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 Guarantors—today 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.