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



















Anonymous said...

Alright Bill , so let's really get to the point why we need GSE elimination reform right now.
1) The long ongoing campaign that GSEs are responsible for all this "Dumb and Dumber" thinking that has spread through Washington like a plague is the product of lobbyist representing those that will profit from GSE demise.
2) There is a window of opportunity for the elimination to occur before the courts step in or people start asking "why do we need reform"? Corker's credit all success to the govt speech is getting old.
3) Time will proceed and as with science, equilibrium will set in to a steady state so nothing new can happen.

Bill Maloni said...

Anon---Wait, wait, I have another idea.

We get a lot of pink paint and some badges, to make us official, and then we.......!

Qualified Observer said...

Enjoyed, as usual. Thanks, as usual!

Anonymous said...

What Congress is trying to do is reverse an entrenched legal status of the GSEs and the resulting financial status of them. The companies have due process rights and legislation that takes control of the disposition of their assets and/or their ability to benefit from their work in creating them is illegal.

There is one negative counter-balance that the government has to deal with in exchange for the right to impose taxes and having the power to set the rules of the playing field for everyone in the country.

If there is any reasonable doubt about the constitutional fairness of its dealings, the tie goes to the runner.

There would probably be no issue if they had kept the record of their dealings with the companies consistent. If they had made an effort to communicate their intentions from the initiation of the conservatorships and had reinforced that intention by an acknowledgment of progress toward their initial goal, then shareholders would feel secure that no matter what terms had been decided at the beginning that there would always be consistency in the decision making progress from the government.

This entire conflict could have been avoided with even minimal consideration of the legal ramifications of modifying the already existing terms of the bail-outs.

There are gigantic piles of money being made here by the GSEs. At this point I've almost stopped caring about the money. The government is being so relentlessly unfair and malicious that I feel my sanity and identity as a person and a citizen slipping away more and more everyday. I feel stuck in a battle for the clarity of my judgement. That somehow if I sell this stock and quit that it will validate my own doubts of worthlessness as an individual. All I have now is hope, and I hope that I am on the right side of justice.

Anonymous said...

I doubt very seriously there will be an elimination bill to make it through both House & Senate for at least the next couple of years so I am not worried. That leaves the judicial card which might just play out nicely at the rate things are going.

Bill Maloni said...

Anon 1--

I communicated this week with a former Fannie CEO and after exchanging views on certain matters--including the well done Richard Bove paper I linked in my blog and agreeing on the fact that nobody seems to be listening to the F&F side of the story--we concluded, in a massive understatement, that "this issue just is frustrating."

I can't find any traction for the contrary view that F&F caused major problems and were bad for the country. If it exists out there, it's among a minority with no real clout to support their point.

My lament hopefully comes through in the blog where you see the banks getting help hand over fist--all the while biting the hand that feeds them--and possibly more support in the future, and F&F getting screwed this way and that.

While I root for the court cases to be decided favorably,
I think it is naïve to believe that the Courts (judges) don't read the newspapers and know which way the political wind is blowing.

Absent that, I believe the plaintiffs would win in a heart beat.

But, when people say how tough it is to "beat the government," it's not because the actions of government always are right and proper, it's because the federal government gets the benefits of most doubts and ties belong to it.

Bill Maloni said...

Anon 2--

I have agreed with you and written accordingly,but if you consider the Hensarling approach unlikely to happen, substantively and ideologically, I wonder why the House ever would go to conference, assuming the Senate passes some form of their legislation?

Now Hosue D's have introduced their bill, which starts with abvolishign F&F, and then gors on its way to set up a cooperative.

The pace honestly has quickened and until someone stands up (Reid because he thinks his vulnerable Senators will get crucified by their GOP opponents, no matter how many R's vote for CWJC) or angry D's who say, "Whoa, too much for the bad guy financials here," the issue seems to have momentum.

But, it's early and Congress does like to pretend its really working on issues to deal with problems. Only this issue isn't as major as most suggest and their approach has holes.

But all the banks and the insurers have to do is keep providing the campaign financing in bundles and you might get the Tea Party asking Uncle Sam to provide more housing assistance for poor people!!!

Anonymous said...

