Sunday, January 26, 2014

What Was Mike S. Trying to Do or Say?


January and February Are Dull, But..


At a Las Vegas housing conference speech, last week, Treasury’s Mike Stegman—an Administration a point person on mortgage finance reform (and former Fannie consultant, but who wasn’t?)--raised eyebrows with remarks which, charitably, were mixed F&F reviews or very lame Admin anti-GSE propaganda. 

I link his speech below and also repeat a comment I sent to the media following Stegman’s appearance.




"I just don't understand Mr. Stegman's tone or objective.

"Stegman--or maybe it's the Obama Administration--sounds somewhat fearful that people could think Fannie and Freddie have a systemic revival in their futures because of their recent solid financial performance? 

"Fannie/Freddie didn't make up their revenues, or the tax laws and accounting rules, which created the DTA (Deferred Tax Asset). They didn't invent GAAP (Generally Accepted Accounting Principles) which required the exercise of their DTA.  

"All that Fannie and Freddie do--and most certainly everything in their earnings statements--is closely scrutinized, indeed controlled, by the Federal Housing Finance Agency (FHFA) and, likely, the Treasury. So, why the disdain?  

"I think their recent financial performance, likely with additional solid earnings coming next month, suggests their 2008 "insolvency" was far less than meets the eye. 

"BTW, is the F&F that Stegman dissed the same F&F that Treasury noted a week ago helped the U.S. secure a December 2013 over December 2012 revenue surplus?"



More Fannie & Freddie Ramblings
What’s Ahead in 2014 and Beyond


Immediate Horizon: 

--Solid 2013 earnings bring in needed Obama deficit reducing revenue, a flow Admin won’t disrupt;

--despite some barbed rhetoric, no major White House effort foreseen to drive F&F change;

--bi-partisan GSE legislative conflict and confusion continues;

--industry doubts and uncertainty about successor mortgage models pervade;

--new FHFA regulator offers hope of easier credit access;

--tighter credit standards exist, but no current mortgage finance “emergencies” prevail (which dictates whether Congress acts quickly or not);

--“Takings” and  “Administrative Procedures Act" (APA) lawsuits hold specter of dramatic Fannie and Freddie changes owing to rulings and likely SCOTUS appeals.

--and, 2014 is a congressional election year.

All of the above and more, including congressional bloviating and partisan “high stepping,” give mortgage market observers plenty of grist for blogs, laughs, columns, trade association posturing, and media stories, but what’s it all mean for the nation? 

One prominent wire service reporter told me that she sees no F&F legislative changes in “her lifetime.” 

I told her that I couldn’t totally buy into that because some of us have shorter lifetime expectancies than youthful reporters. But, her point was well made. 

Indeed, I’ve joked that we won’t see serious F&F statutory changes “in God’s lifetime.” 

But, let me amend that and declare, “There won’t be any monstrous legislative changes in F&F until, first, we see one party control in the House, Senate, and White House.”  

Practically speaking, that means 2017 at the earliest, even if the GOP wins the Senate this year, which still is not a political slam dunk. 

My opinion doesn’t preclude, as I’ve suggested before, Senate Banking mark producing and getting a bill to the floor in 2014, but it never will get to the President’s desk owing to House resistance.

What Are Policy Makers Missing? 

The obstacle holding back policy makers—who operate with flawed memories of history or no historical perspective at all—is thinking that a national mortgage market with a F&F presence can

Dream, Maloni, dream.

They are fixated on an old F&F which don’t exist anymore.  

I have a message for Democrats and Republicans alike, a Fannie and Freddie in your market model might be the closest and best way to achieve what you claim is your desired mortgage market Valhalla. 

Like them or not, the big banks are a financial fact of mortgage market life.

The good news/bad news is that everyone’s primary and secondary US mortgage markets must include the banks, big and small, with the behemoth depositories dominating.  

