Sunday, March 30, 2014

On the Right we have..and on the Left we have......


CWJC Has Some Critics


Let’s see now, there’s the Obama White House, check; Corker-Warner (Senate D’s and R’s), check; Johnson-Crapo (Senate D’s and R’s), check; Hensarling (mostly House R’s), check; and now Maxine Waters (mostly House D’s), check. 

Yep that makes it official, elements of the full political spectrum want to blow up Fannie/Freddie, make off with their resources and assets, and substitute a monstrous melange of new and untried schemes to run the nation’s $10 Trillion primary and secondary mortgage markets, while providing the large financial institutions with ways and means to ravish the new system and satisfy their own selfish financial interests.

Has anyone asked Putin, Assad, Kim Jong-Un, the Syrian rebels, or the Lord’s Resistance Army, if they want to throw their weight behind some version of mortgage reform?

This GSE firing squad lineup reminds me of the scene in “Blazing Saddles,” where “Attorney General Hedley LaMarr(actor Harvey Korman) is recruiting “bad guys” to raid the town of Rock Ridge and he enlists every clichéd Hollywood villain he can gather, cowboy rapists, Klansmen, Nazis, Arab raiders, Mongols, Indians, and Mexican bandits (“Badges, we don’t need stinkin’ badges”). 

Maybe the US Capitol Police can ferret out a Fannie Mae congressional supporter, in some dark hidden basement in the Longworth or Cannon House office buildings? 

The Numbers Don’t Matter (gulp)!

That overwhelming CWJC political support doesn’t awe or intimidate. 

The way Congress works, no matter how many lemmings hop to follow the loud Grand Poobahs, you’ll still have critics exposing details of the various bills. Enough of that noise will make an elected official’s excitation cool and ardor wane. 

So, let’s see what some CWJC detractors think. 

Josh Rosner, a managing Director at Graham Fisher who once co-authored a Fannie-critical book, this week said the following about the new Senate legislation, which reportedly is filled with statutory language written by the TBTF institutions. 

 “Unfortunately, the bill replaces Fannie and Freddie with an untold number of new government-sponsored enterprises by handing a massive taxpayer backstop to the nation's largest banks. These banks will also profit handsomely from large mortgage volumes as a result of the bill. … Rather than fix these problems, legislators seek to demolish the current mortgage market and build, from scratch, a new system that makes things worse.  … They put at its center a new regulator, the Federal Mortgage Insurance Corporation, with a fundamentally conflicted mission—combining safety and soundness, affordable-housing goals and consumer protection.

“The bill will have the effect of increasing rather than reducing the concentration of lending in the hands of a few large banks. Under the legislation
the government will also sponsor mortgage aggregators, insurance entities and a mutually owned securitization platform. Our largest financial firms will use their public homeownership mission to push for eased lending standards. In good times lenders and their shareholders will enjoy the profits generated by higher mortgage volumes, and in bad times the public will again be stuck holding the bag.”



Come on Josh, don’t hold back, tell us what you really think? (I love it!)

Hey Congress, suck on that analysis! 

A published author, Rosner isn’t the lonely voice of some former Fannie Mae lobbyist, an all-around good guy and handsome Pittsburgh sports fan. 

I’ll take acolytes wherever I can find them. Here’s the Heritage Foundation's review. Heritage is headed by Tea Party darling and former South Carolina GOP Senator Jim DeMint.


And, there’s the American Enterprise Institute (AEI), with angry Ed Pinto writing that CWJC is dangerous and lame.

The draft bill released on Sunday, March 16 by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho) will not protect taxpayers from future bailouts. 

It will replace the implicit federal guarantees enjoyed by Fannie and Freddie with explicit guarantees enjoyed by their successors. 
  • It will replace the single-family affordable housing mandates with a new set of affordable housing provisions that will also lead to debased underwriting standards. 
  • It will raise taxes on the middle class by imposing a new tax on homeownership that will be used to provide billions annually in furtherance of a misguided policy to promote risky lending to lower income homebuyers.

Experience has shown that any bill which includes an explicit guarantee of an insurance program will fail to protect taxpayers.  The proposed Federal Mortgage Insurance Corporation (FMIC) will be no different. 

