Monday, February 3, 2014

Just Put It on Red or Black


Hold ‘Em, 21, 3 or 4 Card Poker Anyone?


The Ed-ster
We’ve seen endless proposals offered by a variety of sources to restructure the residential mortgage market and otherwise get rid of Fannie Mae and Freddie Mac. 

We had the Bipartisan Commission which gave birth to the Corker (R-Tenn.)-Warner (D-Va.) bill; their senior committee colleagues Tim Johnson (D-SD) and Mike Crapo (R-Idaho) are wrapping up their draft; Jim Millstein has a comprehensive idea; Bruce Berkowitz outlined a plan; House Banking Chairman Jeb Hensarling produced a bill which he got through his  committee and there have been several others which earned little official attention. 

So, why not a proposal from “Eddie,” a self-described “degenerate gambler” (not me, another--bet lesser-- degenerate gambler), who discussed this issue with me at the Charles Town, West Virginia, “Hollywood Casino,” where I met him after he lost $500 playing 4 card poker. 

I regularly visit Charles Town to make involuntary contributions to the West Virginal economy, succeeding in generating some branding rights, like the newly named “Dummy Maloni Fish Way,” leading up to the casino! 

Over a lunch, which I funded, Eddie told me that he was a former builder/developer, went bust a few years ago, and was very familiar with Fannie, Freddie, banks and mortgage finance. 

I thought, with Eddie’s practical experience and mine, we could collaborate and come up with some good ideas.
In about 30 minutes, we did. Here’s the distillation.

The Me-ster 

I worked at Fannie Mae for over two decades with dedicated smart people. My addiction and ongoing attraction were Fannie’s (pre-2005, before I retired) stunning achievements. The company utilized the capital markets to produce enviable systemic efficiencies, time/money saving technology, small lender inclusion, mortgage standardization, making mortgages availability at affordable prices throughout the nation, and for a variety of income groups. 

The latter was Fannie’s mission, which meant that mortgage finance was the company’s only product and the outfit, through the end of 2004, was single minded in seeking to improve its delivery and value and I saw it up close. 

So, my guidance to Eddie and others begins with those previously Fannie achieved objectives. 

The  informal Eddie and Maloni Commission report—the product of our half hour lunch—likely makes too much sense for quick acceptance but it starts with certain realities that everyone else beavering on mortgage market design faced, so here are a few thoughts for policy makers and others that keep the best of Fannie and Freddie and welcomes big banks.
I pen this thought often, but it is a seminal and needs repeating. (Oh, and Eddie concurs.) 

The nation’s large privately owned commercial bank holding companies can’t be properly regulated to do “the right thing” for the public. The existing federal financial regulation isn’t nimble enough to stop them if they want to go rogue.

But, banks are a reality, a necessary evil especially the major ones and super especially the half dozen or more Too Big to Fail (TBTF) institutions which will dominate any product area they enter. 

So, they have to be carefully “overwatched” and supervised to do the right thing. (Continuously pointing at his eyes and to mine, Eddie says you have to “eyeball them.”) 

Here is one mortgage finance approach--with sanctions and rewards--which might produce what E&MC think is good for the American home buying public as well as the builder, Realtor, lending community, and the always-need-to-be-scrutinized big banks. 

The E&MC Plan 

For now—say the five year horizon in Corker-Warner--let Fannie and Freddie operate just as they are in transition to their next mortgage finance iteration. 

In the interim, have the Treasury (here is where Eddie kicks in and likely starts the controversy) establish a financial “minimum” which any financial institution in the nation interested and committed to taking on the Fannie/Freddie mission, at the end of those five years, bids a dollar price for those rights. 

Once Treasury blesses their capacity to perform the macro job, two or three bidders (but no more) will be declared the “winners”--if they agree to match the top amount bid--and those institutions will be awarded the F&F franchises, with the money going to the Treasury. 

That’s the “buy in” to which the winners must pay an additional yearly payment based on mortgage revenue generated. (The accountants can decide what will be corporate income tax and what will be a “GSE fee and what each winners “share” will be if the successful bids are disparate.)

A new bidding process will occur every few years to determine which institutions (the same original ones if they are the highest bidders?) get the franchises.

I am assuming that the winners almost always will be the TBTF institutions, but some determined “other” might break in.

Going back to what I wrote last week, operationally this new mortgage model would require statutory efficiency, fairness, ease of access to all lenders, builders, Realtors, consumers, utilize the latest technology, make mortgage products (loans) standard across the country, and do so in a way that minimizes the risks involved to borrowers, financial institutions, and the taxpayers. 

Essentially, the successor would provide almost exactly what F&F provides today.

(Eddie, again.) The “buy in,” plus the financial institutions annual fees could provide some sort of pool insurance of guarantees for lender/investor users. 

Operationally, for purposes of this newly sanctioned mortgage activity--which could be portfolio purchases, securitization, or whatever other systemic needs arise-- the “winners” would be regulated by a Federal Housing Finance Agency (FHFA) writ large, employing the same rules and mortgage limitations applied right now to Fannie and Freddie, re quality of mortgage assets supported and operating limits activity. 

Hang Together or Hang Separately 

The chosen institutions could join together and form a consortium with identical underwriting standards and product standardization or they could stay apart and compete (as F&F did in their early years). 

