Sun Shines on GSEs Last Week
Frankly, I cannot remember a week which had as many F&F positives as last week provided.
From judicial announcements to surprising congressional affirmations, with some superlative reportage in the middle, it was a week to be savored offering some legitimate hope for a rationale way out of the current legal and political mortgage morass.
I continue to believe a growing number of people recognize the “replace F&F” meme is not the ideal housing finance policy or practical approach to pursue, since the inherent political head banging creates doubt and weighs down the U.S. housing market’s operational success.
More discussion and exposure to the issues—and more importantly the many manufactured but relentlessly repeated mistruths—can only facilitate this needed education.
Specific Good Things
Watt Testifies; Bipartisan Acknowledgements
Mel Watt’s testimony before (R-Tex.) Jeb Hensarling (R-Tex.) and the House Banking Committee kicked off the week of surprises—not that the Director was a “profile in courage” --but political gold was unearthed when Democrats and Republicans in their statements and questions first affirmed F&F have repaid the Treasury almost $40 Billion more than the two received from Uncle Sam in 2008, (the “paid back” construct also crept more into media reports) but the Members expressed their belief that Fannie and Freddie are undercapitalized.
The next step should question why F&F don’t have necessary and desirable capital to protect again future losses or even begin a transition to more full market participation, as envisioned by the 2008 Housing and Economic Recovery Act (HERA).
While some Members used that as a cudgel, IMO, drawing attention to this fact will just bring more exposure of the “Third Amendment sweep,” which takes every penny of F&F earnings for the Treasury.
Hey Mel, See How Dumb I Am
It wasn’t all love and kisses for Mel, but the cause was helped, when senior R’s—Chairman Hensarling, Ed Royce (R-Cal.) and Wayne Garrett (R-NJ.)—inevitably displayed their F&F irritation, ignorance, and mortgage market naivety.
Hensarling, still blaming F&F exclusively for the 2008 troubles, using out of date 2011 information continued to mix apples and oranges and still couldn’t even produce edible fruit salad; small example below.
“ACORN-like,” whoosh there’s an incendiary, possibly racially charged, indictment. You don’t think Hensarling is using a derogatory phrase to put down the FHFA rental housing funds and families who need them, do you?
Nah, that couldn’t be right because Chairman Jeb Hensarling must know—and likely voted for—the appropriations bill which specifically, by—says that Acorn nor any affiliated organization can’t receive federal rental assistance money.
Now that they’ve been “schooled,” you don’t think Jeb and his posse uses the description again, do you, do you, huh?
Ed Royce persisted in suggesting F&F hadn’t paid the government anything. And—in a shot at Watt’s call for funding two rental housing funds--earlier introduced a bill saying F&F earnings only could be used to reduce the deficit.
Garrett ignoring any role in the 2008 meltdown for the grievously underwritten and rated $2.7 trillion PLS subprime issuances by banks and investments banks.
In full partisan throat, Garrett blamed only government policies and suggested Watt’s recent decisions on rental housing funds and 3% mortgages would rekindle the 2008 problems, again.
Despite those obstacles, kudos to those Democrats and Republicans who made the point that F&F can’t possibly build capital when the Treasury takes every penny the two make.
That cold hard fact—along with the efforts of 20 or so plaintiffs in the lawsuits charging Treasury and FHFA with violating the Constitution’s 5th Amendment--will force policy makers and media to pay attention to the illogical impact of the 2012 Treasury sweep decisions.
Judge Sweeney Stiffs the Government
Hallelujah, last week, we also had Judge Margaret Sweeney--finally getting irritated at the government’s failure to follow through on her original “discovery” directive--announce she would not “stay” discovery, as the federal government requested and—this is Maloni’s interpretation, not the Judge’s actual words—told the DoJ lawyers to get off their butts, quit slow- walking the process and playing “hide the pea” regarding plaintiffs lawyers legitimate requests.”
The government contends, among other things, that the documents being sought are super sensitive and could cause major financial and economic damage if revealed. Reportedly Treasury/DoJ/FHFA are stamping the equivalent of “top secret” on many of the materials to keep them away from the plaintiffs.
I will repeat there is nothing in the existing F&F files that could bring down our market or cause the dollar to fall.
Sweeney knows what the government is up to and, I hope, she is upset and offended.
Unlike Administration declarations last year about the super sensitivity of these document, government lawyers likely are hiding politically embarrassing docs which show the US Treasury likely violated HERA, forced FHFA to abandon and cede to Treasury its F&F statutory conservatorship authority. Treasury then conjectured some twisted legal logic for the “sweep,” that allows the government to gobble every penny which Fannie and Freddie earned to the tune of close to $218 Billion.
The Week Gets Better, Times 50
Tim Howard’s paper--which scolded the government for its conservatorship actions as well as “the sweep”--then got amplified about 50 fold when former FDIC official and current Arnold and Porter attorney Michael Krimminger and the Cato Institute’s Mark Calabria, a former Senate staffer, issued a dynamic paper which earned immediate attention suggesting that the “third amendment sweep” was outside the statutory parameters of HERA.
See a link to the paper below.
Too many people saw, read, and heard about it for their work to be ignored or cast aside.
Dessert, Dessert, We Need Sen. Shelby
Senate Banking Committee Chairman Richard Shelby (R-Ala.) provided some major icing on the week’s GSE cake, when he told Bloomberg, as part of a much longer interview, that he hopes to return Fannie and Freddie to the mortgage market, but without their government ties..
The major significance for me—and others—is that the Senate’s most powerful financial services voice did not call for atomizing or disassembling the mortgage giants.
That does not mean he will fly F&F banners in his hearing room or put their decals on his car, but it does suggest that he understands the structural, operational, and political problems contained in the “let do away with them” approach to mortgage finance reform.