The bill, as was the case with Fannie and Freddie, assumes the government would be better at pricing risk than the market.  The examples of the government’s mispricing of insurance risk are legion—flood insurance, Medicare, and pension guarantees to name but a few.  Supporters point to the 10 percent requirement for private capital.  Deposit insurance is based on a similar concept, yet it has failed not once but twice.  The savings and loan deposit insurance bailout (FSLIC) of the early-1990s and the FDIC bailout by the Troubled Asset Relief Program (TARP) in 2008.   And lest we forget, Fannie Mae at one point had a similar capital requirement which was whittled away over time by Congress.

The bill, as was the case with Fannie and Freddie, would encourage too much of the wrong kind of debt for our economy—debt that bids up existing housing assets and the land they sit on, creating a temporary wealth effect and a crowding out of capital investment needed for a productive and growing economy and jobs growth.  Worse, the result will be another artificial housing boom and consequent bust. 

The bill, as was the case with Fannie and Freddie, would require politicized credit standards--once again putting lower-income families into housing they can’t afford, with the same disastrous results

We also have Mike Whitney’s biting analysis, in the Smirking Chimp(which is not a commentary on any of the congressional sponsors). 

The leaders of the U.S. Senate Banking Committee, Sen. Tim Johnson (D., S.D.) and Sen. Mike Crapo (R., Idaho), released a draft bill on Sunday that would provide explicit government guarantees on mortgage-backed securities (MBS) generated by privately-owned banks and financial institutions. The gigantic giveaway to Wall Street would put US taxpayers on the hook for 90 percent of the losses on toxic MBS the likes of which crashed the financial system in 2008 plunging the economy into the deepest slump since the Great Depression. Proponents of the bill say that new rules by the Consumer Financial Protection Bureau (CFPB) –which set standards for a “qualified mortgage” (QM) – assure that borrowers will be able to repay their loans thus reducing the chances of a similar meltdown in the future. However, those QE rules were largely shaped by lobbyists and attorneys from the banking industry who eviscerated strict underwriting requirements– like high FICO scores and 20 percent down payments– in order to lend freely to borrowers who may be less able to repay their loans. Additionally, a particularly lethal clause has been inserted into the bill that would provide blanket coverage for all MBS (whether they met the CFPB’s QE standard or not) in the event of another financial crisis. Here’s the paragraph:

(Read Whitney’s entire piece, here.)


John Taylor and the National Community Reinvestment Coalition threw this brickbat, aimed at the absence of enforceable low income housing provisions when the J-C bill first was released and which remain unchanged. 

"While we are encouraged that the Johnson-Crapo draft incorporates elements of a
proposal put forth by NCRC, and addresses some of the shortcomings in Corker-Warner, the details of the draft text still raise serious concerns. It is critical that housing finance reform ensures access for all creditworthy borrowers, regardless of their income level, geographical location, or race. In its current form, the details of Johnson-Crapo appear to fall short. The draft bill does not include meaningful enforcement and evaluation criteria to ensure access. “

And last—for now—Chuck Gabriel of Capital Alpha Partners excellent review which gets into the competing accounting issues raised by the CWJC legislation in “wonky Washington.”

As my late father loved to say, when something he predicted came to pass, “I told you, didn’t I tell you. I told you!” 

With the Conservative/Teapublicans rising in Washington, how does this unorthodox federal budget stuffing meet “GOP code?” 

The Waters’ bill does mandate lenders to do affordable housing, but the details (where “the Devil” hides) won’t necessarily make it so.

The only way the lending community willingly does low income mortgage lending is if they are threatened with loss of huge paydays for not complying; don’t look for “goodness of the heart” or “it’s the right thing” mentalities from the big money guys. It’s all about the bottom line. 

Carrots are fine but sticks work better.

Seriously Folks….

In anticipation of next Tuesday’s knee slapping humor and stealing a joke from the wonderful team at Inside Mortgage Finance, “Did you hear that FHFA Director Mel Watt just agreed officially to speak?” April Fool!!!

Just teasing, Mr. Director.

