Monday, December 15, 2014

Last Blog on 2014(?); Will Be Wordy



Advice to WH and Mel Watt
(I wrote this before Mel Watt  announced his decision, last week, to have F&F fund their two rental housing funds. My counsel makes more sense now.)

A President, hoping to burnish his legacy--thinking his WH advisors misled him about Fannie and Freddie--should issue an executive order, now, allowing the two to retain a sliver/small percentage/scosh of their earned revenue for capital purposes, thus protecting the two from the slightly greater business and political risks they face because of Administration dictates. It also would position F&F well for future productivity. 

I don’t think the 3% down loan (and now the rental program, which has constraints) portends huge GSE risk but GSE foes will spin it that way.

Act to Pre-empt Their Arguments

An executive order letting F&F keep a bit of their revenue for capital purposes would serve two operational monsters, stave off political complaints and still allow the feds to feed the General Fund, as long as F&F stayed profitable.


It would blunt some of the claims F&F have no cash protection against losses and therefore should not conduct any expanded lending.


Of course, GSE opponents seldom if ever the facts right when they argue that F&F might get risky again.


GSE detractors ignore the substantial loan loss reserves (Fannie @$50 billon and Freddie about $22.8 billion) which each has to protect against credit losses and the fact that both have private mortgage insurance (PMI) on many of their loans. 

But that won’t stop antagonists from alleging F&F are too risky, engaging in bad old habits with little capital, and need their discretion minimized and should only finance higher quality credits (families).

Adversaries will point to the pre-2008 disaster, when F&F did not have the same tight operating rules they have now or current limitations on securitizing lower quality mortgages.

They’ll be wrong on several fronts. 


Banshees Jump on 3% Loans & Rental

Some elements of the anti-GSE press—including one prominent Wall Street Journal (WSJ) reporter—weeks ago began warning F&F could stop being profitable in the near future and might have to, again, borrow money from the taxpayer, meaning the US Treasury. 

That put this meme in the water. 

The fear--“OMIGOD they will lose money and again start down that horrible slope to financial perdition, taking the taxpayers with them”--reared its ugly head this week when FHFA Director Mel Watt directed both entities to begin funding two moribund rental housing funds. The rental programs have been on their books for 6 years but never were activated because F&F didn’t generate the necessary income. 

Obviously, Watt believes the GSE penury is over and his rental "call to arms" came just weeks after he told F&F to begin accepting 3% down single family loans. 

The predictable wailing voices rose (See Sen. Bob Corker, R-Tenn. and Rep. Ed Royce, R-Cal., later in the blog) and the GOP threat machine started spewing.

Relax, Congress folks.


I offered my advice to the WH/Watt at the blog’s beginning (which could be unnecessary, if as some people think, i.e., TimHoward717, the Obama Admin is already close to where Maloni would send them). 

There is no reason—absent a mortgagor-crushing return to the bad old pre-2008 days (where the new GOP Congress never would lead us, right?)—that either F&F’s “new” 3% single family lending or two rental housing funds (which could garner some $300 million in annual GSE cash) will lose rather than make F&F money. 

The companies have too many other quality, performing assets on their books and are very closely monitored/regulated. FHFA is not going to preside over aberrant lending which shakes F&F safety and soundness and (growing?) political support. 

Watt’s actions speak to his and the WH’s belief that F&F can do more to help increase homeownership and rental shelter to those who have been denied. 

That’s not to say that F&F’s political and business opponents won’t overreact and bellow threats. I had to laugh when Ed Royce (R-Cal.) came out channeling his best ”Bob Corker” and ranted that F&F haven’t yet paid back anything to the federal government.


That’s the crazy ultra conservative crap we’ll see loads  (appropriate quantifier and measurement) in 2015.
Congressional extremists might also notice there are plenty of savvy and powerful Washington interest groups-- beefed up by the affordable housing/rental groups (community and professional)—which applaud these Watt moves and will vigorously fight political opponents in DC or back home.

Earth to Ed Royce, obviously orbiting outer space near Uranus:

The Hell you say, Ed! No matter how you try to spin and distort, there are about $210 billion F&F provided dollars sitting in the Treasury’s General Fund, about $21 billion more than was infused in them in 2008. That amount grows with each quarter’s positive GSE earnings. It all belongs to “Uncle Sam” and is his to do whatever he wants with it. It doesn’t belong to the woe begotten Fannie and Freddie shareholders, some of whom I’ll bet you represent. Go tell them F&F haven’t repaid anything to the Feds. Before you do, check out the ProPublica report below (and which was linked in my last blog) describing recipients’ repayments of 2008 bailout funds. It crushes your angry statement and makes your argument look like the partisan bullpucky it is.




A Slim Hope, R’s Go With Mel?


If the R’s realize they can’t destroy F/F right now, they can go with the “Mel Watt flow” or revert to form and try to rollback efforts to allow F&F to serve borrowers with wider personal credit variations. Or they might legislatively “Bigfoot” F&F and limit the two to just financing sterling credits and deny lower income families conventional financing.

One reminder for the F&F Detractors.

