Thursday, March 20, 2014

Now we have CWJC




Congress: Why Do It at All?
And, if You Choose to Do It,
Why Can’t the GSEs play?



My early random thoughts about Corker-Warner-Johnson-Crapo (CWJC). 

I’m not ready to concede my primary position which is that some variation of F&F, delinked from or with reduced federal financial backing, is superior to the CWJC scheme, because the latter screams of disruption, confusion, forced commercial relationships, doubt, much higher mortgage costs (repeat much higher mortgage costs, maybe 90 to 200 basis points). 

None is which is necessary. 

What irks me the most is that I still haven’t seen a good explanation why there needs to be a total GSE disassembly—as in “abolish” Fannie Mae and Freddie Mac--if the unwieldy Federal Mortgage Insurance Corporation (FMIC) monster ever becomes law. The deal—despite some nice sounding features--suggests a protracted Frankenstein implementation, filled with regulatory overlap, murk and miasma.


What Are We Fixing? 

Advocates for this omnibus kahuna say it will fix “the mortgage problems.”  

What mortgage problems are F&F causing?  

They’ve earned a bazillion $$$$, have paid Uncle Sam back what they were given, plus about $20 Billion on top, and with no hint of the 2008 misery issues recurring. 

I hear proponents talk about “getting rid of loans which people can’t afford.” 

Mortgage loans are not created by F&F, but originated by large and small banks, credit unions, and mortgage companies—each with their own federal regulatory overseer and mortgage guidelines—and then sent to F&F after the fact to be put into securities.

Friends, F&F don’t do retail. They have no contact with mortgagors/borrowers. They have no storefronts or consumer advertising. Their customers are the lenders. 

So what loans which F&F now securitize are unaffordable or poorly underwritten? 

The answer is very few, with most defaults caused by a borrower’s death, loss or job, divorce. Most of F&F initial losses also are covered by mandatory private mortgage insurance. 

Yes, a sudden national economic collapse  would possibly hurt Fannie and Freddie, but there would be so many other commercial casualties that the two mortgage giants—which have put on nearly four years of pristine business (meaning low risk, high quality) loans-- would be among the last of the financial institutions to feel the blowback. 

I still can’t see the CWJC happening before 2017, unless the House R’s all fall from the face of the earth (please Lord?). But everyone is talking CWJC now, so let’s maintain the theme.


Gathering at the Trough 

Before going further, I look for this puppy to be changed many times over as the interest groups or “shareholders,” as my friend Barry Zigas likes to call them/us, weigh in and the critics point out major inconsistencies with what the bill’s sponsors claim  will happen and what’s truly in there and what could happen. 

If I understand the bill’s explanation, supporters already have “swallowed the financial spinach,” in agreeing to put on budget,  the FMIC's total cost and expense  and all that’s left of the dismembered F&F assets and liabilities, presumably to permit a reasonable disposition over time.

That means at some point--and the bill is vague about when, maybe five years, 10 years, or possibly even further out--the first Presidential budget which reflects this legislative reality will be SEVERAL TRILLION DOLLARS LARGER THAN THE LAST OBAMA BUDGET. 

So, with that gastronomic financial grenade swallowed, how can anyone object if I propose that Congress, going through with this kabuki,  permit these two entities to go forward –with their same names or as “Thing 1” and “Thing 2”--and participate as a guarantors, originators, mortgage gatherers, or otherwise work with the new FMIC? 

What would be the issue with that plan Senators CWJC? 

In the legislative game, where winners get statute and losers get bubkis, allowing F&F to participate (they’ve already paid Uncle Sam and had their assets and liabilities confiscated) in a shallow manner, is like giving the surviving F&F non-binding report language which insures some life.

One other thought, as anyone who reads the blog knows, I believe that the TBTF banks and many other of the major financial service companies always will be more nimble than their regulators.


Don’t Worry About the Banks (!!??)


The CWJC legislation leaves in place all of the bank regulators, which failed to halt the banks when they  ran amok seven years ago and originated and sold worldwide 2 $Trillion dollars of worthless subprime mortgage bonds.

Ignoring recent mortgage excesses and other financial rule bending, CWJC sets no statutory limits on the amount of business FMIC can securitize for the TBTF and SIFY financial institutions. It even does did away with the soft limits C-W initially had. (Class, can you say, "The draft bill was written in New York and on K Street!”) 