Watt is in a tough position, he can’t get too far away from his White House sponsors, but I have no doubt that his heart is in the right place when it comes to helping people achieve homeownership.

I believe he’s sincere when he tells people that his primary mission is insuring the safety and soundness of Fannie and Freddie and preserving their value.

Based on that intent, I hope Watt slow walks or jettisons Ed DeMarco’s legacy common securitization platform, which may cost taxpayers as much as $300 million plus see a few hundred new employees constructing something which clearly isn’t in F&F’s best interests because it’s was designed by its maker (Mr. DeMarco) to serve their successor(s)—and frankly it’s questionable whether it‘s even needed given the existence of the separate F&F platforms to which every lender in the nation is a commercial partner to one or both.

That  government giveaway was Ed DeMarco’s personal dream not his official/statutory agenda, which is why—now that Ed’s gone—I expect he will join an ideological comfort spot (AEI, Cato, or with one conservative financial companies outfits in the Southwest).

Senate Markup of CWJC has been scheduled for April 29, which should give the primary sponsors sufficient time to make changes and build additional support.

I keep hearing that the big banks could be shocked to unhappiness by some mystery amendment in the works. That would be great to see, but talk is cheap.

Worth Watching and Hearing


Maloni, 3-30-2014











Wednesday, March 26, 2014

There is a faster, easier way...

It’s Simple, It’s Fabulous, It’s Mine 


Corky: OK, yinz guys with me? We kill them, right. We mess them up so bad their mothers won’t even recognize, we tear ‘em apart.

Not to bright accomplice: Uh, Corky, why we doin this?

Corky: Why, why?  Because they are bad, they did bad stuff, we know it, and we don’t like them. OK, everyone on board, no questions asked?

I mean it, you can’t question me on this, because, because…..

NTBA: Because you don’t have the answers?

Corky: Well that and, no, no, because, because….because I don’t wanna answer those questions.

Does everyone have their congressional badges?

NTBA: We don’t need those stinkin’ badges, do we?

Corky: No, Come on, lock step march, let just go thrash ‘em.

Progressives: Screw this clown parade, let’s just drop the veil, take them in and use them. 


For those of you who read the Corker-Warner-Johnson-Crapo bill, I have a compelling idea for you--which I’ll pick up later--but I’ll start with some observations about the new proposal (which isn’t that new). 

How it’s supposed to works.

Under CWJC—which would create a new federal mortgage insurance agency and abolish the former GSEs--the federal government first would formally stand behind all remaining Fannie and Freddie debt and securities.

The bill gives birth to the Federal Mortgage Insurance Corporation (FMIC) and puts all of its business activities on the federal budget.   

In addition, the legislation contemplates adding all remaining F&F asset and liability remnants to the federal budget, presumably for the Treasury to dispose of thoughtfully. (F&F haven’t been a part of the federal budget since before 1970, when Lyndon Johnson had Fannie Mae was kicked out the federal budget and privatized.) 

That’s adds maybe an additional $5.5 trillion dollars or so to that creaking deficit-rich account, known as the US federal budget, (Really, some of these guys are Republicans?) 

Originators, Guarantors, and Aggregators

In reorganizing the nation’s secondary mortgage market--where consumers benefit but don’t shop and financial companies do--CWJC stipulates that “originators”-- the same companies and financial institutions which today make home loans—would transmit their mortgages for pooling (as F&F do for them now) to an “aggregator,” which would put the loans into mortgage backed securities (as F&F do for them now), after first buying a private insurance policy—from a guarantor—said policy covering 10% of the possible losses on the underlying loans.  

Note: Fannie and Freddie do the last two things, too, using their own capital, with lenders—utilizing F&F underwriting systems—delivering them the loans. 

Depending on the amount of down payment and related factors, F&F often require borrower-paid PMI (private mortgage insurance) added to those loans. 

Anyone see a duplicative pattern here?

No Capital Required on That “Wrap?”

The legislation suggests that the FMIC-approved guarantor can be any decently capitalized institution, including the TBTF banks. (But, if they are banks, we know their capital isn’t really private because most of it comes from their federally subsidized Federal Deposit Insurance, which is provided below cost by the Federal Deposit Insurance Corporation, or FDIC, on which the FMIC is modeled.) 

