Sunday, March 16, 2014

Um, Get Back to Me in 2017



Musings over Fannie and Freddie
Corker (R-Tenn.)-Warner (D-Va.),
Johnson (D-S.D.)-Crapo (R-Idaho)


(Today’s blog is lengthy but has good content.)


Nobody should perceive my Fannie and Freddie vehemence and strong feelings as thoughtless opposition to the Corker-Warner cum Johnson-Crapo bills. (“Insiders” say the J-C bill will be circulated today or tomorrow.)

But, once F&F repay $187 Billion to the federal government with a bonus "$$cherry$$" on top, I believe an restructured version of the current Fannie and Freddie based system—with the two separated from their federal patronage and allowed to keep their earnings as a future capital base--offers a more hopeful, equitable, fair, efficient, and better commercial and consumer option than that in the new legislative proposals.

The latter are rife with unnecessary macro changes, forced business relationships, as well as uncertainty, and give monstrous mortgage market power to the TBTF banks that already have too much. 

I’ve documented the disparate treatment of F&F by Republican and Democrat administrations, yet so few people seem to acknowledge the violence done to our mortgage finance system—as well as to the financial regulatory system--by the very people who would be the major beneficiaries of Corker-Warner-Johnson-Crapo, the nation’s largest commercial banks. 

Fannie and Freddie get grief for buying the bank-created private label mortgage crap, but who has gone after the big banks for issuing $2 Trillion of near worthless mortgage backed securities—outside of the Fannie/Freddie systems, with bogus ratings and flimsy bank corporate guarantees—and peddling them worldwide, thus making the 2007 US residential downturn an international financial debacle. 

Fannie and Freddie Versus the Big Banks


Total GSE mortgage debt outstanding year end 2007, $4.8 trillion, which engendered $194 billion in losses, a 4% loss rate(Source Laurie Goodman.) 

F&F’s combined loan loss provisions 2008-2013: $194 Billion.

Private Label (non-F&F) total mortgage debt outstanding year end 2007:  $2.2 trillion, which engendered $864 billion in losses (including $150 billion of synthetic CDOs, which financed no housing at all), total losses of 39%. (Source Philadelphia Federal Reserve and thanks DF for your assistance.)

Banks generated roughly only half the securities as F&F did, but produced 4 times the losses. 


Fannie and Freddie, together, were helped with $187 Billion in taxpayer’s funds—all of which, plus an additional $20 Billion or so, will get paid back by the end of this month.

The banks and others took down $750 Billion (3/4 Trillion) in federal Troubled Asset Relief Program (TARP) money and as far as I can see, invested most of it in overnight Treasury securities and Fed funds, a practice known as “arbitraging.”  

Yes, it strengthened bank bottom lines, since it boosted bank earnings over the past few years, but the recipients did very little lending for business or home ownership. 

Neither the Bush nor Obama teams extracted any reciprocal bank investment in return for the cash.

Yet, Fannie and Freddie—as government controlled automatons have held up the nation’s mortgage finance system since 2008, facilitating hundreds of billions in mortgage lending-- would be destroyed in these Senate proposals (and Hensarling’s House bill), while the banks get  new federal mortgage bond insurance to cover any of their future uncovered losses. 

If anyone needs any additional commentary on  institutional integrity absence of those who most benefit from the Senate proposals, the Federal Deposit Insurance Corporation (FDIC) said last week it is suing 16 large US and foreign banks for their roles in manipulating the London Interbank Borrowing Rate or LIBOR.

That crucial and heavily utilized index has been the standard for virtually all US adjustable rate mortgages (ARMs), and thousands of other US and international financial contracts.

Cry foul all you want but those are the same guys to which the Senate is racing to give control of our country’s primary and secondary mortgage markets.


Let’s Reward the Really Bad Guys

So, the guys who get the C-W goodies just have been hit by FDIC for screwing around—to their own benefit not consumers—with a key mortgage index. 

They’re the people to whom the Senate in Corker-Warner, cum Johnson-Crapo would give the family jewels and Grandpa’s ranch.  

I have a question for the financially naive who complain that Fannie and Freddie “made too much money putting families into home ownership and deserve to be punched out by Congress”--do you think the banks will create loans for free, especially now if they get the federal golden handshake of insurance on their mortgage bond losses? 

If so, in what financial and economic world do you people live? 

The media suggest that across the board in Congress, everyone wants private capital making loans and covering losses. But capital is not really private when Uncle Sam stands behind it, no matter how far back, since that fact impacts the price of credit and the risk “private capital” is willing to take. 

Sorry, but the dirty little secret--which so many ignore-- is that all federal depositories (those which offer checking and savings accounts) benefit from a huge federal financial subsidy, the federal deposit insurance which protects the first $250,000 in virtually every account in a US bank. 