I’ve written before I don’t think the current financial regulatory agencies are up to the task of controlling the big guys, especially if the banks choose to cheat, manipulate markets, sidestep rules, or engage in super risky practices. 

In 2013 alone, the number of major banks fined billions of dollars for varied regulatory violations affirms that fact. 

F&F as Mortgage Police?

But—with regard to fair/honest mortgage lending--an active F&F, with skin in the game, owned by shareholders, and managing their own investments, would do a better job than any federal regulator controlling possible bank mortgage lender and investor excesses. 

Before anyone screams, “But 6 years ago, they were part of the problem.” 

Yes, that’s true, but Fannie’s and Freddie’s intervening regulation has laundered and rung out of them, every potential bad practice to which anyone looking back could object. 

Today, F&F can’t buy/securitize loans which are considered high risk; their credit standards also are much higher; their charges to lenders much higher; the FHA not Fannie and Freddie now has most of the low income housing mission; and F&F’s protective capital requirements have been increased. 

Right now, they are a profit making, vanilla ice cream mortgage machines, doing fine work but they could do a lot more. 

I think they could be positioned as a stronger/better cop on the beat than any federal entity with bank oversight, because banks trying to scam would be trying to take F&F’s money and that wouldn’t happen.


Rejuvenate F&F Throughout

Before we go too far down this road, let me point out the two operations--currently masquerading as Fannie and Freddie--are not the entities I have in mind to manage the mortgage finance leadership job going forward. 

Unless they have it well hidden and ready to be tapped like maple syrup from a tree, I think the needed entrepreneurial spirit has been drained from F&F, leaving behind—if talk emanating from and about the two is even marginally accurate—two shells, slothfully going through the boards motions, driven by business people, and controlled not by their boards or competition, but government bureaucrats, themselves conflicted on how they should operate Fannie and Freddie. 

If properly incented, unshackled, and given a few new faces—and with both operations slimmed down to commercial effectiveness. i.e. they each have  too many bodies doing very little—I think F&F easily could step up to the task and generate all of the market benefits they once did (defined as pre-2004), plus be more nimble, less costly, and more efficient and better regulated.

That’s good for the Congress because it saves them years of hot air and wasted hearings, even potentially fouling up a market which needs less tinkering than most understand; good for the home buying public; good for F&F’s future owners; good for the government’s coffers (tax revenues and efficient secondary markets); and especially good for the mortgage finance system’s businesses, including the big banks.

To the latter, Fannie and Freddie would bring welcomed standardization, familiarity, reliability and –most important--risk transference.  

The TBTF financial institutions have multiple ways to generate revenue, but few are as low risk as F&F securitizing their bank’s mortgage production. (Are you listening Frank Keating, Tim Pawlenty and John Dalton?) 

I’ll leave it to others to debate the need for ongoing federal financial support. 

Few will accept what I believe, which is to start this process the two only would need access to their future revenues, once the Treasury and taxpayers have been repaid all they infused in F&F.

Major Changes Without Congress

I mentioned the pending court cases, with plaintiffs challenging the federal government over possible violations of the Administrative Procedures Act (APA), first in 2008, following Bush Treasury's “conservatorship,” and later the Obama Admin's  2012 machinations. 

The lawsuits alleged the Treasury expropriated shareholders’ funds, first in 2008 and again in 2012, the latter when Treasury changed the F&F repayment agreement, that year, from a 10% annual dividend tariff to a “sweep” all revenue generated by each entity over minimum capital set asides.

(See link below to richly argued “Epstein paper,” justifying plaintiffs “takings” actions.) 

While nobody knows when an initial court decision will be made on either of these matters, one could speculate that if plaintiffs win either lawsuit could produce major structural changes to F&F operations, given the range of options the presiding Judge has in both cases. Plus the losing party could appeal to the SCOTUS, because of the sums involved.

One prominent industry publication—Guy Cecala’s Inside Mortgage Finance--speculated whether it’s time for Congress to examine if the government acted lawfully when the major Treasury actions--challenged in the lawsuits--were taken in 2008 and 2012? (Link to the article follows.) 