Investors buying the securities, many of which will be the banks, insurance companies, pension funds, and other major institutions, won’t have to hold capital against the “wrap,” because it is a full faith and credit guarantee from Uncle Sam. (Note that is very valuable to those who get them.)

Can You Spell N-A-T-I-O-N-A-L-I-Z-E? 

But, here’s my question (which, also, I will try to answer later in the blog).Why waste 5-10 or fifteen years tearing up the mortgage countryside, rolling out this beast, and risk incurring every single bureaucratic foul-up known to mankind? Congress could just achieve almost every bit of what the sponsors claim they want--and much sooner—by nationalizing Fannie and Freddie and letting them do all of this, with the federal government behind them as it will be for the FMIC? 

Then you could save all of the CWJC political sturm and drang, finger pointing,  posturing and caterwauling and there would no shareholders demanding any of the voluminous cash flow headed for the US Treasury. 

The Originators, Aggregators, and the Guarantorstoday called lenders, Fannie and Freddie--already exist and they do the FMIC thing with F&F providing the underwriting platforms and underwriting guidelines, based in part the Consumer Finance Production Bureau’s (CFPB) current Qualified Mortgage rule (QM)? 

The Senate bill would put on budget everything the FMIC provides and any losses not covered; so why not save time and grief and take over Fannie and Freddie, put them on budget and save a dozen years of silly wrangling and confusion.

A Distinction Without a Difference?


Employing F&F that way, the public won’t miss a beat; mortgage rates won’t go up (as several different economist predict will happen if the FMIC ever happens); lenders still can lend using judicious federal lending rules. 

The same multifamily procedures and some expanded affordable housing goals could go forward, as well, with experienced F&F execs who do the stuff every day, doing it for the government, which—as  under the FMIC—will own all the means of mortgage production. 

Now,  isn’t that a winning idea based on the time saved and the absence of huge bureaucratic creationism, the legislation’s massive mortgage finance systemic destruction (even the bill suggests years and years of implementation)? 

Bringing F&F inside the government will limit the inevitable clashes with existing federal regulators as the latter try and protect their favored institutions—did I mention the time saved and the simplicity of merely codifying what already happens—and avoid all the mishaps a when Congress decides to push omnibus legislation. 

The Real Agenda Is…….?

Think before you answer my early question and slowly  the dirty little secret will dawn on you. 

Nothing, nothing, nothing in CWJC is new or unique except its mandatory destruction of Fannie and Freddie. 

Murdering the GSEs is the bill’s raison d’etre wrapped in a systemic re-creation, which needn’t be undertaken, to achieve the housing and homeownership goals which many Hill advocates claim they want. 

New, complex and complicated doesn’t mean better. 

The legislation would be a yawner, if it didn’t promise killing F&F.

There is nothing dramatically new in CWJC and no magic when buy it with $5 trillion heaped on the federal budget.

It’s Primarily a GSE Killing Scheme

In fact, money could be saved by requiring F&F to provide the same service and products they always have, but cutting their work forces in half, saving huge amounts of overhead, and letting them play/work at being the FMIC equivalent, without going through the endless squabbling trying to create the latter. 

But, the sponsors—especially  those on the R side, as well as a few D’s—need the F&F scalps to show constituents they “did something,” even if it hardly can be justified by how the mortgage market really works and what financial were sins committed by others (including many who get to reap the abundance in this legislation). 

The fact is that Congress and the past two administrations did and do very little to the true miscreants except direct at them a lot of hot air. 

Most on the Hill don’t want to admit that F&F regulations put in place beginning five years ago, plus the QM underwriting rules, have solved most of the troubles they associate with F&F, to the extent anyone has substantive not ideological complaints. 

With this idea, you would have no private owners, which you really don’t have now but you do have shareholder law suits (a plaintiffs finding still could shake up everything)

Congress, I am not even calling for Fannie and Freddie to be re-privatized—which still is a superior idea--but why take 5 to 10 or more years screwing around with CWJC recreating exactly what you have now?

