Tuesday, December 11, 2018

GSE hope and a fear or two......

New Year, New GSE Court Hopes??

I’m on record viewing skeptically the possibility of any positive legal actions that hugely benefit plaintiffs who have been suing the federal government over its mistreatment of Fannie Mae and Freddie Mac and their shareholders.

But, as cynical as I am (my shorthand for that condition is, “the courts read the newspapers, too” means judges are guided by the prevailing—mainly negative—views of the GSEs), others believe that the late January 2019 Fifth Circuit’s “en banc” review of the Collins case, as originally decided by Judge Royce Lamberth, offers new hope.

Technically, that’s true, but not surprisingly, a hearing date is nice but still unknown is what “en banc” mean in this case, since it won’t be the entire group of judges on the Fifth Circuit and might be only those few who are available that day and do not have other cases or conflicts. (Hell of a way to run a railroad, your honors!)

But, what worries me most is that I have not heard—from any of the several GSE hearing judges/justices—a full-throated rebuttal of the original Judge Lambert decision, which found that the federal government can do anything it wants to the GSEs and their shareholders, no matter how bizarre or out of sync with the statutory language of the Housing and Economic Recovery Act of 2008 or HERA.

Indeed, most of the presiding judges have been like sheep consuming Lamberth grass and pasture plants, not questioning the absurdity embedded in HERA and how the regulatory mandate to “preserve and protect GSE assets” excuses expropriation of GSE earnings in perpetuity, now totaling $280 Billion dollars.

Until that happens, I’ll fall back on my opinion that the best hope for the GSEs is a Trump Admin regulatory fix from the fertile mind of Treasury Secretary Steve Mnuchin.

If Mnuchin leaves to go back to NYC or moves elsewhere in the Admin (some recent rumors), his successor will pick up those cudgels.

Mnuchin/Treasury has some skin in the game, namely how best can he squeeze the most out of the federal government’s current 79.9% Fannie and Freddie ownership, without killing the two golden geese or angering the House D’s and their growing low income housing allies, who see the GSEs as they once were, balancing the homeownership scales and making owning a home more available and affordable for those who want that piece of the American dream and are creditworthy.

Mark Calabria to succeed Mel Watt???


Garden variety conservative, whose name has been around for months; his anti-GSE, pro-bank priorities are well known. He might want to check the US history for the dark episodes of relying on depository institutions, exclusively, for housing finance.

That hasn’t gone well and the pre-2008 private label security (PLS) bank follies suggest the risk still is there, especially with Treasury and Fed soft on bank regulation.
If nominated, likely Calabria will get necessary GOP votes in the Senate, with lots of phony accolades about his skills and experience, but….

My view of the GSE world inside the Beltway is the red chips all rest in the Treasury Secretary’s office, which holds 79.9 % ownership of the GSEs.

If Calabria is bent on being GSE-hostile, he would be wise not screw around, tampering with Treasury possible $100 Billion plus return-to-the-government cash haul, embedded in the freeing Fannie and Freddie and allowing them to return to private ownership.

Caution economist Mark Calabria, 79.9 % of nothing is….nothing.

In addition, unlike in the past eight years, if Calabria is in charge and engages in GSE-belligerent FHFA action, he will earn major institutional and personal pushback in the House, including House D’s squeezing FHFA’s budget and otherwise making his life tough.

The surprise will be if Calabria doesn’t run to form and instead looks to improve the current GSE situation and not be an obstructionist. (Of course, I believe in UFOs.)

Ennui: A vignette from my GSE past, the way things were

About two weeks ago, I noticed the FHFA approved a new (higher) mortgage ceiling for the variety of single and multifamily units the GSEs finance/securitize, effective January 1 of the coming year.

The new ceiling allows lenders to employ now for GSE loans delivered to Fannie and Freddie post Jan. 1.
The market and industry media response was ho hum, which pre-2004 never was the situation.

The mechanics for adjustment back then still may be the same.

In essence, FHFA (OFHEO in my time) every September would survey 1000 mortgage lenders (banks, thrifts, mortgage companies, credit unions) from across the country to determine the size GSE mortgage they were originating—relative to the previous year’s data—and then index that  percentage increase (it seldom went down) to the previous year’s base number, making it effective for loans delivered in January of the coming year, allowing the higher balance loans to be originated but briefly held until the calendar year switched.

However, a long time thrift industry lobbyist who went from trade association to law firm, to individual institutions (mostly in California)--who admitted to me personal jealousy over all things Fannie and Freddie—every year would initiate political  battles on the Hill, claiming that this study over which the GSEs had no control, was eating in to “private lender” markets.

The guy would twist the annual agency survey, established in statute, numbers—which invariable produced the same continuing result giving the GSEs access to 90% of all loans under written but only 75% of the dollar volume, meaning the higher value loans were beyond the GSEs ability to buy/securitize them, and therefore exclusive available to the interests he represented to finance them with no GSE competition.

That separation was known as the “conforming/non-conforming loan limit,” meaning “conforming to GSE ability to acquire or not available to F&F and exclusively the province of non-GSEs lenders. (Psst, that another way the federal government subsidizes the banks through keeping Fannie and Freddie—and their efficiency and lower borrowing--costs away from certain borrowers.)

He was persistent and every year, he played the same tune and it went on for as long as people paid him to make that hoary and ultimately losing case. But, invariably he reached someone on the Hill to challenge the new number the issue, for which our response was easy.

“Congressman, the GSEs don’t control the survey, the lenders interviewed, or the data reported. By law, we just apply the new findings and move forward.”

And every year, Fannie got the Realtors, Homebuilders, and even (then) the Mortgage Bankers to speak to those same congressional sources, because the survey results meant more opportunities for consumers and the trade associations' dues paying members.

Ergo, when FHFA issued the new numbers a fortnight ago, there were CRICKETS, NADA. There was no noise from anyone, not even a murmur. But the guy—whom I always liked—still is alive.

I wonder if today he gets fire in the belly, when his old warhorse snorts in the barn, and those higher annual GSE mortgage ceilings figures come out? (Once this blog is published, I expect to hear from that guy and share some “Remember when” stories.)

Maloni, 12-11-2018