Wednesday, April 23, 2014

Hurry, hurry, hurry, step right up and……


Will You Really Sell Me the Brooklyn Bridge and You'll Let me Rename It? 


Recently, I’ve read eloquent tomes filled with CorkerWarnerJohnsonCrapo (CWJC) accolades and the requisite dumping on Fannie Mae and Freddie Mac.

The authors extol CWJC and crap on F&F. 

They start with the assumption that Fannie and Freddie should be destroyed because they were flawed and made mistakes and that CWJC machinations are the answer to all problems in the nation’s primary and secondary mortgage markets (since the latter drives to the former). 

I have problems with many of these “Johnny’s come lately” because it’s all GSE blame and little insight, let alone anything positive about Fannie’s and Freddie’s success at sustaining the nation’s mortgage markets.

When these “experts” talk about the 2008 mortgage market financial meltdown, which prompted the Bush Administration to take over Fannie and Freddie--and the Obama Administration to keep them in indentured servitude--you almost never see any discussion that while F&F had woes, it occurred mostly from buying private label subprime mortgage bonds from the major NYC firms—not with failures of their own in-house generated MBS. The latter produced some losses but nothing close to what befell the “out house” (appropriate term for them) securities F&F purchased.

CWJC Beneficiaries &%&# Up Big Time


Few articles condemning F&F carry any critical discussion about that disastrous commercial bank/investment handiwork. 

During 2005 - 2007, the major New York institutions created--outside the Fannie and Freddie systems--$2.9 trillion in marginally underwritten, non-guaranteed, but highly rated private label mortgage backed securities (PLS) and sold them worldwide.  

Relying on claims made in SEC filings, Fannie and Freddie did purchase some of the most senior triple-A-rated tranches in PLS, primarily for reasons that had nothing to do with affordable housing goals. But we now know from legal documents in lawsuits, which Wall Street banks have been eager to settle, that the vast majority of PLS were riddled with fraud.  

Consequently, shortly after they were issued, these garbage non-F&F mortgage bonds quickly failed and produced @$725 Billion in losses not counting the CDO red ink created from the underlying PLS. 

The PLS mortgage securities had losses seven and a half times greater than F&F MBS  And that $725 Billion doesn’t include an additional billions in losses from synthetic CDOs created by those Big Apple financial stalwarts based on the underlying PLS.

In contrast, when Uncle Sam took them over, Fannie and Freddie need $187 Billion in federal cash infusions and since every penny has been repaid, including a surplus, now at $15 Billion but soon to grow larger as both entities announce their 1Q 2014 earnings.


As one sided as that performance was, none of the CWJC boosters are willing to acknowledge their proposed  legislation gives mammoth new market power and wealth via the delivery of a new federal subsidy to the very institutions which just 7 years ago committed financial mayhem on the world through their issuance of near worthless mortgage bonds. 

The nation’s largest banks already run their regulators ragged, going under, over, around, and behind them. (I’m tired tallying the laundry lists of violations and near criminal activity for which they have been fined in the past two years).

Why the Senate's Big Bank Largess? 

Can a brand spanking new federal regulator truly control the voracious TBTF institutions, especially if their “real federal regulator” (the Fed or the OCC) doesn’t want the FMIC to mess with a holding company or a national bank? 

If you say “yes,” then you’ve spent some time recently in Colorado and Washington states sampling their newest local products. 

Why will bank behavior be any different this time?

I’m not the only commentator pointing out to Senate legislators how much they would give the nation’s largest banks in return for what? 

This gets me to another bothersome issue. 

Most of the CWJC advocates disparage Fannie and Freddie and talk about the FMIC and its proposed aggregators, guarantors, and insurers, as if they are certainties which already have slain the mortgage beast, provided attractive products, reasonably priced for American families across the income continuum, with marginal losses totally covered by some yet to be raised $500 Billion in fairy dust capital (did I mention CWJC may cure the heartbreak of psoriasis, halitosis, and athlete’s feet?). Step right up and buy a bottle of Uncle……!


FMIC in the Bush, Better than F&F in the Hand?

This mortgage market savior doesn’t exist yet, let alone has it created its first mortgage, but the Senate desperate are lining up as if it is the “mortgage Lourdes.” 

Senators are touting the CWJC and how much it will reduce government financial obligations, the risk sharing the private sector is taking on (you mean the banks with their FDIC cheap deposits, that private capital?), and the words from every public official’s mouth are rich with promise, certitude and assured positive results. 

Pretty soon they will announce how many new jobs it will create. 