And what do the banks pay for that working capital? Well, it’s their smallish FDIC insurance premium plus the 1% or less they give you for your checking or savings money. That’s what their working capital costs. The FDIC fund protecting those deposits is about one eighth the size of the deposits outstanding.

Just how “private” is the banks money? Consumers put money in banks only because, once again, Uncle Sam guarantees it. So, please stop the crocodile tears for the banks and the excoriation of Fannie and Freddie. If anything the working capital for both sides is draped all in red, white, and blue.


The WSJ Man 

The unfailingly exceptional Nick Timiraos in a weekend WSJ column lays out three possible options for the future US mortgage market. See below. 


His third—some sort of F&F revival with limitations (the “Maloni scheme”) doesn’t seem to be his favorite, but it is the one which I believe makes the most sense, can be achieved the fastest, and can be shaped to exorcise all of the demons which people conjure when someone says “Fannie Mae or Freddie Mac.”

Most GSE complaints have long been remedied with post 2008 regulation.

Part of the problem on Capitol Hill is that their current legislative contortions invoke some unnatural acts, fitting square pegs into round holes, relying on those who’ve shown themselves to be unreliable or wanton thugs (just look at the billions of dollars in federal fines, for a variety of sins the banks have paid in the past two years), and Congress failing to see the virtues of past systems. 

You can reduce, what most policy makers claim they want to eradicate, i.e. Uncle Sam being on the hook for mortgage market losses.

What you cannot wish away is the “Too Big to Fail” (TBTF) phenomenon, unless the President and D&R policy makers on both sides of the Hill force the TBTF institutions to slim down (much as they have forced F&F to slim down). 

Yet, they are gutless when it comes to the big banks. 

Make the financial behemoths smaller, increase their capital and voila, much of the problem disappears.

Let me close reiterating something I’ve written before. Don’t look for any major mortgage market reform/restructuring until the White House, the Senate and the House are controlled by the same political party, the soonest being in 2017 following the next presidential election. 

Until that situation occurs D’s and R’s can offset the other’s political leverage.

Then we have the courts………. (Timiraos, who the WSJ is moving from the GSE and related issues beat to a broader task in Washington, last week wrote about that lawsuit situation, too). See below.



More Gifts for the Begging Big Banks


The excellent reporting staff at Inside Mortgage Finance last week reported on the wasteful, unnecessary, stuck in the mud, “will someone please kill me?” Common Securitization Platform (CSP) project, which Mel Watt’s predecessor maced Fannie and Freddie into supporting and creating. 

This is the scheme, involving a narrow purpose Delaware registered corporation—which F&F were forced to support, with a reported $200-300 million budget and 300 planned employees--living in new  Bethesda, Maryland offices. The CSP has yet to get a top person (nobody seems to want the job), a board, or any action plans, but does have a new board room.

The CSP was Ed DeMarco’s wet dream to force F&F to succor and pay for an “independent” underwriting platform which Ed planned to give to mortgage originators, hoping that that F&F would be long gone and the big banks could have the product free. 

Can you say “clusterf_ _ _  and boondoggle” class? 

Why do the banks need more Uncle Sam paid for and gift wrapped emoluments? Why does anyone need a third underwriting platform when F&F each have their own which function, are state of the art and can be used by any lender who hopes to securitize loans with the two? 

Corker and Warner (and we presume Johnson and Crapo) already declare all F&F assets--including their operations systems--will go to Uncle Sam when the two perish or are euthanized? 

Come on, Director Watt, kill this unneeded vestige of a former Director DeMarco, whose priorities were different from yours; save that $300 million for the taxpayers.

Hensarling Wouldn’t, Would He? 

One of the better stories last week is that Senate Majority Leader Harry Reid doesn’t want a Johnson-Crapo bill going to the floor because it would mean his politically vulnerable Democrats would likely be forced to vote for it, setting themselves up for their November GOP opponents beating them over the head for approving new federal mortgage market largesse. Smart man, Harry!

But, purely for the political gamesmanship involved, would the House R’s lull the Senate into a vote first by passing their Hensarling bill--rooted in the 19th century, where only banks would be there for mortgage lending—dangle the hope of making changes in a joint conference, just to get the vulnerable Senate D’s to vote on something? 

I don’t think Hensarling is that smart, but someone in the Speaker’s office might be. 

“Caution Will Robinson/Harry Reid!” 

To President Obama (sigh), repeat, often, don’t trust the Russians, the Iranians, or the Syrians.


Maloni, 3-16-2014







Qualified Observer said...

Wow. Bill, tell us how you *really* feel!

Excellent column this time around, thank you.

Bill Maloni said...

QM--Thanks for reading and commenting.

What good are one's feelings if they never are expressed fully.

I don't have to convince myself of anything, but to the extent people who read the blog have any doubts or questions, I feel a need to provide some insight.

