Monday, March 23, 2015

There's Basketball and the GSE Follies


GSE March Madness Bracketology


There were the predictably odd, discordant, but always interesting, GSE follies last week. 

Sweet 16 

None more riveting (figuratively) than the verbal  flailing that Rep, Mike Capuano (D-Mass)--sponsor of HR 1036, which would allow F&F to repay the Treasury and move on—delivered to Treasury Secretary Jack Lew when the latter appeared before the HBC on another topic.

It wasn’t quite a Barney Frank-esque hostile witness excoriation, but it came the closest in years to any Democrat kicking the Obama Administration’s ass over its Fannie and Freddie treatment. (Brief exchange below.) 

While I suspect that Capuano respects Lew, he wasn’t buying any of the Admin’s GSE pabulum and tied Sir Jack in not quite Gordian knots, but serious enough that Secretary spoke out of both sides of his mouth (standard Obama F&F fare) and, in essence said, paraphrasing, “We ain’t going to fix F&F, that’s up to the Congress, but we like their revenue, just fine.” 

Capuano did force him to admit the Admin hadn’t proposed any F&F legislation proposal, yet, which Lew tried to obfuscate, claiming the Obama team had worked on the Senate bill last year. 

Psst. Has anyone told the Secretary that bill died--and not in a humane way politically--with some very traditional Democrat constituencies coming out against the bill, not to mention D’s still on the committee? 

Secretary Lew, despite all of the Obama BS about concern for the “middle class,” there was no—repeat no, none, nada, keine, injen, nenhum, nissen (“zilch” in other languages)--mandatory affordable mortgage lending in the bill for which you claim some responsibility.

There was rhetoric but no substance, all happy talk and no walk!

Why do you think those prominent committee Democrats, civil rights and social action groups opposed it? Why did the Realtors and community banks balk at all of the power and revenue you were channeling to the TBTF banks? 

Lew and Capuano exchange: 

Capuano: Since FF went into conservatorship, FF borrowed $187.5bn and have since repaid $225.5bn, a $40bn profit or a 20pc rate of return. Can you tell me what you’ve done with the $40bn that you’ve gotten back beyond what the taxpayers lent?

Lew: It becomes part of government receipts and general funds. As a practical matter, it’s what has helped us to reduce our overall deficit.

Capuano: More receipts is fine, but it’s come into the general fund and we’ve spend it any way we want. That’s not the issue. But that $40bn, that’s only the beginning. What has FF been able to pay down on what they originally borrowed?

Lew: Congressman, I think the idea that they are kind of out of the woods.

Capuano: I didn’t say that. I’m asking you what happened with the money?

Lew: There’s still a federal guarantee behind FF.

Capuano: I understand that, I actually like and appreciate that even though some of my colleagues don’t.

Lew: And the exposure that taxpayers have until there is housing finance reform…

Capuano: Fair enough. What kind of capital reserve have FF been able to build up?

Lew: They have not built up a capital reserve…

Capuano: Because we’re sweeping all the money out and putting it into the General Fund and spending it, am I right?

Lew: Until we move to a system beyond the current one, taxpayers are ultimately responsible and therefore

Capuano: But that’s been the case since the 1930s that the taxpayers have been on the hook and they had a blip and taxpayers stepped in, as we promised we would do for 80 years and now we’ve been paid back. The question I have is, when are we going to stop using this as a piggybank? I know we have to have a debate about reforming FF, but if that’s the case, what’s the Administration’s proposal on how to move forward?

Lew: I think that the important question is how do we move forward on housing finance reform? We have very much wanted to move forward. We think it’s an important priority.

Capuano: Have you submitted a proposal that I haven’t seen?

Lew: Well, we worked closely in the development of proposals, particularly on the Senate side and have been engaged with thinking through with others on how to move forward.

Capuano: But those have not moved forward as we clearly both know.

Lew: I don’t disagree that progress has been slow.

Capuano: If that’s the case, how long are you going to keep Fannie and Freddie hostage? The reason I ask is not about Fannie and Freddie. It’s about homeowners. By holding them hostage, number 1, you’re not allowing FF to capitalize. Number 2, you’re not allowing any funds to be left over for the housing trust fund. Number 3, you’re basically submitting homeowners to an additional tax for the purposes of general revenue which doesn’t sound fair to me. General revenue should be paid by general people.

