Friday, January 31, 2014

Get TH While You Can!


To Hill People Seeking a F&F Change
Here’s My Best, “Can’t Miss” Advice


Do I have a deal for you!
It’s free, comes with no strings attached, and is the kind of thing at which smart people--who are “on their game”--will leap, especially if they are honest with themselves about the enormity of their task and the hurdles they’re encountering.

Everyone drafting a mortgage finance reform proposal runs into the same rat’s nest of issues.

No matter what your ideology or political leaning, it is not easy trying to design a U.S. mortgage finance system, which features efficiency, fairness, ease of access to lenders, builders, Realtors, consumers, utilizes the latest technology, makes mortgage products (loans) standard across the country, and does so in a way that minimizes the risks involved to borrowers, financial institutions, and the taxpayers. 

Back to my point.

Republicans and Democrats alike should make every effort to sit down with Tim Howard, Fannie’s former Chief Financial Officer, and take advantage of his mortgage finance career spanning 30 years and then pick his brain like hungry birds attacking popcorn. 

Having just heard him address a group of interested folks, I can assure you that the one thing he won’t say to anyone is “revive Fannie and Freddie” or “make no changes to the current system.” 

Let me repeat that for emphasis, Tim will not argue for the status quo, with few or minor changes.

He will explain the necessary component parts of any functioning national mortgage market, like ours, which has a set of primary market lenders, secondary market guarantors, and the all-important capital market investors, and likely try and guide you—no matter your ideology—through how best to string together the parts to achieve the laundry list of systemic benefits I spelled earlier, bearing in mind, the current splintered political terrain.

If you sit with this sophisticated former Fannie executive, you won’t be selling out to the enemy or risk coming down with GSE-itus. 

To the R’s, check him out with some of your Wall Street and big banks acquaintances--from the operational side of the institution—and see what they say about Howard’s financial acumen.

He also won't tout his book, “The Mortgage Wars,” which has been very favorably received, save one ridiculous off-the mark-review (which I will address later) in your discussion of future mortgage market models (unless you press him to discuss it). 

Anyone reading my blog knows I think that many people at work on these bills--whether it’s Hensarling (R-Tex.), Corker R-Tenn.)-Warner (D-Va.), the new effort by three House D’s, the forgotten Capuano (D-Mass.) proposal-- have very little idea of the complex history of mortgage finance, let alone Fannie and Freddie. 

I suspect also they don’t realize—in the GSE halcyon days more than a generation ago--dedicated and incented people labored judiciously trying to come up with a Fannie/Freddie substitute, which hit all the systemic value points I enumerated. 

Staff for Senators Johnson (D-SD) and Crapo (R-Idaho) reportedly are close to finishing their work and looking ahead, possibly, to a March mark up. Even with that timetable, it's not too late for them to benefit from Howard. 

People should know—in my 21 years at Fannie—Howard worked on three major variations of that same “find an alternative” challenge, under Fannie’s most successful Chairmen, David Maxwell, Jim Johnson, and Frank Raines. 

Fannie (with Tim always present) turned the GSE model upside down, inside out, shook it, stressed it and occasionally kicked it to see what could be superior approaches. 

Indeed ideas not part of today’s Fannie and Freddie emerged, but they fell victim to pragmatic political and industry compromises which produced the inevitable mush, sinking the efforts. 

The last effort was over a decade ago, but Tim was there for all of it and worked with a variety of outside consultants and insiders charged with the same undertaking. 

My point is that Howard has thrice been through all of the issues and problems, complete with systemic, industry and congressional politics, and could be a beacon for those now trying to do the same thing. As noted, he won’t call for the simple resurrection of F&F, although the Congress could do (and has proposed) a lot worse. 

Having written his book, Tim’s objective now is meeting with as many people working on this Herculean legislative task, who will meet with him, and share his experience. 

Don't forget, he is an expert and successfully ran the nation’s largest credit risk/interest rate risk and global financing mortgage corporation. (It's necessary at this point to remind readers  that Fannie Mae's entry into major private label subprime (PLS) purchases occurred in 2005, after Howard, Raines and Spencer departed the company.) 

Capitol Hill D’s and R’s won’t encounter too many sources more intelligent, more capable, and more indulgent in responding to any idea raised by any audience.

Oh, and if you do invite him in, don’t sit too close to him, he is a major “hand waver,” swirling both paws in ways that many of us first thought were anatomically impossible until we viewed him do it more than once!