Well thankfully it's not even close to a tie. It's a slam dunk and unless the judges are reading a newspaper that tells them how to prevent the overturn of 200,000 previous forclosure actions for lack of due process, or a realistic way to add 5.2 trillion dollars to the balance sheet and avoid the housing market collapsing, then they have no choice but to rule in our favor.

If we all wanted to tell the truth it would be that Richard Bove is stabbing the shareholders in the heart with his proposed solution to donate the legally precarious "Senior Preferred Stock" to the housing trust fund AND to allow the government to keep 79.9 percent of the companies as some sort of ass-kissing bow of deference to the supremecy of our crooked political construct that we call the US Government.

What Bove wants is never going to happen because it's illegal. What Corker wants is never going to happen . Even what Maxine Waters wants is never going to happen.

I'm not naive they are. And if you're writing this blog because you actually believe that these guys even have a choice here in the outcome you might want to throw some advertising on it to make some extra dough. Because the outcome is already certain and has been decided by economic reality. So don't be part of the political wind of fake debate and propaganda.

Bill Maloni said...

Anon--seriously, you lost me at the end of your missive.

Are you asking whether I think the plaintiffs have a chance or the House and Senate each can Congress can pass "mortgage reform"similar legislation?

If it is the former, I think the plaintiffs have the strongest case, but Courts have no schedules, so I don't know when the Judge will decide.

And until that event happens, I have to assume either side can triumph, which begs the question of an appeal to SCOTU.

If you are asking, can the Congress--both chambers in conference--agree and send back a common document which can pass each chamber, I believe it is possible but not likely...unless as I have written the House majority leaves the Capital.

As someone who loves to gamble in casinos, but loses more times than he wins, I've learned you never say "never" and the same principle applies to politics and legislation.

Anonymous said...

Fannie Mae is not Al Qaeda. Any legislation that passes that tries to piggyback off of these conservatorships to wind-down the companies is destined to be overturned. But let's say you're right and somehow they agree to legislation that winds them down. What happens to all of those people who went through foreclosure proceedings and argued(or never used the argument but would now) unsuccessfully that they were entitled to higher levels of due-process because the companies were under government imposed conservatorship? Well if legislation passes that piggybacks off of the conservatorships without allowing the shareholders to regain their rights, judges are likely to say that the government owned them all along. It could result in huge additional liability.

Then there is the issue of having court decisions related to these matters coming in during certain parts of the transition period where the enterprises are still engaging in ongoing business and having to reverse those changes due to the courts ordering it.

The Federal Reserve balance sheet and its current wind-down efforts are also just starting to conflict with the wind-down in the retain portfolios of the enterprises. It is estimated that by May the combination of the Fed reducing and the GSEs reducing their MBS purchases will require otheres in the private market to be willing to make those investments. As the FED progresses with its plans it is unwise to force the GSEs to ignore profitable bonds that they could use their excess cash to purchase.

The reason I am angry is not because I am scared of housing reform legislation. It's because they are wasting so much time avoiding the small range of obvious and reasonable outcomes. They are hurting my potential ROI. I'm trying to beat Warren Buffet.

I'm saying never.

Bill Maloni said...

Hang in there; we need people like you, truly. I also appreciate your ardor and that you share your opinions.

Lots of us are POd with the waste, BS, posturing and theatrics of this exercise. But, it's cheap and easy theater, which most in the media fail to call out and treat it like real stuff.

Despite all of the bloviating about our capitalist system--even from Republicans--nobody seems to care about investors or--I can tell you from my professional experience--understands where capital providing investors fit in the picture.

I think your second paragraph is keen, that is a decision in the middle of considered legislative activity.

I keep reminding people that I am not a lawyer--and that I am with the plaintiffs regarding the change in dividends (as well as the original 2008 actions)--but both sides make quality arguments supporting their positions but someone is going to lose.

I just don't know which side.

jwnoblethree said...

Hi Bill

Great blog, always appreciate your insight and candor.

Question -
Any idea who gave the CSP (common securitization platform) idea to FHFA?

Best JW

Bill Maloni said...

QO--any of the big guys could have given it to DeMarco, on whose watch it developed and who took credit for the idea.

Obviously, someone who wanted something or free (or the Feds paying for it); someone who stood to buy, steal, inherit it.

Not a F or F source, because why create a competitor for their own systems.

Where does that process of elimination get you?