It hasn’t even passed the Senate Banking Committee and, if it does, it may never get to the Senate floor for major political reasons having nothing to do with Fannie and Freddie, let alone smooth and efficient mortgage financing? 

Suddenly every one accepts as truth what every Senate pol claims about CWJC and that it all will come true in a reasonable time frame. (Senator, I have some Las Vegas real estate, if you are in a “buying” mode?)

Aren't we fortunate that politicians never lie, inflate, or exaggerate about future results. 

The Senate is reshaping a totally new way for 20% of our national economy to operate, rewarding major financial miscreants, and covering all of its inevitable mistakes with taxpayer’s promises. 

Senators insist that CWJC will provide mortgage bounty for everyone because—as we know from Pentagon weapon systems to energy saving, not to mention healthcare--everything Congress builds happens seamlessly and with no interruptions, no delays, no cost overruns, and no losers. 

I Think It’s This Way Lassie… 

The FMIC is so far down this country road that Timmy and Lassie never may find, even with Opie and Barney Fife’s help. Its sponsors talk hopefully about five years, but don’t exclude 10 or even 15 years of phase in. 

I also think the CWJC’s affordable housing provisions are a joke, a ruse, something which sounds much better than it can possibly perform because—unless it gets dramatically changed— CWJC doesn’t compel, force, or statutorily require lenders to make mortgage loans to low income families, very few will be made. 

A “low income fund” sounds nice, but it’s like the banks paying fines for manipulating LIBOR or laundering Mexican drug money (both of which our big financial behemoths did), it’s a cost of doing business, but don’t look for any lender to heavily utilize it if they are not compelled by law to do so.

Why Not Reconsider Fannie and Freddie? 

Because it would undercut their case for a “new day,” GSE faultfinders seldom point to the F&F progress which the post 2008 regulation has produced.

Neither F nor F can buy or securitize the low quality loans which was part of their pre-2008 undoing. 

The “books” of business they have put on in the past few years have been exemplary because of the new rules and credit standards under which they must operate (I would loosen them a bit and I hope their regulator does), but when detractors talk about fixing F&F risk just what are they describing? 

The two are limited in their portfolio size, they largely securitize or guarantee loans which conform to the Consumer Finance Protection Agency’s QM (quality mortgage) standards, and whatever seasoned bad loans still are on their books are curing or rolling off, in the natural order of portfolio lenders. 

To me, this seems to be a lot of achievement, productivity, experience, success, and market familiarity to throw in the trash heap especially in exchange for promises and hope that the big banks don’t run roughshod over their regulators, again. 

The GSE denigrators claim they know the problems with Fannie and Freddie, but--if they do--does it really require CWJC's earthmoving, system changing upheaval, and financial uncertainty as the “fix,” especially when the sponsors only are going to put the whole kahuna on the federal budget (plus what’s left of Fannie and Freddie after the Congress fillets them)?

Just Junk CWJC.

The Congress can get a lot more housing finance done, still make desirable changes to  Fannie and Freddie, and preserve that which has worked—and a lot has—for less money, in less time, with less chance of failure and systemic breakdowns and far less political jousting which could occur when the Senate Banking Committee meets to markup CWJC. 

Who is Saying What? 

And this story in Compass Point, from Isaac Boltansky

Conservative Groups Voice Opposition. On April 22, a group of ~25 conservative groups – some far more significant than others – sent a letter to members of the Senate Banking Committee voicing their opposition to the Johnson-Crapo GSE reform bill. The letter cites a number of concerns including: (1) an “increase in moral hazard and taxpayer risk”; (2) an opposition to the construct of the housing trust funds in the language; and (3) the treatment of current shareholders under the 3rd Preferred Stock Purchase Agreement (PSPA) which would be codified under Johnson-Crapo. We believe that the conservative core on the Senate Banking Committee was already squarely opposed to the Johnson-Crapo language and this letter will only fortify their stances. As our vote count below illustrates, we continue to count Senators Vitter (R-LA), Coburn (R-OK), Toomey (R-PA), and Shelby (R-AL) as “likely against” the Johnson-Crapo bill. We highlight the letter from conservative groups because we continue to believe that as leadership aggressively courts the liberal contingent on the committee, it runs the risk of losing a handful of right-leaning supporters of the original Corker-Warner proposal.
Maloni, 4-24-2014


Bill Maloni said...

The beat goes on.

The National Urban League just sent a letter to Banking Committee Senators opposing CWJC over reduced availability of low income mortgage assistance.

Matt Hill said...