There Once Was a Reporter
Named Kathleen Day,
Who Would Sit and….


Former Washington Post journalist, Kathleen Day—who now toils for Johns Hopkins University business school—recently bragged to a bunch of DC private school kids about what a superlative reporter she had been, breaking big financial stories left and right. 

According to my source, a parent to one of the students, the kids were taken back and turned off by the braggadocio. 

When I heard that story, I thought, “Yep, a legend in your own mind,” because of the strong suggestion that Ms. Day may have been manipulated by former OFHEO officials, who hoped that she and colleagues would write inaccurate and anti-Fannie stories based on the pap the regulator supplied – with a goal to belittle and embarrass Fannie executives (Frank Raines, Tim Howard, and Leanne Garmon Spencer), making them more pliable. 

Ms. Day surfaced again this week, in USA Today, writing a snarky and dismissive review of Tim Howard’s book, with Ms. Day seemingly focusing on everything but what he had written.

Below is a letter I sent to the publication, after reading her review. 

Kathleen Day should have recused herself from writing about Tim Howard's book. 
It strongly has been suggested that she was one of the favored reporters receiving and using Office of Financial Enterprise Oversight (OFHEO) spoon-fed anti-Fannie and Freddie propaganda. The providing OFHEO officials hoped their guerilla tactics would drive down the F&F stock price and cower their officials into accepting the oversight agency's less than thoughtful rulings. (See 2004 report of HUD Inspector General into OFHEO practices, which should have produced a recommendation to the Department of Justice for violations of law.)

Indeed it was OFHEO which started the totally fallacious rumor that Howard, Fannie CEO Frank Raines and Comptroller Leanne Spencer, committed securities fraud, a charge which forced the three from their jobs. (I wouldn’t be shocked if the record showed that Ms. Day authored some of those articles which abetted a politically vicious attack and a partisan drive-by shooting.)

That “securities fraud” allegation was the basis of the 2004 lawsuit, which 8 years later Judge Richard Leon dismissed saying that he could find nothing in the  "65 million pages" of hearing records which would allow any jury, anywhere to convict the defendants of the charges made against them.

What did Ms. Day think about that Bush Administration’s scurrilous behavior? What did Ms. Day think about the many, many reports which declared that Fannie and Freddie were not the cause of the 2008 financial debacle?
What did Ms. Day think of the fact that major New York banks and investment banks went around the Fannie and Freddie systems, because the latter couldn’t be manipulated, and produced and sold worldwide more than $2 Trillion in poorly underwritten and falsely rated, private label mortgage backed securities (PLS) which promptly failed making the US real estate softening an international financial Armageddon?
Everything I’ve pointed to was in the Howard book, but Ms. Day--still hung up on her anti-Fannie attitudes--must have missed it all, since she reports there was “nothing new” in Howard’s account.
Of all people, why did Ms. Day seek quotes from the AEI's Peter Wallison, an avowed F&F critic, whose own work has been intellectually shredded by the Fed's staff, the President's Financial Inquiry Commission report, and dozens of financial reporters of all political stripes?
I've joked that Wallison and his AEI colleague Ed Pinto have been rolled over by so many sources, their suits have permanent tire marks on them.
What did she expect Wallison to say about Howard's book? 
Bad review and bad choice of reviewer. 

Fannie and Freddie in the SOTU

Ho hum, not to be dismissive of our President (again!), but anybody reading any “get tough on F&F” intent in his Tuesday remarks is over reading it. 

His delivered remarks were benign, while a prepared statement, more elaborate on many items, contained (paraphrasing) “change Fannie and Freddie, as we know them.” 

It’s the wrong year for that, there is a lack of objective consensus, as well as serious doubt about procedure, especially with F&F earning the Feds so much money and successfully undergirding the nation’s mortgage market.


Maloni, 1-31-2014







Anonymous said...

Bill, great comments. Tim Howard is the expert that would be a great asset to reform.

Wondering what your thoughts are on the new risk sharing approach? This is the second time Fannie Mae has done this and it all seems rather positive. Would this be something that Tim supports? From what I read, it all makes sense. TS.


Bill Maloni said...

TS--I like the effort and think they should be market rewarded for the try and their success.

Note that Freddie, employing a similar debt offering didn't fare so well.

But, no matter how warmly received,the market's purchase of this still flies in the face of the political Conservatives' primary F&F issue, which is all Fannie debt activity benefits from its relationship with the federal government, even now.

