This and That
White House Reluctance
Afraid to Be Successful?
(I am not sure in what sequence to arrange the following sections, since they all seem to scream the same message and overlap, rather than feed seamlessly into one another. So let me just run them as I wrote them and let you enjoy the prose, mine and other’s.)
I admit to being frustrated by this White House and its approach to mortgage finance reform.
There are lots of ways to engage in reform. Metaphorically, sometimes reform isn’t blowing a tunnel through a gnarly, granite filled mountain. It just could be posting better directions on how to drive around the elevation.
With mortgage finance, we seem to be at that juncture right now.
No matter what partisan hassling occurs before the 2016 elections--which will produce this nation’s next and our 45th President—Fannie Mae and Freddie Mac likely will be a fact of mortgage finance life through the end of the Obama Administration.
Some in Congress will bitch and moan, but the nation’s primary and secondary mortgage markets lenders will continue to utilize F&F, much as they have for the past three and a half decades and as they have for the nearly six years following F&F “conservatorship.”
The OMB and Treasury like F&F revenue and the two mortgage giants are here and operationally successful.
My hope, no matter who controls the Senate after November, who is the next House Majority Leader, and maybe who the next House Banking Committee Chairman is--if Jed Hensarling somehow moves into the House Majority Leader’s job—is that White House policy makers will concentrate on how the Administration—without Congress--efficiently and safely can expand the pool of eligible mortgagors, drive additional homeownership. This also means adding to the inventory of rental housing for those who can’t or don’t want to buy.
The answer “at the Administration’s fingertips” is greater utilization of Fannie Mae and Freddie Mac. If done thoughtfully and with urgency, success can produce burgeoning economic activity and more jobs in and around those new households.
That’s not or shouldn’t be, exclusively, a Republican or Democratic goal, but a responsible public policy objective which politicians in both parties can endorse.
Since events have conspired to make congressional cooperation a rarity, the Obama White House should seize that opportunity and-- working with the Federal Housing Finance Agency’s Director, Mel Watt--use Fannie Mae’s and Freddie Mac’s ample capacity to do good and well, at the same time, seeking to expand the number of eligible borrowers and generate additional jobs.
Sure, Mr. President, your guys cut a political deal with Sen. Bob Corker (R-Tenn.) — which I am sure God and Tip O’Neil will forgive—but how about putting the same energy into picking up the cudgels on your end NOW and move aggressively with regulation to finance more rental and homeownership activity and allow the country to reap the attendant commercial and employment benefits, too?
As Jim Millstein (pronounced “Mill-stEYEn” for those who don’t know) and others have suggested, the ball is in the Obama court, the bat in his hands, he’s behind wheel with no real obstacles fronting him.
He needs a few good lawyers—and one or two good pols-- and then just has to do it.
Mary Miller Speaks; the Result Floats!
Yet it appears that the White House is timid and may not be ready to listen to Watt and the industry groups.
This past week Treasury tried to throw cold water on burgeoning calls to energize Fannie and Freddie through regulatory action.
In remarks claiming inability to properly capitalize them, outgoing Treasury official Mary Miller took a weak shot at derailing industry and other requests for Obama Admin F&F action through regulation, claiming it would take “20 years” to refill their capital coffers. (See below.)
The lady may be the best of the best at Treasury, but seriously, who can accurately measure what’s going to happen—financially and economically—in the next 20 years?
Treasury couldn’t even see that F&F were poised to earn major revenue in 2012 and 2013.
The OMB this year projects that F&F will earn about $155 Billion over the next 10 years. The enterprises already have paid back all that $187.5 they were given, with a still-growing cash cherry on top.
If this Admin--which says it can change the “conservatorship rules”--would let F&F keep some/most of that $150 Billion that alone would be a pretty good dose of recapitalization.
But Miller tries to induce doubt and fear when saying it will take a generation to build F&F’s capital.
Ms. Miller must have forgotten that her White House and Treasury bosses endorsed—and still are rooting for--the (“heh, heh, heh”) CWJC legislation, which calls for raising $500 Billion in new protective capital in its first five years for the private insurance which is supposed to make the nation’s mortgage finance system far less dependent on Uncle Sam?
Really Mary, that bill is “Francisco Franco” dead, but from where/whom did you think all that money would come?
Mary Miller is leaving the Administration and I think she was sent out to “take one for the team” with her transparent suggestion.
Poor Mary, we hardly knew ye!
The Hammer “Hammers”
Just after completing this final blog draft, I received an email from, David Fiderer, whom I call, “The Hebrew Hammer,” writing about Mary Miller’s remarks.
Well that's complete idiocy. The GSEs make money, not only from financing new mortgages, but by holding and insuring the mortgages on their books. So the revenue from their core business should not plummet like it would for originate-to-distribute banks.
The GSEs would be well capitalized but for the cash drain imposed on them by the senior preferred stock agreements.
Also, the extraordinary profits of the last 15 months are really prior period adjustments to illusory GSE losses during 2008-2010. Rumors of the GSEs collapse were greatly exaggerated.
So sayeth “The Hammer.”
FHFA Steps in It, Again
I am sure that most of FHFA’s F&F 2013 report sent to Congress on Friday was done before Mel Watt came on board—at least I hope so.