With all due respect to the Congress, I suspect most serving Senators and Members just deferred to Treasury Secretary Hank Paulson and later to Secretary Jack Lew on the actions, which now are targeted in 17 lawsuits. 

Maybe Darrell Issa (R-Cal)—“Congressman Oversight”--and/or the two Banking Committees might want to spend some time looking at and understanding those issues, before rushing off to abolish Fannie and Freddie.

What Others Are Saying 

--Sen. Mark Warner (D-Va.), last week in the Richmond Times Dispatch.

--Former OMB Dir. Jim Miller, same day in the same paper.


--Another major F&F knock on the Admin from the Right in National Review, delivered by Ike Brannon, a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm based in Washington, D.C.


--Ryan Chittum, writing in the Columbia Journalism Review, smacks Bloomberg for carrying more Wallison/AEI “big lies.”

--The WSJ’s Nick Timiraos, writes about Mike Stegman’s F&F putdown in Las Vegas. 


Maloni, 1-26-14



Anonymous said...

Hey Bill, any idea on what President Obama might say on mortgage reform tonight? Haven't heard a peep from Mel Watt. My previous understanding is the Administration wants to wind down to protect the taxpayer (yeah right) yet offer new incentives to the poor such as 40 year mortgages and lower class assistance. TS

Bill Maloni said...

Haven't heard word one; not unusual since "mortgage finance" or "mortgage reform" aren't the stuff of SOU headlines--unless he calls for an F&F revival--but, despite the fact that it isn't the problem it was 18 months ago, he might suggest support for helping borrowers with underwater loans.

These speeches often are laundry lists of plans, although he doesn't have a lot of time--three years, with big hunks neutralized by congressional and then the presidential election--to achieve some successes.

But, as low in the polls as the President is, nothing he says tonight would shock me.

His serious policy request still face a very divided Congress.

Of course, he could amend the F&F dividends scheme through regulatory action. But, don't bet your grandkids college money on that happening.

Anonymous said...

Thanks Bill. I watched Senator Corker on CNBC this morning and no mention of mortgage reform so I guess no news is good. A person in contact with a legislative aide from 30:1's office was suggesting that the lawsuits might direct how some of the details might be written in a GSE disposal bill. Patiently waiting for q4 net zero and court action.

Bill Maloni said...

Speaking of, Warner was identified as the second wealthiest person in Congress, with a reputed net worth of @$500 Million.

With that kind of cash in his "kick," I guess you don't have to worry about being accurate, let alone right.

Anonymous said...

Well it turned out to be a one-liner to send him a bill to prevent the taxpayer from footing the bill for another housing crisis. Sounds like a big task that now has to start with the understanding what really caused the crisis!

Anonymous said...


I like your articulated thoughts. My feeling has been that these two provided a good and valuable service. They have fostered the housing revolution in this country by making home ownership affordable. But at the same time made homes more "expensive" because it moved the demand/supply curve. However, well capitalized with strong underwriting criteria these entities should thrive. No reason to mess that up. Good luck.

Bill Maloni said...

Combined answer to both "Anons."

Not surprising and I expect the "benign delivered version" (supposedly in an earlier written version there may have been a more specific "do away with' reference) will rule the day.

I don't expect any major Admin push against F&F this year.

A few elements to the second question.

If those conditions are met, not only would the companies do well, but IMO, the approach is systemically better than the alternatives.

But, it is a very hard sell, given that most people in DC can't remember a Fannie (and Freddie) not covered in bogus generously served up bull crap.

That stuff just doesn't wash off easily when minds are not open, no mater how logical the arguments or illogical the case is for blowing them up and substituting something which never has worked before.

That doesn't even take into consideration rearranging all of mortgage lending business and consumer relationships.

Small fixes to what exists rather than gut wrenching, soil turning
changes in a model not horrendously out of whack.