Lew: I don’t agree with that analysis in terms of the impact on homeowners. I do think that there is a very serious question as long FF are in conservatorship they’re in public exposure.

Capuano: Because you won’t let them out. You won’t let them pay off their debt!

Lew: There is, I think, the need for housing finance reform in order to move beyond.

Capuano: If one of my constituents were to loan me money and not allow me to pay them back, what would you call that? 

He’s the Horse

What’s important to me--and any effort which needs to gain Capitol Hill support--is a self-identified “horse,” someone boldly willing get up, lead, state and re-state the obvious case until people begin to listen. 

Rep, Mike Capuano stood up first, when he introduced H.R. 1036, and he’s stayed vertical, declaring the obvious when he has the opportunity. Pols on both sides of the aisle will begin to listen. 

Readers, keep thanking Rep. Capuano, via his office email, Facebook page, calls and letters. He deserves our support

Almost Sweet 16, but not quite 

Does the Government Communicate With Itself? 

Last week Jack Lew was joined by the Federal Housing Finance Agency’s Office of Inspector General (FHFA IG) –in loose choreography—as they each strummed the same tune in different venues. Both called on the Congress to bite a political bullet and--in the year before most Senators and all Members are up for re-election, plus a little presidential contest—asked the Hill to turn the nation’s residential real estate market upside down and produce some new delivery system, consequences be damned.  

GOP to WH: “Sure, we’ll get right on that for you!”

The White House chose to ignore that the US may have the best one of those, right now, in the core F&F delivery mechanism. 

In its congressional “SOS,” the FHFA IG’s office raised the specter of F&F possibly needing more Treasury cash for their operations, ignoring the fact their bosses just across the street at Treasury and in the White House--with a regulatory stroke--could quickly solve the problem and allow F&F to keep their earnings, especially now they have repaid the $187.5 Billion they were given, plus a $40 Billion taxpayer sweetener on top.

The IG warned that "stakeholders should not presume continued profitability" at the two companies.


Why FHFA’s Fear Mongering Rings Hollow?

Fannie and Freddie have created excellent books of business over the past 7 years; they are selling off their legacy portfolios with creative risk sharing deals; they have major DTAs still on their books, as well as significant loan loss reserves, their current tight regulation limits them from doing anything that is risky or financially untoward, and nobody is trying to end that regulatory arrangement. 

If rates rise, the derivatives both enterprises employed—which reduced last quarter’s profits—will reverse those results.

Also, as a reminder, the President’s other department, the Office of Management and Budget (OMB), earlier this year estimated that F&F will provide somewhere $195 Billion in new revenue to the Treasury over the next 10 years.

Did FHFA’s IG office miss that little report, also called the President’s FY2016 Federal Budget? (See below.) 


Which Administration claim should we consider specious, OMB Director Sean Donovan’s or the FHFA’s IG?

And how about sidebar inconsistencies, if fears are present about earnings and the need to borrow from Uncle, why the FHFA approved new building leases and a separate new construction project for Fannie to move and consolidate its workforce. If F&F are going to run out of money, are those prudent regulatory actions?

Also, isn’t there just a little political disconnect, naiveté, or ignorance in the WH’s and IG’s effort to goad this Congress into screwing the middle class, a Congress, which doesn’t really want to leap into a very boiling mess of icky mortgage reform politics now or any time soon? 

The IG report was fodder to Reuters, CNBC and others and got the agency’s name mentioned, but to what end? 

Come on, FHFA boys and girls, take your scare tactics elsewhere, although I do have a cadre of friends who say every time you raise that issue you draw attention to the unfathomable “PSPA Third Amendment” sweep, which takes every penny F&F earn and puts it into “the fungible pot” of the government general fund.
By all means, pick your poison, do you call greater congressional/media attention to the bolloxed, enigmatic “sweep” or do you just demean yourselves and the Administration politically?  

Judge Sweeney’s “gonna getcha,” if you don’t watch out!


Never Got Out of the First Round of 64 


You can’t make this stuff up, but I admit to putting the worst possible interpretation on certain players' actions.

The good news: 10 US Senators—led by the ubiquitous Mark “30-1” Warner (D-Va.) and Mike Crapo (R-Idaho)--want to make sure that the Treasury doesn’t use F&F earnings to fund other government programs and introduced legislation to that effect. 