Fannie and Freddie, after their “time runs out,” as per the five years, would become financial institutions with the same access to purchase services from the new mortgage giants/consortium running the future secondary mortgage market. 

What (Eddie and) I have conceived skimps a bit on a financial/insuring role for the federal government to guarantee the availability of the long term fixed rate mortgage, which most people believe requires Uncle Sam’s, but we only had 20 minutes. 

What we’ve opted for is a system, likely run by the big banks, but with F&F standards and rules that could hold down any franchisee effort to scam the system and cut corners. 

In our world, the future Fannie and Freddie would retain the accumulated capital they’ve netted after they repaid the Treasury the $187 billion received, plus some agreed upon additional amount ($20 billion??) and whatever their corporate reputation allows them to raise in the debt markets.

Thank You, Thank You Very Much 

I think this would be a giant opportunity for the large banks to prove they are up to the secondary mortgage market role which--for years--they claim they’ve wanted. 

If they don’t stand up, then Congress still will have a Fannie and Freddie to consider reviving, possibly, in a more robust way than I have described, acting as a fail safe. 

As Eddie observed, as he ordered his second beer, burger and fries, “That puts the banks in, Fannie and Freddie out--slowly but not altogether--and gives a form and shape to federal regulation of the new masters of the nation’s secondary mortgage market.” 

Any other problems you want Eddie and me to work on President Obama, Speaker Boehner, and Leader Reid? 

I am here and Eddie can be reached at Beechwood 4-5-7-8-…..…!

Maloni, 2-3-2014




Anonymous said...

I followed your idea up until where you said the franchise fee for the GSEs goes to Treasury. I don't see the government owning any part of the business or assets. Their sponsorship in support of an MBS does not entitle them to anything more than reimbursement for their 189 billion dollar infusion at a rate of 10%. If the government doesn't like the GSE model, than revoke the charter and let them fend for themselves to obtain private financing.

Speaking of plans on a bar napkin, I've come up with my own ideas. It's still in its infancy and in work but it includes the following.

1) Immediate Release of Fannie Mae and Freddie Mac from Conservatorship allowing recapitalization.

2) Restore Dividends to both common and preferred shareholders.

3) Exercise 4.6 billion in common warrants and sell these shares in open market in a special offering. Use proceeds for a federal guaranty insurance fund. Call it “Taxpayer Protection Insurance Fund for Mortgages” (This could be 80-200 billion depending on market value).

4) Establish repayment agreement for 25 billion dollars to Treasury for interest on 189 billion provided for crisis liquidity (not a bailout). Send Sr. preferred dividend, not to exceed 10% of net earnings to Treasury until par plus dividends equals the amount of interest due. Upon repayment, retire the 2 million Govt. owned Sr. Preferred Stock.

5) Phase out Federal Mortgage Backed Securities and offer to entities that comply with competitive standardized federal loan guidelines. This must include a portfolio of 30 year mortgages and first time buyer incentives using risk analysis guidelines. Use a division of the GSEs with FHA/OIG oversight to monitor compliance.

6) Mandatory Wind Down/phase out of government charter and all Mortgage Backed Securities in 7 years. Mortgage secured by fees collected and fund established by recapitalization. Require mortgage insurance (PMI) under specific guidelines (LTV and FICA scores). Require risk sharing (skin in the game) until fully phased out.

7) Encourage new, private market competition (under construction)

Like I said, still adding and changing as new ideas are received.

May the best bar napkin win!

Bill Maloni said...

Yes, but I have "Eddie" and we have a "Commission."

Your valid first point now is the stuff of 17 lawsuits.

Some of the most famous legal minds in the nation, i.e. Olsen and Boies, obviously think the Treasury/FHFA just decided willy nilly to do whatever they wanted to do with the companies, their assets, and resources. That also applies to how they are currently managed and overseen by FHFA.

IMO, they did it because they knew--at the time--nobody would bitch and or defend F&F (and they were right).

What they didn't know is that come would come a few years later.

I'm likely going to CT this afternoon and see if they'll let me bring a legal tablet to the table? Hopefully, Eddie will be there.

Bill Maloni said...

BTW, I forgot to note that I like the direction of your thinking, but it would force too many interests and people to "put up or shut up" and that would be uncomfortable for them, since talking about issues is what they do best.

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Bill Maloni said...

Harry--Give me a fresh email address, since the one you left doesn't work.

Anonymous said...


Put the wine glass down. This is silly.

Why not just manage the existing infrastructure that is in place and functioning?


Bill Maloni said...

Anon--I'm a diet cola man.

Your answer is the "powers that be"--the Obama Admin which is "gutless", the House which is ruled by uninformed "Crazies", and the Senate can't seem to get out of its own way--refuse to acknowledge the benefits of doing just what you suggest.

I think that any determined effort to do what you propose would generate allies.

The one bill to do that, introduced months by Mike Capuano (D-Mass) has been abandoned by its sponsor and all but forgotten.

(There was a rumor that his senior colleagues--in and out of Congress--button holed him and asked him to drop the effort. And to my knowledge. he hasn't said a word about his legislation since first introducing it.)

One of his constituents or the media should ask him about that.