Wait until you see my spring gardening tips!!

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Bill Maloni said...

Now my blog is being used as a commercial pitch site.

Out, out damn spot!

My God what have I created??!!

1st Anon... JM said...


You know you've "arrived" if your blog talk spot is worth the time of someone hawking their wares...


Now... back to the show.


Bill Maloni said...

JM--Now that you mention it, I have these collapsible hoses, Ginzu knives, and velveteen portraits of Elvis available.

And, if you order now--sending a second shipping and handling fee, you'll get two of each!

(That's the end line on virtually every daytime ad on Fox Network!)

Qualified Observer said...

What do you hear from your network regarding the lawsuits and their chances for success? Not-the-real-TimHoward says we're going to win and the third amendment to the PSPA will be rolled back...

(PS: Your 'bias' is showing- in your reply to my first comment you referred to me as 'QM' ;) )

Again, thanks for all you do.

Bill Maloni said...

QO--wasn't personal. If you haven't realized it, I can't type (I use two fingers, honest), which is the source of many typos.

Ironically, I put some info on that site, using my bogus ID--where the bogus Tim hangs out-- about the lawsuit issue.

Right now, as difficult as it is to win a suit against Uncle Sam, I would have to believe the chances are greater for the plaintiffs winning than the defendants.

"Uncle" then will have to decide whether to go to SCOTUS or settle. I say they choose to appeal.

But, who knows. I was with some very, very bright people yesterday and there was no consensus on what may happen legally, except that the decision could go anywhere and involve lots of angles, besides just financial damages.

So, sorry, no unique insight.

Investor said...

Hi Bill,
Can you elaborate on what other angles were mentioned besides financial?

Anonymous said...

Hi Bill, this seems to be the slight of hand J/C attempts:

"The most recent legislation also incorporates language from a 1992 statute for winding down the GSEs, rather than language in the 2008 Housing and Economic Recovery Act. The earlier provision had allowed regulators more flexibility in how they structure a wind-down, including what happens to profits from the sale of the GSEs.

"By using the 1992 statute instead of HERA, the Committee chose a circuitous route to avoid having to follow the very prescriptive steps of receivership," Barford said. "This new process, or ‘wind down,' gives more discretion and latitude to regulators."

Critically, the Johnson-Crapo legislation also calls for steps to fund the GSEs' wind-down that would effectively limit potential shareholder returns. Using funds from the GSEs to support the transition to a new system — rather than returning profits — is seen as a much more politically palatable step than using other outside source of appropriations. That means that the pot of money for investors could be further reduced even if they prevail in the courts.

"Fannie and Freddie essentially becomes a piggybank for the new system," said Edward Mills, policy analyst at FBR Capital Markets."

Would love to hear your thought.
Thanks again.

Bill Maloni said...

Investor--This is where most everyone I know--including some of the investors--say it gets murky.

Again, the assumption is the plaintiffs win.

Big huddle with the government and the plaintiffs. Could the Judge--in lieu of making the federal government give back billions, give parts/all of F&F to the plaintiffs? (All speculation, no possible details.)

Again, depends on how severe the Judge thinks the investors got screwed by their own government, what some of the big players really want or would settle for, what the government thinks about ceding control of Fannie and Freddie.

That's the genre but nobody knows if we all are smoking the lawn cuttings or are discussing legal reality.

Lets' just hope the options are there for the Judge because she decides against the government, which I believe took shortcuts and likely evaded the law.

(Anon, running out. when I come back, I'll discuss the slight of hand. In the interim, think "punitive.")

Bill Maloni said...

Anon (re using old statutory language and not HERA)---

Frankly, part of this issue goes back to when I was there and we worked with Congress ont he 1992 legislation, which created OFHEO and the housing goals.

We insisted on the conservatorship option because we didn't trust any Administration (D or R) with the "receivership" capacity. I believe that history showed us to be prescient in that regard.

F&F as "piggybanks" is not new and revenue from both was used once to "pay for" a tax or unemployment provision (forget which).

As I noted much earlier today before running out, there remains an absolute ton of Fannei (and Freddie, btu mostly Fannie) hostility, which most people cannot articulate but feel strongly.

As I keep writing--and will in the coming blog--most of the congressional rhetoric is about problems which no longer exist or
belonged to the PLS subprime guys.

Congress needs a bogeyman and for CWJC is going to be Fannie and Freddie, cone what may.

Only the courts will make a call for the investors.

Most D's in Congress can't/don't relate to "investors" and the R's often get overwhelmed with where the investors put their money, i.e. "F&F.

It's not logical, but don't look for that when F&F are involved.

Hope the courts find for the plaintiffs and come back with a big enough decision so that the Congress gets stopped in its tracks and forced to consider something more workable.