Monday, October 27, 2014

F/F Issues, Watt, Legal Brief, and Other Matters



Watt’s Speech, Cooper Brief, and More


There were two major developments this past week, weighty with meaning and worth reviewing, plus some related events.

First up is Mel Watt reviving 3% down payments.

FHFA Director Mel Watt announced his not well kept secret to allow (perhaps mandate is a better word, since neither can refuse) Fannie and Freddie to begin—again--securitizing 3% down mortgages, a previous practice that had been junked for safety and soundness reasons. (Link to Watt’s remarks.) 

While there were several welcoming comments for Watt’s action, it was far from universal. Some commentators expressed concerns about inviting back “subprime.”  (See W Post editorial link below.) 

I disagree with those critics and don’t think these limited steps usher a new subprime era. Lenders, investors, and the government all are smarter and have better control over that unlikely development. 

Where I agree with the Post editorial is that the federal financial regulators are making a mistake scaling back and lowering their Private Label Securities (PLS or non-F&F) “required skin in the game” rules, since that’s where the red ink hemorrhage and major problems originated before the 2008 real estate meltdown. (Yes, over $2 Trillion in faulty PLS mortgage bond creation, not by F&F but the big banks and investment banks.) 

This latest regulatory caviling shows what happens when lenders whine, drag their feet, making borrowers suffer, and federal overseers quickly fold their cards and rush to accommodate the banks and mortgage companies. 

Meanwhile at FHFA, Watt creatively is trying to use his regulatory authority to stimulate what lenders should be doing on their own, lending to lower income families, which—if they truly did—would be a man bites dog story. 

Some reactions to Watt’s speech 

Major lenders still expressed “buy back” worries (see link to John Carney’s WSJ article covering that), saying they might not do the new 3% down mortgages.

Guy Cecala’s Inside Mortgage Finance carried this from the MBA meeting, last week, on how some banks might react.  

“The mortgage credit box contracted quickly as the housing market slid toward disaster in 2007, but it’s proving to be much more difficult to stretch it back to what used to be considered normal.”
“The subtitle to this week’s annual convention of the Mortgage Bankers Association could well have been access to credit, an idea that clearly dominated the conversation in Las Vegas. Despite the recent unexpected drop in mortgage interest rates, most observers believe originations in 2015 will track closely to this year’s sluggish level. Part of the problem is relatively weak home-purchase lending.”
“And don’t expect any of the megabanks to move quickly to loosen their underwriting standards to attract new customers. During one of the sessions at the convention, David Steckel of Bank of America said his institution has focused on capturing more of the customers who fit into the company’s credit box rather than making that box bigger.”
“About half of BofA’s mortgage originations in the first half of 2014 went to current bank customers, said Steckel. Still, the new lender-friendly representation and warranty framework unveiled this week by the Federal Housing Finance Agency may make the bank a little more interested in considering expanding its credit box than it was six months ago, Steckel said.”


The (stuffy) Economist weighs in on Watt’s call for lower down payment F&F lending. (Brits should be among the last people lecturing the US.)

Ditto, the NYT.

Vox criticizes new policies.

What Maloni Thinks…. 

Most banks and mortgage banks will reveal themselves and frustrate Watt’s move, slow walking any new lending, citing the "possibility" of buyback requests—until Watt gives them something concrete so they don’t have to “worry” as much! 

If lenders followed the F&F automated underwriting rules--and didn't try screwing mortgagors or investors manipulating the underwriting criteria--they would have very few buyback requests. They get into trouble when they cut corners, hoping that nobody will catch them.

Go forward Mel with your not so new changes, but watch the lenders closely—maybe increase the GSE post purchase review procedures—noting carefully the loan quality lenders ship to F&F. 

More Action on Third Amendment Cases 

There are several “third amendment takings” law suits, working through three separate courts.
I discussed Lamberth’s and Sweeney’s initial (and questionable) decisions last week.

Judge Royce Lamberth ruled to dismiss an Administrative Procedures Act (APA) claim against the government that will be appealed. Judge Margaret Sweeney’s opinion only rejected Fairholme Capital’s hiring Tim Howard to view certain information under the document “discovery’” she granted Fairholme lawyers earlier this year.

In an earlier Iowa federal court action, Judge Ross Walters heard a third case--brought by plaintiffs Continental Western Insurance Company---and like the Lamberth opinion, dealt with the Administrative Procedures Act (APA) as well as the Housing and Economic Recovery Act (HERA). 

As predicted, the government circulated Lamberth’s ruling, urging other courts (Iowa and presumably Sweeney) to embrace that finding.
Fairholme’s law firm, Cooper and Kirk—a party to the Perry suit on which Lamberth ruled--filed a brief with Judge Walters last week in Iowa, in response to the government’s courts’ call to “follow Lamberth.”  It contains many items—see below--likely to be in Cooper’s non-lead plaintiff’s appeal of Lamberth’s original decision, supporting the US government. 