I know where the humongous campaign contributions fit into this playlet, but where is the common sense?
I hesitate to estimate how much money F&F could bring into the Treasury under my simple scheme if they just were allowed to work their will as an extension of the government…nothing more.


You Mean That’s What They Do? 

Part of Congress’s Fannie and Freddie bewilderment exists because most of them still don’t understand what Fannie and Freddie do and how they do it. 

In their overtures, the Hill, mostly, is being hustled by interests that stand to make billions of dollars which the Senate is shoveling their way, despite the fact the big financial players have done little to justify it that support and have committed many egregious acts which argue they don’t deserve more federal largess or license. 

Just this week, the New York Fed reported that the TBTF banks have funding advantages and higher risk profiles than other financial institutions of a lesser size.

Why this Democrat controlled Senate keep channeling goodies to financial institutions which disdain them and, the last time I checked, gave most of their election money to the GOP?

Read the CWJC bill and see what’s in it, functionally, and then ask yourself what does this do for the public that the current mortgage finance system doesn’t do (Answer: very, very, very little.)

But CWJC could well hurt the public, with its promise of shaky regulation, dislocation, warring regulators, tons of new rules, cross cutting priorities, manipulation by well-heeled financial interests, and greater costs. 

Truth about Affordable Housing

As for the hang-ups over whether CWJC can/will do anything to help lower income families (read, lots of black, brown, and less than well off white Americans). 

Here’s something the Senate Banking Committee “progressives” know but their colleagues don’t want to admit.  

CWJC can set up all of the affordable housing fund arrangements it wants, but if no originator or aggregator is compelled to do the work, efforts simply won’t produce the mortgage financing desired. 

That’s why F&F in 1992 were given statutory housing goals. The big guys will treat the CWJC fund as a new “cost of doing business with the FMIC.” If the law doesn’t say they must make the loans, they won’t.  

Think About It 

If  the Senate votes for this, as I tried to write  last week, it already will have swallowed a $5 trillion financial chestnut, but the senior sponsors of CWJC—or the adults as I call them—could spend far less and get more honest and safer mortgages from simply nationalizing Fannie and Freddie.  

What others are saying

Rafferty Capital Market’s Richard Bove argues killing F&F is a mistake.

Maloni, 3-27-2014


















Sunday, March 23, 2014

CWJC Gives Way Too Much to the Wrong People

Mortgage Reform and Stuff


Lobbyists Give The Hill Legislation? (Is there gambling at Rick’s?)



I shocked some readers with my last blog, when I mentioned that large parts of Johnson-Crapo statutory language (and Corker-Warner before it) were supplied by the industries affected by and backing the statutory proposals. 

Again, nothing nefarious there and the practice has been around forever (and yes, we/I did it at Fannie Mae)—even though both congressional chambers have their own legislative drafting offices to provide what the lobbyists willingly provide—often because the industries and institutions filling staff requests to supply language know their businesses better than the Hill and know what existing laws come into play when policy and product changes suddenly are on the table. It is understandable that the “interests” prefer certitude in the statute rather than unintended consequences or vagaries which permit too much regulatory discretion. 

If there is process sin here, it with the congressional offices unapologetically taking proffered language,  not amending or changing it to accommodate how their “boss” sees the issue or how their principals want to be portrayed. The interest group’s legislative objectives—not to mention the voluminous campaign support which precedes or follows the official’s acceptance--often enthuse and motivate the Senators or Congressmen, not the other way around. 

As various outside sources and media parse the statutory language (not just the accompanying prose),  right now is the time to “stress test” the CWJC provisions, and identify potential problems, which might be tomorrow’s trigger for a repeat of 2008’s financial collapse. 

If done properly, policy makers still will make changes when shown possible land mines or errors in what they’ve accepted. And, as I pointed out in earlier blogs, CWJC sponsors will change this bill as they hear from more people they want as allies, most of those possible advocates have a statutory “price” for that support.

 Why So Much for the Banks?

One early analysis notes the major advantages it appears to give the TBTF banks, including no limits on the amounts of FMIC business they or their subsidiaries can conduct. 

Hopefully that issue will play itself out over the next several weeks, when enough Senators say, “What the Hell are we doing here?” 