There remain some FMIC discretionary limits, but--as any lawyer worth his/her salt will tell you--that which doesn’t take away gives!! 

CWJC creates a new regulator, with new responsibilities, that right out of the box is supposed to take hold of several new business activities—and multiple TBTF institutions, SIFIs--and assumes it can stay on top of the big guys, who continually have run around, over and through their current regulators. (I don’t have to repeat that list of their wanton violations and fines, do I, or do I?) 

Why does anyone think the new arrangement will be different? Why does anyone think that banks won’t just revert to form and use their new federal mbs insurance for their own bottom line needs and “let the Devil take the hindmost.” 

There is one incontrovertible Fannie fact (I’ll let Freddie vets speak for themselves). When Fannie was preeminent in the business pre-2005, with its own money at stake, it didn’t let the banks run roughshod over it or the consumer….again, and I am talking about pre-2005.

The same can be said for the past five years, with F&F operating under new, tighter underwriting guidelines and capital, fee and revenue requirements. 

There has been no hint, post 2008, of banks or other lenders manipulating the F&F system and turning it to their own benefit. (Which makes me wonder what  these Senators are talking about when they describe the problems CWJC cures?)

It’s Going to Take How Long?

What's the soonest  FMIC will get rid of F&F, undertake its mammoth new policy mission and regulatory undertaking, with handles on the primary users of their services?  (Truth is that it took the old OFHEO/FHFA about 15 years, but this new undertaking would have much higher priority.)

Does anyone think the new FMIC regulator won't get big footed by the Fed if it tries to smack the TBTF institutions or any bank holding company? Does anyone think the Comptroller won’t complain if the OCC is unhappy over FMIC treatment of national banks? 

To me, that and protective behavior is a big reason—and there are others as the stakeholders and critics soon will be pointing out—to  design a national mortgage finance arrangement which builds on something which worked, rather than introduce a broad set of new home loan and financial business arrangements, at much higher systemic and borrowers prices. 

Most people dislike Fannie and Freddie for bizarre reasons for which honest substantiation seems to be lacking. But they are naïve if they believes things can’t be worse under whatever the FMIC and all of its trappings becomes in the 5-10-15-20 year (?) transition timeframe, laid out in the CWJC bill. (That congressional uncertainty should be a tipoff that this odyssey ain’t going to be a quick day at the beach and maybe more like Moses’ desert walk.)


The industry people I heard as recently as Tuesday saying wonderful things about the congressional sponsors (can’t be honest about the ideas and piss off the Hill) are ignoring their better judgment and want to believe that—as one friend said—“the bureaucratic monstrosity of Johnson-Crapo-Corker-Warner will smoothly replace GSE securitization mechanisms that have worked for decades and now account for two-thirds of all mortgage loans that are made.” 

How many years of start, stop, new rules promulgated and taken down, credit easy, credit short will the builders, Realtors, and lenders put up with before they realize that this was a move they never should have chosen. (Think back to that little war in Iraq!) 

The last time I checked, all of the Builders, Realtors, and mortgage lending professionals benefited from certainty, based onefficient,  smooth and a constant flow of mortgage credit, priced accurately with the consumer in mind (since sales means revenue). 

If you like the smooth effective rollout of Obamacare, how will the introduction of this new way to finance US mortgages look like, no matter what Administration does it? 

Motivators: Critical Thought & Fear 

Am I trying to scare people? You’re damn right I am. 

Wake up world! 

No matter what the issue, what has Washington ever done smoothly and efficiently, let alone effectively? Why should this gargantuan exercise be any different,  especially when it doesn’t have to be undertaken? 

Is it just because some pols want to show how tough they are by blowing up Fannie and Freddie when they can’t even describe why they need destroyed? 

Has the Congress moved as dramatically on any other US financial services company? 

Most people can’t tell you what F&F do or did, they just think they are “bad.” 

The few F&F issues which already haven’t been solved by regulation can be targeted with a BB gun. But the Senate—in its “new, bigger and better” mode—has dragged out the CWJC blunderbuss and it will shoot it at something and after all of their bowing to applause and prodigious fundraising, will let others pick up the pieces, while the Senators move onto new committee assignments or blame the regulators for breakdowns. 

Again, I’m not worried CWJC will be law soon, but the sooner someone makes light of some of these possible flaws and foibles—and they get attention-- the better the results will be. That could be a more refined legislative proposal or something smaller—which fits the needs--and is far less disorderly and unruly.


Maloni, 3-20-2014

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