Monday, July 28, 2014

Mortgage Stuff, Honest: "Hello Governor"


Fannie/Freddie Mortgage Future?


Jaret Seiberg, Guggenheim Partner’s first rate DC financial analyst, invited me to join Michael Bright—Tennessee Senator’s Sen. Bob Corker’s principal Banking Committee staffer--and him in NYC last week to discuss with GP’s clients and others mortgage finance reform, the variety of proposed alternatives and the many remaining business and political hurdles facing the eternal question, “What to do with Fannie and Freddie?”  

Double thanks to Jaret and Michael for the opportunity and their flexibility, when at the last moment I had to cancel personally attending and they let me join via conference call. 

Michael discussed the many substantive issues surrounding the Senate’s Corker Warner cum Johnson Crapo (CWJC) legislation and some of the history which generated it.

Yes to F&F in Some Form

My task was to make a case for why F&F should not be abandoned because they still add value and offer smooth and steady operational hope to the nation’s primary and secondary mortgage markets. 

I argued that virtually all the legitimate issues people had with F&F have been solved via regulation or easily could be going forward. Most people who still opposed the two, largely, were swayed by a false narrative. 

As Michael spoke about his* legislation the 2008 “Conservatorship” events and offered explanations for the policy results which evolved, I imagined a bunch of well-meaning Treasury people, operating under immense pressure, trying to build a lifeboat during a hurricane using a variety of hasty figurative patches to get them over. Some of the fixes worked and others are now being challenged both in court and in the policy arena.

(*Behind any major piece of legislation are one or two staffers who shape it, meet with affected interest groups, the Administration, quietly lobby, build support, shoot down opponents, occasionally substitute for their “boss” and then synthesize for and strategize with their principal on developments. Bright did and does this for Corker.) 

The case I made for Fannie Mae and Freddie Mac was simple.

They successfully produced voluminous amounts of mortgage financing, for a variety of income groups, and worked well before the post 2005 PLS debacles. Since being put into “conservatorship,” they still are spectacularly successful—buttressing the nation’s mortgage market-- when their regulation was tightened up post-2008. 

I suggested, with some regulatory relief and little legislative head knocking, they could be revived and permitted to play a principal role in the mortgage market before any of the various F&F alternatives could be operational.

Stayed Away From Political History

And “no,” I didn’t go into the role of the 2004 GOP trying to destroy certain Fannie execs with sham charges of “securities fraud,” possibly ushering in the PLS debacle when replacement Fannie officials to those deposed started buying the private label garbage.

One item I hope I established was my oft stated belief that no massive change in the nation’s mortgage finance structure—especially which abolishes F&F--can effectively be governed by federal regulatory officials because of competing institutional regulatory agendas and turf wars.  

I thought that was a vulnerability in the CorkerWarnerJohnsonCrapo bill (where Senator Corker, to his political credit--with Bright’s help—clearly was a driving force).

Why F&F in the Future Makes Sense

The current bank regulatory regime (Fed, FDIC, CoC, Treasury) and now CFPB—before you would even add CorkerWarnerJohnsonCrapo’s (CWJC) contemplated  Federal Mortgage Insurance Corporation (FMIC) apparatus--largely remains reactive, meaning the bad guys do their evil deeds and only get caught after the fact when and if the regulators catch them. 

I’ve written about other CWJC problems, including the fact that no lender, anywhere, was mandated to make lower income housing finance available, despite a special housing trust fund set up for that purpose. It was in the statute but absent any language requiring banks/lenders to use the fund made it near useless. 

Also, several Banking Committee members expressed concern over handing the mortgage market to the nation’s biggest banks, which had not earned that reward, especially just 7 years after they had ravaged the system with their own—not F&F-- private label securities (three or four times more damaging than whatever F&F errors were and what the GSEs cost). The banks’ flawed mortgage bonds carried ersatz or fake ratings provided by their friendly rating agency business partners. 

We talked that the next iteration of the CWJC or even a perpetuation of F&F could, in fact, get overtaken—or heavily impacted--by legal proceedings before Congress ever acts.

Major Unknown, the Court Cases

Bight and I agreed the “Third amendment” court cases were beyond our ability to analyze and predict content or timing, only that it likely won’t stop with Sweeney’s final opinion and that Congress doesn’t like to screw around, legislatively, where major court action is pending. 

