deal, but there was an interesting wrinkle which came up at the end of the week. 

Reportedly, Mr. (Congressman) Watt, who loses the title officially if he takes over the agency but in fact never gives up the honorific, asked Ed DeMarco, the current acting Director, to stay on board awhile in a transition.

I hope that’s not true. 

Mel Watt might want the helping hand that a departing DeMarco could offer, but Ed reportedly has “civil service status,” which means he can’t be forced out of the agency and the last thing Watt needs is his predecessor still around with the guy’s former staff paying obeisance to him. 

Congressman: Even if it leaves you feeling a little exposed, remove your predecessor ASAP; make the FHA staff understand that there is a new sheriff in town, and just learn on the job, as many of us have in the past when given grander responsibilities. 

Better to arm yourself with a solid assistant or two—brought in from the outside (not the Hill), with heavy mortgage finance and securities experience—and look to them, first, before relying on what FHFA officials tell you, until you know enough to trust those you find there. 

You don’t have to show off for anyone. You are the boss, you make the rules, and you ramp up at the speed you need, and don’t let anyone — especially inside— measure that pace for you. 

Look querulously at any FHFA staffer who starts their sentences with, “What you have to do Mr. Director is…….!” 

You are smart enough to know that you have a lot on your plate and while a dose of DeMarco might seem soothing, it’s wiser to lose him as soon as is seemly and get on with your education and administration of the agency. 

Frankly, what I don’t know is how much you are going to be your own man, making your own calls on issues that—while you may not understand down to the last comma--you instinctively know are right or wrong. 

That’s why you have one or two strong deputies to work over those matters, whose loyalties are to Mel Watt and who won’t spill your business in the FHFA hallways and cafeteria.

It’s going to be difficult for you, but that same logic applies to your keeping at arm’s length your White House sponsors. They chose you. They made the decision, the Senate will have approved it, and now use your brains, skill, and experience you brign through the door. 

The Common Securitization Platform (CSP);
“White Elephant” Requiring Major Oversight

Another event possible this week is  FHFA and the same Ed DeMarco announcing the name (s) of the individual (s)—there are vacancies for a CEO and President--who will head the Common Securitization Platform (CSP), which I consider an outrageous waste of taxpayers’ money and an expropriation of Fannie and Freddie resources not quite as egregious as the 2008 “takings”--now being litigated in 17 different lawsuits--but, it’s close enough. 

The CSP is a new Delaware chartered narrow casted entity, which neither Fannie nor Freddie—who were forced by their regulator to create it--or most lenders  want.

However, acting Director DeMarco believes strongly in this unwanted scheme to develop an independent mortgage underwriting platform, which DeMarco gratuitously funds with Fannie and Freddie (taxpayer) revenue.

FHFA  has rented Bethesda office space for CSP, is building CSP a boardroom for its yet to be named board, will hire a couple of bigwigs (see above) and then bring in some duplicative worker bees (how many?).


$500 Million, Really??

The rumor is that DeMarco’s eventual cast of CSP merry men and women will blow up to $500 Million on this puppy.  

That’s right Congress, $500 Million, which could/should be Treasury-bound and deficit reducing. 

This scheme has no independent oversight or design, just a DeMarco mandate to create something which likely already exists in one or both of Fannie and Freddie. 

Mel Watt, are you or someone close to you reading this? Make yourself an instant hero, ask the vainglorious (in its own mind and congressional reports) FHFA IG office to investigate the CSP thing, “right #$@&^%*$ now!”


Congress once used the GAO to eviscerate these soft projects, maybe some curious/outraged D or R might ask it to so with this one.


I want it now, whine, and cry! 

The common platform has had a quiet evolution and has escaped a lot of outside attention, despite how brazen it is.

Essentially, Ed DeMarco decided that the mortgage banking world—most of which already is attached to one or both of the Fannie Mae or Freddie Mac underwriting platforms--requires a third.  

“For whom” is a good question, especially if Congress is going to do away with the two and keep or sell off all of their assets (including their platforms)? 