The business of both shops is guaranteeing the credit risk on billions of dollars in securities, composed of loans which meet the F&F tight underwriting standards. Yes, it’s possible they could lose money but only if—as in 2007-- families started defaulting on those mortgage loans in record numbers. If that happens, it most likely will be on the GOP Congress bad policy making. 

Before House and Senate R caucuses says, “See, I told you so,” they might want to understand that—while denied capital via Administration machinations--both Fannie Mae and Freddie Mac have built up the aforementioned cash loss reserves, based on frequency and severity of historic default, applied to each and every one of those loans and as noted primate mortgage insurance (PMI). 

It bears repeating, hip shooting GSE naysayers should understand that, right now, the Administration is keeping all F&F income not allowing it to become protective capital. But both institutions have loan loss reserve buffers, which operates similar to capital.

I am Rooting for the Tim Howard717 theory


Reader/Consumers of the “not our” Tim Howard 717 blog (I’m one), will note he’s been strident and—at times teasing—about the F&F positives he believes are just on the cusp of reality.

Simply put, 717’s been hinting, that the Obama Administration is going to do some sort of 180 degree shift on the GSEs and slowly loosen up to the point of possibly reducing the “conservatorship,” allowing them to build some capital and even  serve as they did prior to 2004, but with better regulation. 

The 3% down financing and the recent activation of the rental housing funds lean in that direction.

TH717 last week also announced his plan to produce a document to rebut what he believes are the many lies and GSE history distortions. 

Good for him and I hope it’s effective and more broadly acepted than the work of many of us who have been writing the same things, trying to better educate a variety of audiences. 

While 717 mentioned the name of David Fiderer, as a possible joint author, methinks the “Hebrew Hammer” may be hard at work on his own tome and not have time to help TH717 or do much of anything else. 


Dumb, Dumb, Congress
Blame the GOP, but……
Save Some Blame for Dems 

Banks gain in House spending bill; Senate fails to stop them.


Ugly little, often times expensive, policy changes sneak into every appropriations or spending bill. This week’s $1.1 Trillion behemoth to keep the government going to next fiscal year was no exception.

But the blatant House GOP giveaway, once again to the big banks letting them use a limited portion of taxpayer insured dollars (working capital generated by your FDIC insured checking and savings accounts), to buy, sell, trade, deal in financial derivatives, was smarmy.

Third quarter bank profits were up over a similar period in 2013, meaning they are making money (when don’t they?).

Why did the banks need this statutory change, why did the Congress give it to them, why wasn’t there hearings and discussion, why was it done stealthily—although the subject was pushed in the House by three junior Republican Members, so it wasn’t a total surprise—and where were the financial regulators, the Fed, Treasury, Comptroller, and the Federal Deposit Insurance Corporation, saying, “Derivatives are risky; we need to limit their use; the same players have mishandled their use in the past, why give the banks the public’s money to possibly do it, again?”

A few stalwarts stood up, but not enough. 

Bankers, 1, taxpayers, O (again)!

Personal Pledge
If I am wrong and these actions are not an aggressive harbinger of GOP congressional actions in 2015: carrying water for the “haves;” continuing to assail F&F; slashing existing rules to support more for the financially well-heeled and less for those in the bottom 99%; I will apologize to the majority congressional Republicans, cease criticizing them, and writing this blog. 


Repeat Reminder for Newbies and Oldsters


For those wanting banks to replace F&F, don't hold your breath. 

The big banks don't want to run the nation's secondary mortgage market (Fannie's and Freddie's current job) absent being given massive new federal subsidies to go with their existing massive federal subsidies, so why keep discussing changes to what is working, screw up and harshly disrupt our national mortgage finance system (see 2014 CWJC fights)?

Banks and their allies talk about securitizing mortgage loans and selling the mortgage backed bonds to investors. That practice doesn't exist, unless the securities carry Fannie and Freddie guarantees—which, um, require Fannie and Freddie to exist--because nobody will buy a bank guaranteed bond, since the more than $2 Trillion of those failed in the buildup to the 2008 meltdown.

Fannie and Freddie lost money pre-2008 on their mortgage bonds, but the big banks lost three times as much money (later mostly ponied up by taxpayers) when the financial institutions issued their own bonds, so-called private label securities or PLS. (Because it ruins their financial fairy tales, most conservatives never discuss or even recognize PLS failures.)

In contrast, F&F have been tightly regulated since 2008 and have returned more to the Treasury than any of the "bailed out" financial institutions of that era (no matter what Ed Royce says!).

Fannie and Freddie, today, have very high quality loan portfolios, with very low credit issues, and only can "guaranty" credit worthy borrowers. Those are major constructive post-2008 changes and important issues for critics to understand. 


What Others Are Saying

GOP Corner (Corker and Royce) 

Corker Harumphing on Rental Fund Decision


Ed Royce Harumphing on F&F Not Paying Taxpayers


Al-Jazeera on Warren and Weiss

Yves Smith writing in Naked Capitalism


Les Christie in CNN Money 


Ho Hum, Deutsche Bank Accused of US Tax Fraud (another big one caught) 


Economist: Russia’s Wounded Economy 


Ahhhhhh!!! (Jingle Bells, Jingle Bells……) 

NYT—“A Home of One’s Own” 


Nouriel Roubini on 2015 Geo-Political Risks 


Barack Obama Channels Steven Colbert, Hilarious 


Congressional R’s tear roof off Political Spending 


Borowitz in the New Yorker “peeps” Citi’s HQ move. 