A Judge Sweeney decision for the “takings” plaintiffs could have major financial as well as possible structural consequences. 

Hypothetically, if a conservative GOP president is in office when a decision is rendered, he might not appeal to the SCOTUS and even side with the investors; while a new D president could appeal or if convinced of the GSEs value may to use that decision to build a financial/capital revival. 

Among other possibilities, in my pitch, I suggested since F&F now have repaid all that they were given in 2008 (with a growing surplus), the Treasury Department could let them keep some of their earnings to build capital. I further suggested, the two under certain conditions would be able to fund themselves, without Uncle Sam’s red, white and blue gilding. (It’s Important to note that Jaret doesn’t agree with me.)

Congress Listens to Financial Stakeholders

More importantly, the industries which bring home ownership to Americans know F&F and like working with them—as they have for almost 40 years—there always some exceptions, but not many. I’ll repeat my belief that some of the nation’s largest institutions want a F&F option in the market to securitize their product and reduce bank portfolio risks.

As they’ve just shown, those financial interest groups do speak to Congress in major ways, including making significant political contributions. 

Operational familiarity and continuity are important virtues in an $11 Trillion US mortgage market which can’t afford a “time out” or lengthy transitions (CWJC had five years but most people believed that it would take 10 or 15) where the future is uncertain at best, because legislation left open so many key issues.

Folly If Hill Ignores GSE Regulation


Fannie and Freddie have been tightly regulated for the past 6 years and—assuming that regulation stays in place—there is little chance of a repeat of the subprime debacle for reasons everyone knows (the primary one being F&F cannot touch low quality mortgage loans). 

With QM mortgages now the rule, F&F as principals in a mortgage finance system offering common products, common prices, competition among primary lenders, efficient operations, and with their own money at stake, would be far better at regulating their customers (most of which are banks or bank affiliates) against consumer and systemic abuse than any federal agency.  

The nod goes to the GSEs because federal agencies can’t ever have real “skin in the game,” meaning revenue at risk (except in a very indirect way) and therefore can’t have the same incentives nor employ the operational policing, with consequences, which F&F would possess. 

A further benefit—if one is worried about a future real estate collapse--with the nation’s banks of all sizes, mortgage banks, credit unions, and other lenders upstreaming a lion’s share of the nation’s mortgage loans through the two securitizers, if any prospective market threat evolved, the nation’s mortgage markets and tax payer risk would be quarantined with two easy to reach and heretofore strongly regulated firms.

GSE Myths, Just Hang On 

I contended to the GP audience the major case against F&F is based on a faux allegory, people blaming them for the 2008 financial meltdown and more. These fables were successfully generated and sold by their former business and political enemies--most but not exclusively on the Right--some of whom persist today and beat the same tired drum.  

Faux F&F allegory complements their use of air brushed bank history, since I’m still waiting for anyone in the GOP to admit, in 2006-2007, the major banks and investment banks—outside of the F&F systems—created and sold well over $2 Trillion in poorly underwritten MBS, with tainted ratings and only the institutions’ fast plummeting names backing them.

Those PLS securities, which their originators sold worldwide, are what made a domestic US real estate downturn an international dilemma. 

Again, I believe that only a new president with both congressional chambers controlled by his (or her) party will set the stage for any omnibus mortgage reform  legislative proposal with the soonest that can occur is 2017. 

This Administration could move via regulation to make it easier for F&F to produce for the country. 

Maybe if Sarah Palin suddenly spoke ill of F&F, the President might react and vigorously support them. It’s worth a try. 

“Operator, can you get me former Governor Sarah Palin in Alaska? Tell EssPee its Bill calling.”


What Others Are Saying 

Military Help for the Ukraine

NYT article on military assistance to help the Ukrainian government.

Hillary Discusses Putin

Hillary Clinton talks about Putin in a CNN interview. (Mr. President, please remember, don’t trust Putin or his regime.)


 NYT marijuana legalization editorial.


Maloni, 7-28-2014


Matt Hill said...