That reality--to which no GOP or Conservative source has developed a solution--leaves those likeminded with no option but "abolishing" or otherwise destroying F&F because they fear that markets never will separate F&F from the 2008 Bush Admin financial support.

That narrowness limits their alternatives to no F&F like entities with just large commercial banks running the mortgage world or creating whole new federal things, like the C-W Federal Mortgage Insurance Corporation, putting in on budget, and pretending they are not creating half a dozen other system problems when they do so.
But, that's why they are called "the Congress."

Funny, the Right Wing "destroy F&F" view doesn't seem to extend TARP recipients GM, AIG, or tons of banks.

But as I've always noted, F&F just are treated differently.

Anonymous said...

Bill, I'm hearing the Crapo bill is Plan B to the Corker/Warner "eliminate the company and screw the shareholder" bill. How do they expect to ever bring in private capital investment with these outrageous ideas? I mean, really what are they thinking here?

And another federal insurance company? The FDIC just let's the mom and pop go broke when they fail, and right now at a pace of one per day. What will trigger liquidity to support the economy in bad times, TBTF? Don't hold your breath. That shoe doesn't fit in the mortgage market.

So going forward how do we get people like Tim Howard that really understand the business to the forefront? You would think there would be strong lobbying efforts by someone with a significant stake (Bill Ackman) to be up on capitol hill and in their face!

So far I've seen only the Senator's interested in people that stand to monetarily gain from the destruction of the GSEs instead of listening to reasons why they shouldn't do this.

The Crapo bill is just that, IMO.

Bill Maloni said...

Anon--a few answers to your question.

The very early comments on Johnson-Crapo (hereafter known as J-C) were that it would be C-W lite.

See the issues I enumerated in the last blog about the difficulties in pouting together a massive remaking of the mortgage fiancée system--for anybody.

You also can't signal for a "time out" and ask all mortgage commerce to stop while you try to do your fix.

All four of those previously mentioned Senators (2 D's and 2 R's--plus others working on similar things--encounter the same industry and political concerns and seem to react accordingly. Although it's only fair to see what J-C produce before claiming it's unworkable.

With regard to Tim, he stands ready to work with whomever is interested and has reached out to some of them and I know he is meeting with one of the major non-Hill players. In the meantime, his colleagues and friends have been discussing his book and his availability with important Hill offices.

The best news in all of this is the cold weather syrupy slow way Congress moves and the ability for a determined opponent to slow things down, especially in an election year when the entire House and part of the Senate are up for re-election.

Democrats are circling the wagons to hold onto that chamber and have all but conceded they can't take back the House in 2014 and I doubt if they will go full tilt on something which many in the building, Realtor, mortgage finance community would oppose.

So, you have the lethargy, F&F likely to remain profitable--which counts for a lot--the court cases, and maybe some folks awakening to the reality that Fannie and Freddie, with alterations, can be part of the solution not the problem.

Anonymous said...


Freddie beat Fannie by four months in meeting the FHFA requirements to provide risk sharing options to the market. By being the first mover they had to overcome the nervousness of the market with a new product. Fannie was able to obtain the better pricing by copying Freddie and being able to come to market second when the market could gauge the success better. Fannie also benefits from their larger size and better market relations.

If Fannie continues to extend their domination over Freddie do you think regulators will let them become the de facto monopoly or step in to provide equilibrium? I understand the single security was one option to even the playing field.

Bill Maloni said...

Anon--Good question and I only can give you an opinion.

There has been lots of talk in the past year about combining the two for reasons which likely hold up to scrutiny if the only thing you are discussing is efficiency.

Why do you need two government-connected entities, doing the same things, when one could support the market, considering it isn't a market which requires "competition" at the secondary market stage? Fannie's MBS security has "priced" better since before I retired form Fannie, etc. etc.

But, if they ever were revived (via statute, regulation, or court decision), I think you would want to two--and more?--competing to make the market work better.

Also there is a certain "legacy" element that would argue abolishing Freddie would reduce credit and narrow lender/builder options, etc.

And, lastly you have Congress "at work" (Ha!) on restructuring the market and it might not look kindly on Mel Watt doing a part of that job for them.

So, no definitive Maloni answer, but I said in last week's blog, neither of these entities are ready to lead the market forward until they get leaner and are permitted more entrepreneurial authority.