Sen. Shelby on F&F (Bloomberg)
The other Sweeney Order…and Me and You
The night before Judge Sweeney ruled that she would not “stay” discovery--which the federal government requested—the Judge issued a separate order reaffirming an earlier decision she put out reminding lawyers for both the government and the plaintiffs not to contact her office (including her clerks or herself) with information about the case.
This recent order was aimed at ex parte communications, those from outside the official hearing process, meaning from civilians with an interest in the case.
I never sent anything to the court—and I don’t think the Judge knows me or my blog--but I certainly have suggested it would be nice if someone made sure that the courts, judges, and clerks involved in the “third amendment” cases understand Tim Howard’s paper, exclusively featured in the blog two weeks ago.
There is no evidence that anyone followed my naïve instructions, but, as someone memorialized in the movie “Ghost Busters,” if they did “That would be bad!”
It could hurt plaintiff’s interests (an action not beneath some of those who would see these cases scuttled).
So, continue to vent your court case opinions with your Congressman/woman or Senators; send letters to the editors of your favorite papers, or to your friends; but don’t contact the courts with your ideas related to these important cases.
Sweeney’s ex parte order.
You and Very Good Guy, Bryndon Fisher
For those of you with an unquenchable desire to share your third amendment insights with engaged lawyers, I provide you Bryndon Fisher—an occasional reader and poster here—and his gracious offer.
Bryndon, currently a lawsuit plaintiff, invites you to send all of your thoughts/ideas to his attorney (see below), working on his piece of the “takings” case.
Schubert Jonckheer & Kolbe, LLP
Three Embarcadero Center, Suite 1650
San Francisco, CA 94111
Thank you, Bryndon.
What Others are Saying
Gretchen Morgenson, in her NYT column, cites some jurists not afraid to engage with big bank skullduggery.
Warren wins on Weiss
“None of these reviews showed any familiarity with the book, or contradicted the extensive data that shows the 2008 financial crisis was caused by the government’s housing policies – and not, as the political Left has asserted, by insufficient regulation of private sector financial firms.”
“There’s no reward in it for them (Republicans in Congress),” says Peter Wallison, conservative author and scholar at the American Enterprise Institute who helped craft a privatization scheme that passed the House Financial Services Committee in the last Congress but was never voted by the full House. He explained a privatization of Fannie and Freddie, which is favored by GOP House leaders, would antagonize many powerful constituencies, like realtors, banks and homeowners, as well as those not generally endeared to the Party, like civil rights and community groups. “Congressional leaders do not want to take the risk; they do not want to incur the risk of all these interest groups,” says Wallison.
GOP leaders are also reluctant to pursue a reform measure that would be seen as bailing out shareholders, according to Wallison. “Congress does not want private investors to make a killing on Fannie and Freddie,” he says.
A final word from David Fiderer
Our friend and colleague, David Fiderer, is a major critic of the AEI’s mortgage research efforts, headed by Peter Wallison and Ed Pinto.
Wallison has relied on Pinto’s “research”—which has been rebutted by several prominent sources—but the AEI and Peter (not to mention Ed) keep pumping out the same detritus.
Fiderer sent me the following when he saw Wallison’s new book, using Ed’s old numbers, and saw Peter’s complaint s(mentioned above).
Pinto/Wallison don't equate apples and oranges; they equate apples (GSEs) with sardines (CDOs). They equate the best performing loan portfolios (F&F) with the absolute worst (PLS), they equate a business model that never faced a liquidity crisis (F&F) with the business model that triggered a global meltdown (PLS).
For starters, everything in the lending business is framed around loan performance; and nobody ever came close to matching the stellar performance of the GSEs. Pinto/Wallison want us to believe that the GSEs, and their affordable housing goals, led the race to the bottom in credit standards, and the private market was compelled to follow on that downward path, till an inevitable financial crisis occurred.
So instead of looking at the GSEs' outstanding overall performance, they pluck out a small sliver of the F&F portfolios, mortgages with 95+% LTVs, and say instead, "By 2000 Fannie and Freddie did away with down payments." They translate risk diversification into something more sinister sounding, so those, "low FICO scores were consistently subsidized by less-risky loans." They refuse to mention that high LTV GSE loans were always enhanced by their private mortgage insurance, so that GSE severity on high LTV loans was better than severity on loans with 60-80% LTVs.
The truth is that most of the credit losses were concentrated in a small 20% segment of the overall market, private label securities. The idea that PLS deals mimicked the GSEs is ridiculous. Fannie and Freddie had huge mortgage portfolios comprised of mostly strong credits and some weaker credits. PLS were small static pools of mortgages that were all substantially similar. Deals were segmented by pools of subprime mortgages, Alt-A mortgages, or jumbo mortgages. There was no way PLS could match the GSEs in risk diversification, which is why the idea that Wall Street felt pushed by the GSEs to take on these higher risk loans makes no sense.
Also, the GSEs purchased only 15% of all PLS issued during 2005-2007, and those were only the most senior, triple-A tranches. Which segues to the issue of subordination.
Despite what Pinto/Wallison want us to believe, there never was any "mortgage meltdown" at the GSEs. But in September 2008 there was a huge meltdown, not in mortgages, but in PLS mortgage-backed securities. The deeply subordinated tranches, the slices that assumed the first losses and had scant margin for error, got wiped out right away. And those subordinated tranches were packed into CDOs, of which about $300 billion were held by AIG, Citigroup, UBS, Merrill, AMBAC and MBIA. Those were the biggest companies that got hammered the hardest in short order. That's what melted down, and caused liquidity crises throughout the system, not mortgages, and especially not GSE mortgages.