David Sims Sees Strong F&F Future


Maloni, 12-15-2014


The blog likely will stay quiet until next year—unless something really dramatic happens--so I want to wish each and every one of you and all of your loved ones a healthy, Happy Chanukah and/or Merry Christmas, and a healthy, bountiful, and successful New Year.


(Rex, Tiegan, Daryn, Rocco, Seaver, and McCoy, Grammy and GPC love you and your parents and uncles! You know who is watching!) 


joseph slechta said...

thanks for all you do, Bill. keep up the good work. I think TH717 is more of a guesser and intense observer than an insider. I hope he/she is right, too.

Bill Maloni said...

Me too, Joe!

Anonymous said...

I am sorry, Bill. But I have to disagree with the approach of a "little revenue" diverted to build capital. There is no such thing as being half pregnant. So here are my proposals to overcome the standoff.

1) A Presidential pardon. This would be inline with your proposal but more comprehensive. President Obama can issue some sort of Presidential pardon due to the fact that Fannie and Freddie -aided by the outstanding work of both Mr. DeMarco and now Mr. Watt- have amended their ways. The pardon will lead to Treasury modifying the terms of the PSPAs while still keeping an interest on taxpayers investment. This is a serious suggestion. The companies are -as of now- on death row. Unless the clause from the 3rd amendment that zeros the companies net worth by 2018 is cancelled there won't be a Fannie and Freddie. Cancelling this will also remove the number one block that prevents retaining earnings. So a pardon from the highest authority is in order.

2) A letter to Congress advising continue work on legislative reform while the companies' books are normalized via Treasury's modifying the PSPAs. All in good business sense -with no need to issue a pardon- to not only protect taxpayers' investment but also to permanently prevent the possibility of another rescue. In this proposal, Congress will still have a say and President Obama could continue to condemn the companies if he so chooses, even though for the safety of everyone involved he will allow the companies to stabilize and remain in some fashion.

Pick your favorite.

Bill Maloni said...

Anon--I think your ideas are more comprehensive and I would endorse those approaches.

The "little bit" of capital suggestion, admittedly, is partly "camel's nose under the tent" and also less dramatic and more gradual.

But, I think we agree on the desired destination.

Anonymous said...


Thanks so much for your blog. I wanted to ask you, given your experience, if you thought Watt was acting unilaterally to expand lending, or did the order quietly come from the Administration, and importantly, if you think Watt consulted Treasury on the action?

Bill Maloni said...

Wow, I wish I knew the answer.

I find it hard to believe that he did anything this major without checking with both the WH and Treasury, since the rental deal takes money right from the General Fund and redirects it elsewhere.

Others won't agree, but if Watt checked with both, it could be grist for the TH717 theory, which I hope is true, but--if it is--would be one of the great stealth domestic policy moves of all time.

Totally unrelated, Mr.FSticks, one of our regular readers just pointed me to Rep. Ed Royce's personal/official website.

He has a lot of angry emails from people calling him out over the F&F comments!

Mr fid l sticks said...

Thanks for another great Blog! ....
If I may ....

U.S. Representative Ed Royce (R-CA) wants you to comment on this statement .....

"Contrary to what Fannie and Freddie apologists claim, the GSEs have yet to repay any of the taxpayer-funded bailout funds they received, which makes today's announcement by the FHFA outrageous. Money coming in from the GSEs should go to the taxpayers instead of a slush fund for ideological housing groups to play around with.”

Please get over there now and tell em what you think and just where the buck stops!!

Bill Maloni said...

Mr. F--

I'll be happy to share with Ed my views (believe it or nota million years ago, when I lobbied him he was a Fannie friend--as one of my former colleagues, who I asked to contribute to one of Ed's campaign events, reminded me after reading Royce's silly statement--of course Ed was in the political minority then and wanted all the friends (and cash) he could get).

It looks like some of his constituents and others may have been assailing Royce, on his own website, for the Congressman's statement.

Mr fid l sticks said...

Oh I'm sorry the "you" in the above statement was directed at your viewing audience not you Mr Maloni my fault I didn't mean to confuse.
It was just a shout out to your peeps to get over there and make some noise!
I was not very clear to whom I was speaking ... so please lemme try again
The rest of you regular readers .... get yer butts over there and give ol Mr Ed hell!!

Anonymous said...

Come on Maloni, time to wake up from your holiday boozing and write another blog! You're our only hope Maloni.

Bill Maloni said...

I don't drink (really), but my new Fit Bit suggests that I am hitting 150% of my sleep target!

Look for first 2015 blog @next Noonday.

Bill Maloni said...

That was supposed to be "next Monday," obviously I still; have trouble typing and spell checking!

Bill Maloni said...

Putting finishing touches on first blog of 2015; look for it Monday.

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