But how ironic is it that the Committee which sweat blood over Dodd-Frank got criticized by the big banks before and after the bill became law—for a package which really doesn’t inflict much pain on the big guys—now turns around and plays sweet nursing Nanny to the same institutions? 

Do you think non-stop bank D-F whining begat these bennies? Maloni's answer: Do bears use the woods as a lavatory? 

It is so much easier for Senators and Congressmen to talk the tough pro-consumer/little guy talk than walk the tough pro-consumer/little guy walk. 

Bank Holding Companies 

Bank holding companies (BHCs) have subsidiaries and a near infinite capacity to create new ones.

A TBTF bank already can possess subs which offer mortgage lending, private mortgage insurance, securities insurance, securitizing and securities sales. Why not appraisal, home sales and more? In other words, why couldn’t a vertically integrated BHC provide near everything the new FMIC legislation offers the commercial world?

If BHC double dipping occurs—multiple units of the bank using the FMIC’s services and subsidies--does CWJC have the right limitations in place or capital demands which can’t get passed around the BHC like a hot potato so the regulators lose sight of what sub inside the big shell needs it and who is holding it? 

Can more than one subsidiary claim the same capital, if BHC management gives it different labels? 

The big financial institutions' litany of violations is there for all to see and read (assuming the Senate solons have the time and capacity). How did all of the financial products/services manipulation and chicanery—which one would think would anger elected public officials—instead earn the behemoths so much Senate Banking Committee succor?

Insurance Regulation, A Problem? 

CWJC likely will see an increase in the current handful (seven or so) private mortgage insurance companies which will need to ramp up, mightily in capital and possibly numbers, if they are going to fill the legislation’s insurance demands. 

The economic opportunities might also stimulate more companies seeking insurance charters to take advantage of the $11 Trillion U.S. housing market. 

Insurers are chartered and regulated at the state level under the McCarran-Ferguson law (bars most federal regulation).

Historically, state insurance regulation has been lax (that’s a nice phrase for "industry captives"), with most state insurance officials coming right from the companies they have to regulate. Are the various state Insurance Commissioners up to the task of regulating the new chartered and regulated entities which CWJC produces—or will they trip over one another to display safe havens for a new wave of insurers, plus the existing ones?

Lenders Complaining Already? 

In camouflaged terms--which sound so thoughtful but reflect selfish interests--some banks and mortgage companies already are expressing concern that CWJC’s 10% first tier private capital requirement--to protect taxpayers from lender losses—may be “too steep for____________.” (Fill in the blank with your own public policy rationale, but you would be closer to the truth those lenders are expressing, if you supplied, “Because it won’t allow us to make as much money!”) 


Voters don’t like “Barry?” 

President Obama last week ruminated that Democrats get clobbered” in midterm elections. 

But in 2014's mid terms, this President will contribute political spice to that losing sauce and be a major reason for what now looks like to be a crushing GOP Tsunami of congressional wins, including possible loss of the Democrat Senate. 

It should not have been that way, given the number of Senate/House Republican reactionaries who could have been quarantined and ousted in November, if the President and his congressional allies showed the political skills to isolate and expose the “Teapublicans” with thoughtful political initiatives. 

But, instead the Hill D’s and the White House offered up Syria, “Obamacare,” disputes with Israel, immigration missteps, lingering unemployment and a slack recovery, Russia, Iran, Iraq—and did I mention Obamacare—and will give GOP voters and Independents grist to vote out Democrats this fall, replacing them with Conservatives. 

Maybe that’s just the way our democracy works and, possibly, in 2016, mistakes by a GOP controlled House and Senate, could produce the reverse and   D’s will win back the White House and possibly the Senate, again?

What Others Are Saying 

In the Weekly Standard, an unusual source says Fannie is good!

Harlan Green in the Huffington Post.

Housing Wire article questions if CWJC will hurt housing recovery?

Alvarez and Marsal suggest F&F liquidation value is $200 Billion.

Writing for a forthcoming Brooklyn Law School law journal, David Reiss produces an overview of the F&F law suits. 


Maloni 3-23-2014