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
Compare:
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.
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
11 comments:
Wow. Bill, tell us how you *really* feel!
Excellent column this time around, thank you.
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!!
Now my blog is being used as a commercial pitch site.
Out, out damn spot!
My God what have I created??!!
Bill...
You know you've "arrived" if your blog talk spot is worth the time of someone hawking their wares...
Congrats...
Now... back to the show.
JM
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!)
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.
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.
Hi Bill,
Can you elaborate on what other angles were mentioned besides financial?
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.
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.")
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.
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