Not the Best of GSE Times, But..
I AM A LITTLE CONFUSED (some of you quickly will agree), although I may turn out—figuratively speaking—to win all the marbles, yet, if the GSEs against significant odds survive as shareholder owned entities?
Last week was horrendous for the GSEs.
Fatal? Not ready to go there, yet, since unlike any place in the policy world, in our nation’s capital it ain’t over until it’s over and “the Fat Lady sings.”
The bad news wasn’t so much the fevered activity of another Corker-Warner GSE reform bill (“introduction next year,” said one of the principals). Rumors about which have been circulating for weeks (as IMF’s Paul Muolo chided me, “I already had written this story” or bragging words to that effect).
For me, what turned into a GSE no good horrible very bad event was when the massive political leopard changed most of his sports, i.e. House Financial Services Committee Chairman Jeb Hensarling announced he was coming off his total/complete/never more opposition to Uncle Sam having a role in the nation’s primary and secondary mortgage markets and now would support some…his conditional caveat…if his congressional colleagues would join him and kill Fannie Mae and Freddie Mac.
Why Jeb and why now?
There were rumors that Jeb—who earlier this year announced he wasn’t seeking re-election in 2018—had gotten an offer from the Mortgage Bankers Association to succeed David Stevens, MBA’s current President and CEO, who announced his plans to retire in mid-year 2018. In addition,
Stevens reported seven figure plus salary could have looked real nice to Jeb ergo the latter’s conversion.
In that audition scenario, Jeb’s action just was him trying out and showing his fealty to the MBA agenda, by supporting everything it supports and opposing the GSEs, which, at bottom, is the MBA’s stance.
It also might have been Hensarling’s realization that his old pro-commercial bank MO was so 1920’s and wouldn’t/couldn’t work in the current era, where overly rich and fat banks won’t take normal mortgage risks unless the federal government stands behind their losses, a new feature Jeb endorsed, too.
Further muddying last week was Senator Bob Corker (R-Tenn.) and his wingman Mark Warner (D-Va.) declaring they had their own "strangle Fannie and Freddie" idea, leaving the GSEs alive in a transition mode I guess to suck out any remaining mortgage market bodily essences, if their sceheme didn't work..
But it was Hensarling whose epiphany spoiled the GSE picnic.
In the past, Jeb’s insistence on no federal government role invariably screwed the legislative pooch and killed any GSE cooperation from the Senate.
With the sudden Hensarling “born again in support of Uncle Sam as the mortgage provider,” the odds have shifted to some crippling GSE legislation happening next year.
It is time like this dramatic Hensarling reversal announcement when I wish I could question, publicly, the principal and challenge his/her mortgage finance rationale, looking for the inconsistencies and the holes in his answers and shouting them to the world.
It’s like Lucifer Morningstar, the TV show “Devil,” asking the weekly bad guys—staring them in the eyes—“What is it you really want?” The perps melt and spill their guts to Lucifer.
In my dream, throw in Rep. French Hill (R-Ark.), a bank toadie who never has changed his spots from when he was an anti-GSE staffie working for Senator John Tower (R-Tex), then Chairman of the Senate Banking Committee.
French last week said he would or did drop in legislation, resembling Corker’s “GSE Jumpstart” expiring law, which puts shackles on the Treasury in its management of Fannie and Freddie. Hill’s action, I surmise, needed Hensarling’s blessing.
Caveats to the Above Scenario
The most important and necessary item, missing from last week’s mortgage polka party--with the House and Senate dancing guests--was a position from the Trump Administration. They didn’t say much about either the Senate idea or the Hensarling transfiguration.
Staying silent for a bit might be good for Treasury Secretary Steve Mnuchin—despite all of the Admin spinning—who suffers from a shaky rep on the Hill (his wife’s antics don’t help him).
A still breathing Fannie and Freddie—the opposite of what Hensarling and Corker would do to them--continues to represent $100 Billion or more fresh revenue for DJT and the Treasury because of the value of the GSE warrants Treasury holds worth 79.9% of the two.
But utilizing it means the two entities stay alive.
Of course, given how they GOP approached a $1.4 Trillion in deficit spending in their new tax bill, maybe that cash doesn’t matter to these folks????
Or, maybe it still does and to the extent that “Nooch” has thought creatively about the GSEs (which I doubt he has time to do, only because of everything else on his plate), he might play for time before committing.
The other GOP consideration is one I’ve stated before—MAJOR POLITICAL RISK.
The voting public is a little unhappy and maybe rebellious with the sole party in power.
Do the Republicans, have the stones to destroy the GSEs in the 2018 election year, no matter how they flatter and praise the big banks—the GOP’s all dominating successor to Fannie and Freddie--plus the inevitable chaotic transition where banks hold all of the mortgage finance cards and the consumers have few if any (remember, the GOP just buried the Consumer Finance Protection Board (CFPB).
What federal agency will stand up to the banks then???
Answer, none of them.
Fannie and Freddie can, did, and do act as governors against bank penitent to cut corners, because the broader secondary mortgage market players, now, require GSE underwriting standards on all originated loans which the bankers, mortgage bankers, and other lenders pay Fannie and Freddie a small fee to guarantee.
If the lenders produce crap, that garbage doesn’t get a GSE securities “wrap,” which right now the national and international mortgage markets desire/require.
GSEs and the courts
While outstanding GSE court cases still exist, I doubt any federal judge wants to be the first one to oppose the original Lamberth finding and go against this Administration.
Federal judges live for their legal decisions to promote them to a higher judicial level and—unless this Administration clearly indicates it wants the GSEs around—don’t look for that court help, anywhere, including at the SCOTUS, "them boys have been trained well."
Where does that leave the GSE supporters, hoping for Senate Democrats to show GSE resolve/understanding; some clever and creative political or media source (Investors Unite, small banks, plus Tim Howard writ large) to keep thundering at Congress why the big banks ---based on their sordid anti-consumer and law breakings pasts, remember the PLS content, not just their brigandry—never should be put in total charge of the mortgage finance chicken coops.
Those financial foxes are not worthy and sooner or later, they’ll go for the jugular and violate any market they control, especially if Jeb, French, Corker and Warner also give them new federal loss protection for the mortgage backed securities.
Just like the ill consequence of huge tax cuts for the rich and not much for the little guy, the public won’t realize the GSEs inherent value until they’re no longer around.
Of course, there’s always hope for Democrat political wins in 2018 and 2020.