I. The Perry Court’s Boundless Interpretation of Section 4617(f) Is Wrong. ........................4

A. The Net Worth Sweep Exceeds FHFA’s Powers and Functions as

Conservator. .............................................................................................................4

1. As conservator, FHFA has no power to take the Companies’

profits for itself or to give them to its sister federal agency. .......................5

2. As conservator, FHFA must work to preserve and conserve the

Companies’ assets and to place the Companies in a sound and

solvent condition. .......................................................................................10

3. As conservator, FHFA must exercise its independent judgment and

cannot make decisions at Treasury’s direction. .........................................11

4. As conservator, FHFA may not take steps to wind down the


5. As conservator, FHFA may not make arbitrary and capricious


B. HERA’s Jurisdictional Bar Does Not Shield Treasury’s Unlawful

Conduct. .................................................................................................................15

Here is a Value Walk article on this matter, plus a link to the entire Cooper filing.

Also another document link without commentary.

I am a bit shocked these two judicial decisions seem so far off the mark of statutory and legal reality.

Certainly, Lamberth’s which is far more significant than Sweeney’s,  makes even veteran lawyers wonder what the Judge was thinking in ignoring various court precedents and finding “arbitrary and capricious” protection for Treasury which doesn’t exist in law.

The Lamberth ruling will be appealed and much of what Copper and Kirk will say then is reflected in the report (above) sent to Iowa Judge Ross Walters. 

Part of me still is pissed/outraged at how many people—including jurists who should know better—seem inclined to believe the worst concerning Fannie and Freddie, and that no mistreatment or abuse of them, their officials or shareholders is beyond the pale.

All of which supports David Fiderer’s belief that the “F&F Big Lie” (evil and responsible for the 2008 financial meltdown) is so ingrained it may never get washed out of our national consciousness.
Yet a national mortgage market, without Fannie and Freddie and the affordable fixed rate financing they insure, would be an ugly consumer-unfriendly system.  GSE critics never seem to make that critical connection.
When the Administration, in the form of Mel Watt, goes to Las Vegas to tell the Mortgage Banker’s that help is on the way, what principals did they employ to stimulate conventional mortgage finance—Fannie and Freddie? And he didn’t even offer an Obama, “Thank you very much and excuse me for dumping all over you.”

Will Lucas Challenge Jeb for Banking Chair?

Rumor is that Frank Lucas (R-Okla.) may challenge Jeb Hensarling (R-Tex.) for the chairmanship of the House Banking Committee, when the House R’s vote for leadership positions in December.
Hensarling is tight with Speaker John Boehner (R-Ohio), but Lucas, a member of the Committee, is considered a bright and well thought of Member with leadership skills. He’s also a long shot to unseat Hensarling. Here’s a POLITICO story about the possibility. 

SCOOP: HENSARLING FACES COMMITTEE CHALLENGE — POLITICO’s Jake Sherman, Lauren French and John Bresnahan: “Oklahoma Rep. Frank Lucas is considering a challenge to Texas Rep. Jeb Hensarling for the chairmanship of the House Financial Services Committee, in what could be the first marquee power battle in the House this fall. ‘I’ve been approached by several members about their concerns on the direction of the Financial Services Committee and the indication that they would like to have a different way of going about things compared to the last two years,’ Lucas told POLITICO.

“Frustrations with Hensarling are pervasive throughout a huge swath of the House Republican Conference. The Texas Republican is a favorite of some of the conservative right, but has had extreme difficulty producing legislation that could pass the House. He struggled to pass a flood insurance bill, he relented to leadership and passed an extension of [Ex-Im] and has [TRIA] set to expire because of disagreements within the committee. His PATH ACT, which eliminated Fannie Mae and Freddie Mac, never had enough support to make it to the House floor.”

EARLY HANDICAPPING — per a plugged in financial services industry rep: “Can't see any scenario where a Lucas challenge would be successful. First, precedent to allow consecutive chairmanship of different committees would create havoc for Speaker Boehner. Second, The Texas delegation would be adamantly opposed to the move. And, lastly, Lucas' strategy of calling Hensarling soft on CFPB is ludicrous. 

Canadian Terror: One Man’s Opinion 

I was in my car for three hours last Wednesday, listening primarily to CNN radio on Sirius. The CNN news people interviewed several Canadian media types, Members of Parliament, and others, trying to draw them out about the horrendous shooting of a Canadian soldier and later the Parliament attack, which produced the shooter’s death. 

To a person—unlike what I think would have happened if a similar event occurred in DC— the interviewees--unrelated, except for their shared Canadian citizenship--refused to speculate about who the gunman was (pre public identity), his motive, and his connections to other worrisome (Muslim extremist?) events. 