Industry’s public comments didn’t seek this because it realizes some inherent legal risks which lenders don’t need given their other regulatory and judicial concerns.

DeMarco’s judgment is to give this project to the world (he didn’t bother to answer who might pay the taxpayer back for his gift?), no matter the viability and necessity.

Think about it, who but F&F--and maybe one or two banks--have that type of system demanded, which they keep market contemporary? 

Where will the CSP, board and employee go for input?

I know, I know, in their hostage’s cupboards! 

Clearly this pig, no matter how much lipstick is painted on it, still will look like a sow. When all is said and done—if an intervention can’t be put together—the CSP will use the standards and systems which F&F have developed, remembering these two entities—over which FHFA has conservatorship authority--will continue their automatic improvement.

What is the CSP Going to Seek and Where? 

Demarco does not conserve F&F resources and assets with this exercise.

The CPC will harrumph and call for studies and reports, go on field trips, maybe visit overseas, and then take the active information from Fannie and Freddie, dress it up and pretend that it’s a new creation.

There is precedent for this audacious thievery. Since its early days and I suspect still, OFHEO/FHFA would demand detail rich reports from F&F, then some FHFA apparatchik would publish the info, suggesting the research was done, independently by the regulator. 

It’s stealing, but gobbling up F&F possessions doesn’t seem to bother Congress.

I suspect, the CSP  intellectually will cannibalize some sensitive operational parts of F&F, so some bureaucrat can pretend he/she found out a new way to underwrite loans. 

I’ve suggested that FHFA bag the new corporate façade, the titles and expenses, and just name 10 bright people from each entity and a half dozen of their own staff and do the work in house. 

If it takes any more than that, then, once again, FHFA is “$%$#@* up!” 

Careful Sen. Mark Warner (D-Va.), Mr. 30-1 

Weekend report that Republican lobbyist Ed Gillespie might run against you in your next election. 

With your constant dissing of them, I am sure the thousands of Freddie Mac employees living and voting in Virginia, as well as their Fannie neighbors who reside there, too, would be happy to put putting their voices, wallets and energies behind Eddie G. 

What Others Are Saying/Writing 

The WSJ's Nick Timiraos offers his thoughts on what Mel Watt might do at FHFA.

Tim Howard does TV interviews re, “The Mortgage Wars.”



Yahoo looks at Wall Street and ethics.

Maloni, 12-8-2013




Anonymous said...

The answer to the problem of making sure they have enough capital in a crisis is for them to keep 5 percent of their liabilities in non-housing cash equivalents at all times. For example, Fannie Mae has 3.6 trillion in potential liabilities. They have assets offsetting those liabilities and their risk management is enough to avoid liquidity problems in almost all situations. The one situation where they have liquidity problems is when the asset class they are concentrated in experiences extremely acute short term negative volatility. Their actions to support the market by providing capital become impeded by the mark-to-market accounting requirements. Additionally, because they have political enemies who want to project their temporary problems as a failure of their generally successful model, their access to their statutorily sponsored ability to borrow at low cost rates is excessively highlighted by jealous economic participates who don't have such access.

Holding large amounts of cash for the GSE's is an especially detrimental long term strategy because the totality of the accumulated profits over the years when they are not holding that cash exceeds even the extremely negative losses that recently happened during the financial crisis.

The one asset they can invest in that meets the liquidity requirements needed during a black swan event in the housing market is the 30 year Treasury bond. With their ability to borrow cheaply at short term interest rates they could take advantage of this inherent arbitrage opportunity to obtain a guaranteed source of net interest margin that is almost identical to what they achieve by holding MBS in their portfolio directly.

For Fannie Mae, this would mean requiring them to hold 180 billion dollars worth of 30 year Treasury bonds at all times. Then during a declared crisis and with permission from their regulator they could sell those bonds to provide them with the liquidity that they need to continue to purchase mortgage loans

Bill Maloni said...

Good idea, but will the Chinese sell us Fannie (and Freddie) that much??

Seriously, your idea isn't off the mark re safety and soundness, but that somebody (likely on the left) will argue that is a lot of money to hold out of the residential real estate market.