But at some point Watt might want to look into why this agency keeps peddling bad news stories and doesn’t want to take credit for F&F successes. (See Tim Howard’s comment above, sent before this report was made public last Friday.)
No other federal financial regulatory agency is that chary, reluctant to praise itself and belligerent to its regulated institutions. Are the agency GSE-haters—who exist in senior spots at FHFA--so insecure and baffled?
Shut them down or root them out, Mr. Director, or you could end up “wearing” their disparaging opinions like an unwanted cheap suit.
Tim Howard Weighs In
In a similar vein, writing about the “FHFA F&F Stress Test,” I was dismayed with what I thought was a lack of regulatory candor and honesty (just like the aforementioned “2013 report to the Hill”). Sure, FHFA had to discuss how the two night fare in hypothetical bad times, but the agency must have a keener eye than it lets on.
In describing what I thought FHFA ignored, I wrote that F&F have acquired 5 years’ worth of outstanding, very safe “books” of business (annual securitization business activity) since being forced into “conservatorship” in 2008.
I pointed to the first fact generating substantial revenue and how the 2012 “dividend sweep” decision—now being contested in court--repaid the taxpayers the entire $187.5 Billion initially infused in F&F, in less than 3 years.
More money gets added to that overall payment every business quarter, as F&F to date have sent $18 Billion above the original $187.5 Billion debt to the government’s general fund.
A few days ago, Tim Howard and I went to lunch with an accomplished DC-based financial services analyst and we talked briefly about that same issue.
With Tim’s permission, below is his near verbatim follow up communication he sent to our lunch companion telling him why Howard thinks the chances are unlikely that Fannie and Freddie again will become another 2008 financial basket case.
Those peddling this line of thought seriously lack understanding of how F&F’s mortgage business works or have an alternative agenda. Here is what Tim wrote.
Thanks again for lunch; I appreciated getting your insights on the current goings-on with mortgage reform.
There was one topic I thought we might get to but didn't, that I wanted to follow up on. It was the argument, which I first read in an op-ed by Mark Zandi and Jim Parrot in the Post, that one reason the status quo is not sustainable is that with Fannie and Freddie not being permitted to hold any capital another bailout is inevitable-- and that this second bailout will both shake investor confidence and trigger an adverse reaction from Congress.
Zandi and Parrot say: "Mortgage defaults will increase again in the next recession, and Fannie and Freddie will suffer losses. Without capital, they will have no choice but to borrow again from the Treasury to meet their obligations." It's easy to read their first sentence as a mere statement of fact. It isn't. Yes, Fannie Mae and Freddie Mac's credit losses will very likely rise during the next recession, but credit losses are a far cry from corporate losses. For credit losses to become corporate losses, they would have to grow larger than all of Fannie's and Freddie's other sources of income (less administrative expenses) combined. That's highly unlikely.
Consider the numbers for Fannie Mae. Because it's been raising guaranty fees on its new business, it now is making about $12 billion per year in guaranty fee income. It gets another $4 billion or so in net interest income from its portfolio business (although that number will decrease over time as the portfolio continues to shrink). Its fee and other income average about $1.5 billion per year. With G&A expenses of around $2.5 billion annually, Fannie Mae's pre-tax net income is about $15 billion per year, and growing (even with the portfolio shrinking).
Put aside for the moment the remaining losses on Fannie Mae's pre-2009 books of business (but remember, the company has a $45 billion loan loss allowance--a form of capital-- which should be more than enough to cover them). What are the chances that losses on the post-2008 books will rise to $15 billion per year at any time in the foreseeable future?
I believe they are almost non-existent. The post-2008 books were very conservatively underwritten (too conservatively, in my view). The quality of these loans is at least as high as the loans Fannie Mae put on when I was CFO, and during the 1990-2004 period those loans had an average annual credit loss rate of 2 basis points. Fifteen billion in credit losses, on today's balance of $2.8 trillion in outstanding guarantees, would be a credit loss rate of 54 basis points. You really can't get there from here. Today's Fannie Mae has far too much income for losses on QM loans to threaten its bottom line, even in a recession.
I understand why one (or in this case, two--Zandi and Parrot) might want to make the political argument that having Fannie Mae and Freddie Mac operate in conservatorship with no capital is a knife-edge that could topple into disaster, and therefore a reason why an imperfect Johnson-Crapo is the better alternative. But I wanted to make sure you knew that, economically, if Fannie and Freddie are kept in conservatorship with a net worth sweep, there is almost no chance taxpayers will get the losses critics predict; they instead will receive a very large stream of deficit-reducing income for a very long period of time.
Although that wasn’t his goal, I think Howard’s comments about F&F’s current ability to manage business losses—with adherence to their current product acquisition rules--underscores the point I made in my challenge to the Obama Administration to encourage greater F&F financing activity.
Since the Admin will not shut down Fannie and Freddie and Congress won’t blow them up, an Obama limited F&F revival would be supported by Governors, Mayors, other public officials, commercial developers, residential builders, minority advocates, Realtors, lenders of all kinds, including the major banks.
And, who knows, maybe make this Administration look good, which it hasn’t for two years.
It also would not preclude anyone from returning later to the Fannie and Freddie reform/restructuring discussion.
The GSEs aren’t disappearing, use them well!