But, do these august statesmen fail to understand, no matter the source, any funds which flow to the Treasury (see exchange between Capuano and Lew) are “fungible” and just become government revenue to be used wherever necessary and, in effect, reduce the deficit? 

Possibly, as bad as not knowing/understanding that simple fact, it seems to have escaped the solons if they want the F&F earnings to stay with F&F--and protect against any future financial frailty issues--the Senators should insist the money just remain on the GSE’s books and never go to Treasury. 

Hell, I’d vote for that! 

IMO, the Senators’ best bet is to encourage the Treasury (and the WH) to use its executive authority to end the “sweep,” and leave future earnings with the two enterprises, instead of scooping into the general fund every penny Fannie and Freddie earn.

That would take care of the Senators’ stated problem but it also might keep F&F alive, so they bay at the moon and seek the impossible and tell Treasury not use F&F cash in ill ways.


What Others Are Saying

A closer look at federal subsidies and who gets them.


(When the above article broke, one of my mortgage market friends, observed, wryly, “But Stevens, Parrott and Stegman say the GSE model is the broken one!”



Big Boy Playground?
joshua rosner (@JoshRosner)
@DavidHStevens @MBAMortgage Wow! I just saw you blocked me. You aren't doing much to help your reputation after chickening out on our debate

Another reason, I don’t Tweet.

There appears to be some sort of professional spat between the MBA’s David Stevens and Josh Rosner, Graham, Fisher financial analyst. 

Apparently, they disagree on some matters—including F&F—but the issue du jour is debate challenges from Rosner to Stevens, either in person or on Twitter, which Stevens, according to Rosner and others, is “ducking.”

Tune in next week as we follow the boys as they dare one another to “knock this chip from my shoulder and step over that line.”

Related/unrelated. Josh Rosner’s paper at Fed/Wharton 3-18 conference.

Derivatives, not underlying MBS, was the 2008 problem, claims new book by Howard Hill. 


AIG Investors Get Barely a $1 Billion…


WSJ’s Joe Light, F&F might need cash, IG’s report.


Urban Institute: GSE profit explanations 


B. Swanson in Housing Wire, comments on Jim Parrott’s F&F UI paper.


Only foreign policy comment/link.

Krauthammer on Bibi’s re-election. 


Maloni, 3-23-2015



Matt Hill said...

Thanks Bill,
Yep, it's a little hard trying to teach my kids how to be successful in the world. Politics and high finance have a totally different set of rules. It seems that logic is something to be avoided at all costs. Maybe there is a different realm of logic that they teach for the elite? Whatever it is, they all seem to be on the same page in a book that none of us even know about.

Bill Maloni said...

Matt--As a father of four sons (all employed professionally), and grandfather to six and hopefully more when the younger two guys marry and start families, I am pretty traditional.

It starts with making sure the kids get a strong education, both at school and at home (lots of reading)and love, structure too and plenty of outside activities. Trust me, all of the advice and guidance you give--which you think goes in one ear and out the other--doesn't.

They keep it and only when they are older do you hear or see it repeated.

Nothing comes easy, so encourage them to work hard, take risks, and learn from mistakes (they teach you more than quick wins).

Hang in there and pay attention to them and their friends, just don't overly worry.

When they are away form your orbit, if you've thoughtfully counseled them about what you and "Mom" expect, they produce that more often than not. And, when/if they don't, allow for the fact that's why they call them "kids." Second chances make sense.


Just to hold onto our mortgage theme, I just heard that Rep. Capuano sent out a "Dear Colleague" letter late last week, urging his fellow House Members to co-sponsor HR 1036, so contact your Congressman/woman and ask he/she to look at the bill and consider signing on.

Matt Hill said...

Thanks Bill,
That's excellent advice! I need as many reminders as I can get that they are taking in the guidance. When they are out on their own, you just hope they can put it all together for themselves.

Also, great to hear about Capuano's "Dear Colleague" letter.Hope to be a more patient and optimistic parent when all this is behind us.

Bill Maloni said...

Matt--Nothing going on in the F&F world, including any investments you might have, should impede or overly influence how you parent.

Your kids are the most important think a parent can get straight, everything else is background music.

Try very hard not to miss the school plays, teacher meetings, sporting events, even driving them to same.