No diatribes against Muslims, ISIL, or Al Queda, just several different variations of, “We don’t know enough yet to guess and until the facts come out….!” 

Kudos for the stoic and thoughtful Canadians! 

What Others Are Saying 

Valuewalk says Lamberth blew it.


Former FDIC chief, Bill Issac, weighs in on F&F investors getting shafted.


Aaron Task on Yahoo business.


FHFA’s IG investigators get to carry weapons reports IMF.  I hope their weapons weren’t air dropped to the FHFA folks. Who knows where they could end up, given the bulky winds over DC, maybe at the ABA or Financial Services Roundtable staging areas as the trade groups import extremist bankers from adjoining states!


Just found a new (for me) Fannie site,, and discovered an informative lead article. 


Turkey and the Kurds 

If you are as confused as I am about what is happening with Turkey, the Kurds, Syria and Iraq, then join the club. Anyone have a “good guys—bad guys” program with distinguishing jersey colors and numbers? 


W Post: Obama’s ISIS Effort “Half-hearted”—Ayup!


The GOP Corner. Those southern R’s.

The Republican Speaker of the Alabama House--who also is the head of the Alabama state GOP--may be a very bad boy, if the criminal charges against him hold up.

Don’t forget to Vote Next Tuesday and, also, support Halloween for the kids (of all ages) in your neighborhood.

Maloni, 10-27-31




Anonymous said...

Hope that you will do a substantial commentary on Clifford Rossi's latest F&F article.
Some one should send it to every congressional office and ask for A reply.
Wake up Homebuilders!

Bill Maloni said...

Thanks Anon for mentioning it and I'll do my best.

I plan to listen in when he does his presentation tomorrow on the Tim Pagliara program (which is available to callers, BTW.

Running out but will try and get up that call in info this evening and maybe post it on a F&F site or two.

I've blog linked two of his recent pieces.

Bill Maloni said...

BTW--Thanks everyone.

Yesterday I had the largest number of daily blog hits since I've been doing this (the number are at the lower left hand side of the blog).

Bill Maloni said...

Here is the call in info for Clifford Rossi's presentation at the Pagliara conference, tomorrow (Wednesday).

WHEN: Wednesday, October 29, 2014; 3:00 PM EDT

DIAL: Toll Free: 866-952-1908; Toll: 785-424-1827
Conference ID: IU

NOTE: Please RSVP to

Mr fid l sticks said...

Bill wondering if you are aware of this?

Bill Maloni said...

Mr. Sticks,

Yes I am (It was sent to me last night), but thank you for sharing this with the blog.

I've sent two emails containing my candid opinion to folks who shared it with me, hoping it is a game changer. I don't think it is.

In the main, these are D leaning organizations and they help, if this Admin cares about public support for using their explicit regulatory authority to start unwinding parts of F&F "conservatorship" or even just to loosening the F&F credit standards in hopes that lenders deliver under the initiative.

On that score, I noted in this blog how lenders may slow walk their response to try and get more favorable treatment from the Admin on their issues (buyback demands).

However, this alliance/collation and their positions likely won't change too many minds among the GOP, whose numbers--after next week's elections--likely will grow.

I'd rather have them then not have them, but whether it is F&F, immigration reform, corporate tax reform, abortion rights, etc. etc., these groups are limited in what they can produce.

As with the "Third Amendment," it was Treasury/WH calling the shots, not FHFA, and I believe that will be the situation if and whether the White House gets more aggressive on unwinding some parts of "conservatorship."

I think the President is missing a great opportunity to enhance his legacy--which doesn't contain much domestic success and doesn't have many significant elements beyond Obamacare--by not moving more aggressively on this platform. But, he's disappointed in the past, let's see if the WH continues to nibble at the edges or takes a big bite of this GSE sandwich!

Mr fid l sticks said...

OK and thank you for your insight ....
never a dull moment for sure
Oh and someone ask the potus if he wants chips with that .....

Bill Maloni said...

Yep--Anything that will make this meal more appealing for the President to consume and swallow.

(With apologies to mothers everywhere), "Here Barack, eat all of this and it will help your legacy grow big and strong."

Anonymous said...

Time overdue to develop a strategy to restore a well functioning secondary market with a reformed Freddie and Fannie (or a combination of both).
A few suggestions.
First, a legal/constitutional strategy. This takes forever and is not a viable route for a reformed secondary market
Now, let us focus on a political and policy strategy for accomplishing our objective.
The Howard book and the Rossi articles should help develop a substantial political basis for such reforms. Waking up the participants and beneficiaries of a functioning secondary market is the first step.
The focus of such a coalition should be FHFA policy changes. Forget legislation. Work on the regulator and the WH who can achieve most of the reforms needed to make the markets function effectively.
When the secondary markets are working satisfactorily, then we should consider legislative reforms, probably several years from now.
Let's focus on this more limited but more effective approach.