Great job Bill on representing the other side on this reform! I'd assume Corker is already familiar with your blog and knew the line of thinking he would get from you beforehand. From my perspective you did a good job representing all the key points you've been talking about for years. Hopefully it makes a difference with their future efforts. Was there any positive feedback from them, or was it more of an information gathering exercise from their side?

Bill Maloni said...

Thanks, Matt--

You are the second person to ask a variant of that question.

Truth is that nothing in the comments/questions--more aimed at Michael than me--indicated any long term support or hope for a revitalized F&F and not being physically present prohibited me from mingling and getting any real feedback.

That doesn't mean it didn't exist, since I assume that some, many, all of the audience were investors just that nobody blabbed it.

I suggested to the last person who asked your question that they speak to/email Jaret Seiberg to see if he had a sense or even would discuss it.

To be fair to Michael Bright, I sensed a certain skepticism in the questions he was asked about how the various bill parts would mesh when compared to the functions and roles in today's mortgage market.

Since the bill still is a proposal and theoretically still being massaged by its sponsors to attract more support, there is no way to measure what may occur and how the parts, players, and new regulatory regime would work in concert.

I have lots of doubts because of the variety of mortgage market stakeholders who backed off, shied away or even opposed CWJC.

As noted, I can't see that changing until 2017, if then.

The situation almost begs the Obama Administration to do something via regulation, which goes beyond tinkering at the margins.

Matt Hill said...

Thanks for the updates Bill. I am a long time holder of some Guggenheim securities, including RZV and RPV. I am appalled of their lack of forethought in excluding many of their own clients that have made long term investments in Fannie Mae and Freddie Mac.

Bill Maloni said...

Not sure how those things work. I've done many of these conference calls and never get into who the invitees are--beyond "clients"--or what criteria the host uses.

Generally, though, they can provide a tape or they leave the recording up for people who missed the original.

I can ask Jaret Seiberg about GP's practices and will post his answer for you.

Bill Maloni said...

Matt--I mentioned your concern to Jaret Seiberg and he suggests you contact him at GP.

Let me know if you need his email address.

Matt Hill said...

Hi Bill,

I will get in touch with you and Jaret soon. I am not an expert, nor a big shot of any kind. My primary concern is that me and anyone else who invested in Fannie Mae 5 years ago are treated like vultures. There were many investments I had to choose from at that time. Thousands of various investment choices have gone through the roof since the economy has recovered. No one is treating any other of the investments as vulture investments. I thought that housing, the economy, and the GSEs would recover and they did. Now I feel that someone is trying to retroactively undo my correct call on this investment and take it away from me because I am a bailout vulture. I find this line of reasoning ridiculous. I also invested in RZV at $10 and now it is $60. No one is trying to take away that gain from me and my Fannie Mae investment should not be treated any differently. I could have easily put that money in several other places and received a great return as well without having to be told to feel guilty about it. There are thousands of other investors with my same concerns, yet we are cast aside as money grubbers.

I feel Fannie Mae and Freddie Mac do a lot more for Americans than the casual taxpayer realizes and that knowledge gap is being taken advantage of by the treasury and many in congress. I believe a strongly regulated, reformed GSE can be a solid company going forward and help many realize the American dream without putting taxpayers on the hook again.

Not only am I concerned about my investment, but also in the hope that my kids can afford to get a loan on their own home in the future. I'm also concerned about my property value when lending tightens even further with a drastic reform of the GSEs.

The exclusion of GSE shareholders from these types of meetings really concerns me and makes me feel that all the people that should be advocating for me are not doing so. I should really be used to it by now, but this one just got to me this time.

Thanks for providing a place for me to voice my concerns.

Bill Maloni said...

Matt--I am glad I can help, if nothing more than to let you vent.

My sympathy is with both common and preferred investors, having been one of those myself, at one time.

And I know Guggenheim's business revolves around investors
of all sizes, although--as someone who worked for me used to remind me at bonus time, "bigger is better."

But, if you made me finger point at a culprit, it would be--once again--the Congress, which never, never understood the role of GSE investors even long before "Conservatorship" was a fact.

That was the result of not understanding business, in general, and thinking F&F were government agencies.

My standard lobbyist line when I hit that on the Hill was, "Sir/Mam, Federal agencies aren't traded on the New York (then!) stock exchange.

It didn't help them totally understand investor interests but but gave them something to think about.