But, maybe Jack Lew is reading my blog, along with Mel Watt.

Anonymous said...

@ anonymous 12:18 PM

As if the 30 year bond weren't volatile itself!

Anonymous said...

I'll respond to both comments. During Operation Twist and QE1,2, and 3, the Federal Reserve along with the private market purchased large amounts of Treasury securities. The rate of return on the 30 bond dropped to as low as a 2.80 yield. Bonds trade with an inverse relationship of price to yield. That is why the strategy of the GSE's continously holding 30 year Treasury bonds as their capital cushion is so optimal for their circumstances.

Let's say the average price they pay for their bonds is slightly below par. If the average price they pay for the bonds during normal times is 97, and the price increases to 100 because of the demand during the crisis, they will have made a huge profit exactly when they need to sell.

So during normal times they get income from the bonds and at the time when they need to sell they get the higher price than they could ever achieve on the asset.

There are additional benefits to this strategy:

1. It provides the Federal Reserve with a large buyer if any when they decide to reduce their own support measures.

2. It legally creates a "captive buyer" situation for US Treasury Securities which contributes to overall demand for the securities.

3. The debt stays domestic. Which in extreme scenarios makes it easier on the government to reduce its risk of default if under financial stress.

Anonymous said...

You are selectively screening information out.

Here is the big picture:

Hold for 2 to 3 decades. And you think the bond will not drop in price -LONG TERM- as interest rates rise? Gov bonds also carry risk. You scheme can work if they hedge that risk. But you did not mention that.

Anonymous said...

I wanted to respond to that other point about them holding 180 billion out of the mortgage market. Currently in combination the GSE's are involved in most mortgages in the country already. That is even with them giving 185 dollars back to the Treasury. So that money was "removed" from the market and they have still provided 5 trillion in liquidity and control most of the market. With the quality of the their assets and their cash-flow/profitability, they easily have the capacity to implement the Treasury bond purchase with 0 effect o their ability to provide liquidity. Additionally, because the capital requirement is based on a percentage of their liabilities and generates income it will give them more opportunity to allocate the profitable portion of the capital cushion toward affordable housing goals without any risk of materially affecting the stability of the enterprises.

Anonymous said...

The capital cushion should be un-hedged to avoid all counter-party risk. If the market price of the bonds causes the liquid value of the capital cushion to fall below 5 percent the companies will simply implement more purchases of bonds to bring the ratio back to 5 percent of liabilities.

Only for purposes of overall solvency should the regulator consider losses in the capital cushion in a mark-to-market mentality.

In a situation where both housing bond prices and 30 year Treasury bond sales would result in losses if sold for purposes of liquidity, the regulator will not compel a sale for purposes of liquidity unless the following conditions are satisfied.

1. In such a condition the regulator will instruct the Enterprise to limit its borrowing in the short term debt markets to a range between 75-100 percent of its average borrowing for the preceding 8 quarters.

2. If an unsuccessful auction of Enterprise debt securities occurs the regulator will restrict the Enterprise from accessing the pubic debt markets for a period of Thirty(30) business days. After this time period they can attempt to sell securities. For each unsuccessful debt offering a Thirty(30) business day waiting period will commence.

3. If both a failed auction has occured and the Enterprise is projected to exhaust its available cash within less than 90 days based on a accerlating deficit in net asset value the regualtor will instruct the Enterprise to cease all new home loan additions to its retained portfolio. Its guarantee business will not be restricted as long as there is a material reason to alter pricing for specific circumstances and attributes of the loans if somehow conditions have made normal pricing unprofitable as to affect the overall solvency of the Enterprise.

4. After having ceased new mortgage purchase activity the cash burn through rate results in a balance sheet position that is projected to be depleted in less than 30 calendar days, and all other conditions of this legislation have been satisfied, the regulator is instructed to use the conservatorship and/or receivership authority granted under HERA if otherwise appropriate within the authority granted under that legislation.

So yeah that's how I would write GSE Reform legislation.