Sunday, December 8, 2019

Are the FHFA newbies birds of a negative feather?

Quack, Quack………

I am going to repeat something I did before, lead with a “news” story from Inside Mortgage Finance, which I suspect most readers didn’t see, to illustrate a point I make below.
Inside Mortgage Finance, Paul Muolo
“IN CASE YOU MISSED IT: The Federal Housing Finance Agency recently added two new members to its cohort of Cato Institute alumnae: Thaya Knight and Lydia Mashburn, who join Director Mark Calabria in the agency’s senior leadership team. Knight comes aboard as senior counsel for policy and regulation. She previously served as counsel to Securities and Exchange Commission chief Hester Peirce. Mashburn joins FHFA as deputy chief of staff. At Cato, she served as managing director of the institute’s Center for Monetary and Financial Alternatives. Prior to that, she was a member of the financial markets working group at the Mercatus Center at George Mason University. George Mason is Calabria’s alma mater.”

 "If it looks like a duck swims like a duck, quacks like a duck, then it probably is a duck."

I’ll fall back on this hackneyed explanation above of abductive reasoning to offer more insight into my opinion of Mark Calabria and his management of the Federal Housing Finance Agency (FHFA), the Fannie/Freddie regulator.
My thumbnail sketch of him—until proven otherwise—is he is a doctrinaire GOP agency head who has consumed the Conservative Kool-Aid and is uncomfortable, possibly opposed, to his primary mission (as per President Trump and Treasury Secretary Mnuchin, who are pretty tough foes to cross) to free the GSEs from “Conservatorship” and return them to privately-owned institutions, providing their superior securitization skills to investors in the nation’s secondary mortgage market.
To me, Calabria’s current slow-walking of all things-GSE reflects that. This shouldn’t be a three or four-year process, as he’s suggested.
There’s a big part of him which just appears reluctant to untether the GSEs, cutting their current chains. But it may just be inevitable because too many of his bosses predicted it and--finally--recent court decisions. (Thanks, Judge Sweeney.)
To people who understand the market dynamics, Fannie’s and Freddie’s mortgage market presence, efficiency, and underwriting guidelines support what primary market lenders—banks, mortgage bankers, non-bank lenders, credit unions, etc. (all the facilities where consumers go to get mortgages)—do best.
In my view, however--and less understood by many--is the GSEs' greatest value. In setting underwriting guidelines, i.e. “the rules of the mortgage road,” Fannie and Freddie act as a governor/decider, temptation restrainer on primary market lenders' temptation to go rogue and reintroduce very risky subprime loans through the system, which yield more money to that lender. 
Those loans largely are banned from GSE trading, but still can be originated if that lender is willing to keep those subprime loans on its own books and themselves assume the credit and interest rate risk those loans contain or sell them to a lesser angel.
Ironically, although few will admit it, I believe many bank execs  in operational roles support the GSEs for their competence, efficiency, and ability to generate revenue for commercial bank mortgage banking purposes.
I don’t know who else MC has hired to FHFA, but clearly, he is unhappy with resident folks he inherited and is seeking different skills.
At FHFA and for the Director, what are these new folks, Knight and Mashburn, going to do? Will MC elevate them to senior FHFA players? Is he going to bring in more, with similar backgrounds? Will deadwood FHFA incumbents—as some should-- feel the heat and get the message, “You are not giving the Boss what he wants, prepare to clean out your desks?” (I could offer MC some names of people he might “retired!”)
But my question is, if we are to ignore his management stumbles, his delaying tactics, and his efforts to stretch out the first GSE IPO (it would be nice if he postulated his required capital) and the fact that he hasn’t even brought in his touted Wall Street consultants—what jobs are these new folks (whom I don't know) going to perform??
Will they be in charge of throwing CATO and Mercaitus sand in the efficient GSE gears or the equivalent, which is where I think the Director would like to go?
Their backgrounds, Cato, Mercatus (founded by former SBC chair Phil Gramm and his wife Wendy, herself a conservative economist), etc., both are institutions which historically have displayed major animus and strong opposition to the concept of GSEs and certainly to Fannie and Freddie specifically. That doesn’t give me hope they new guys will be GSE-positive contributors.
Are they just hired ideological guns brought in to creatively scuttle future GSE operations and success?
If those new folks are to play some role in an evolving Fannie and Freddie, do either support the GSEs affordable housing mission, are they sensitive to the problems of minority mortgagors; do they believe that active GSE involvement means more homeowners and more jobs for those employed in affiliated industries, which is not usually the ken of conservatives??
There are a lot of ideological ducks walking around FHFA. Has that flight just grown?
It never hurts to read what smart GSE lawyers have said
Here is an excellent brief by GSE plaintiffs’ attorneys - submitted to SCOTUS--in response to the government’s false/misleading GSE narratives.

Judge Margaret Sweeney

Not ignoring Judge Sweeney's Friday decision, but, since I am "NAFL," I still am trying to figure out the parts and pieces; I will cover that in my next blog.

Maloni, 12-9-2019