Unfortunately, ever statement or meme the GSE reform proponents use is an outright lie. Someone needs to be held accountable for each and every one of these statements on why the GSE's need to be abolished, including the president. Here are several statements they cannot back up with documentation or proof. If they can prove all these things will happen with GSE reform and wind down, then a bill can be approved. Otherwise the whole effort is just a fraud.

1. We need private capital back to have healthy housing - Great, re-privatize Fannie Mae and let new private participants compete.
2. Taxpayer off hook from losses - This is really homeowner vs taxpayer. I agree taxpayer should not pay for homeowner losses. This has nothing to do with which securitizer you use, just has to do with getting taxpayer out of equation, therefore getting government out. Fine, re privatize Fannie Mae and take government out of equation. Other securitizers can then compete with Fannie Mae.
3. Private can price risk better - Great, re-privatize Fannie Mae and let new securitizers prove they can price better.
4. Banks will be better at securitizing than Fannie Mae - Let's see some proof of that. Delinquency rates and 18 FHFA lawsuits show differently.
5. Fannie Mae too risky in it's loan practices with sub-prime loans - See point 4, all others were actually worse. A good regulator will help control this for all the new private participants.
6. Fannie Mae must support housing goals - Great, that can be stripped away. Some other government program can come in and support affordable housing with a separate initiative approved by congress.
7. Seven Deadly Sins? - abnormally low capital requirements; shamefully weak regulatory oversight; an implicit guarantee by the U.S. government; retained portfolios with an insatiable appetite for assets that fueled excessive risk-taking; a distinctively large lender bias that placed small firms at a competitive disadvantage; a mission seeking to maximize shareholder value and political franchise value at the same time; and heavy Congressional meddling that introduced enormous political distortions in the form of excessive affordable housing targets into the secondary market. -
All those sins above have either been fixed or will be fixed by the time Fannie is re-privatized.
8. Need to provide more liquidity to market - This will not happen by taking the 2 main securitizers away, the opposite will actually happen.

Bill Maloni said...

Matt--Excellent points all of them, cogent and well made.

While I appreciate the fact that you read my blog and comment, add your views to other forum, either as Matt Hill opinion pieces or article commentary on what others say, with whom you agree or disagree.

The more that the Obama Administration and those on the hill are challenged over their predicate for CWJC, the better the chances of reasonable mortgage finance reform occurring.

Go for it!

Matt Hill said...

Thanks Bill. Good suggestion. I put it out on the FnF google message board and will start from there.


Bill Maloni said...

Matt--Consider the American Banker, National Mortgage News, "Restore Fannie Mae" website, The Hill, Politico and Huff Post depending on how much you discuss the Congress or White House, and any number of self publishing methods, sending your material to key audiences.

Apparently, there also are a few F&F message boards you can hit.

Anonymous said...

Bill...a colleague and I were discussing the upcoming court date recently. I'm sure highly unlikely, however, what about the idea of a sort of stay on any further (earnings) dividends to the TSY? Basically, given the pending lawsuits, would it even be a remote possibility that the plintiff(s) would try to argue for building capital (v. the current sweep) pending a decision from the court? Obviously the govt. would fight like mad against such an idea. Just thinking out loud...


Anonymous said...

oops...meant to say 'plaintiffs'


Bill Maloni said...

GW--I am assuming you mean could the Court impose a stay on dividend payments to Treasury and revive GSE dividend payments to the investors?

While a final decision might encompass that, I doubt strongly whether any judge would reach that as an "interim decision," pending a final resolution.

You've more or less stated your own answer.

I am sure that government would object to anything which appears to be the Court offering a partial victory to the plaintiffs in advance of a final decision, when the Court just as easily could decide for the government.

The Court will decide on the Court's timetable, for which all interested parties just will have to wait.

My opinion--as a non-lawyer--is that the plaintiffs will prevail on a major part of this, the "third amendment" matter; not sure if they can get any traction on "conservatorship" issues.

But, I can't even guess on what the Court's decision could include, given the $$$$ involved.

And then you have the "appeals" question.

Maybe that's the point where you might get some "haggling," i.e. "We wont' appeal, if you'll agree to.......?"

Anonymous said...

Bill...sort of figured your answer, and/or answered my own question. Thanks -


Matt Hill said...

Thanks for the suggestions Bill. I will definitely take action on many of those.

Bill Maloni said...

Folks--Not sure yet, but some stuff just erupting re next week's markup.

Communications from FHFA (Directory Watt) raising serious question about the bill, plus an published amendment (widely predicted) that would limit "vertical integration" and other issues of power concentration.

Stay tuned.