Sunday, March 25, 2007

My first entry

My initial entry, into the world of "blogging," is meant to be a personal periodic commentary—for friends and others--on business and political issues surrounding Fannie Mae and Freddie Mac, the two secondary mortgage market government sponsored enterprises (GSE).

I have worked in financial services and GSE issues for more than 35 years, since 1968: 11 years as a legislative assistant on Capitol Hill; head of congressional liaison at the Federal Home Loan Bank Board; and as a congressional liaison officer for the Federal Reserve Board and its Chairman, Paul Volcker.

In 1983, I left the Fed to go to work for Fannie Mae, as a lobbyist and later was named senior vice president of its Government and Industry Relations unit. I was hired under David Maxwell, worked Jim Johnson’s entire tenure, and for Frank Raines. After spending my final year as "adviser" to the corporation, I retired from the company in December, 2004.

I have no business connections, of any kind, with any business, trade association, or other individual or group, in the financial services or mortgage finance communities.

I, exclusively, am just an interested observer, having worked for and against many of the colliding interests in the GSE world.

(From a recent, unpublished article by Bill Maloni.)

Mortgage market observers can expect that the newest round of GSEs hearings will produce the usual GOP fear mongering and half truths.

Before all is said and done, nobody should be surprised if Fannie and Freddie are accused of knowing the whereabouts of Judger Crater, Amelia Earhardt and Jimmy Hoffa, but only after the last one—as Democrat—will have been linked to working in the Fannie accounting department!

Reports of Fannie operatives “pictured on the grassy knoll” also could surface.

Senators and Congressmen will hear about “systemic risk” (the latest of the big GSEs lies), accounting scandals, insufficient capital, mission creep, and more tall tales produced by hearing witnesses and the paid anti-Fannie/Freddie agitators.

These all will be canards, masks—and old ones at that—behind which the anti-GSE crowd hides their real agenda.

Nowhere will Congress hear the real reason why GOP administrations going back to Ronald Regan, in 1983, and Bush I and Bush II, have carried out an anti-Fannie/Freddie Jihad, always supported by the right wing think tanks, conservative media, Fannie/Freddie business opponents, and some in the financial regulatory community (read Federal Reserve).

What won’t be said—by this Administration and its “Amen Chorus”—is the fact that Fannie Mae and Freddie Mac have made the mortgage market too efficient, too open and too available to consumers. This means that--because of the GSEs-- the large commercial banks, which now dominate the primary mortgage market and hope to control the secondary mortgage market, where Congress created Fannie and Freddie exclusively to operate, can’t force their adjustable rate mortgages preferences and uncompetitive pricing, on families seeking mortgage loans.

In the past five years, both companies have made $7 trillion in mortgage investments in virtually every community in the nation. That’s 7000 billion dollars and over 50 million families served. That’s a whole lot of “housing mission,” market efficiency, and happy home owners, which now is at stake.

The large banks and the ideologues, historically, have employed GOP administrations, Senators and Congressmen to wage the anti-GSE campaigns, which banks can’t win in the marketplace. (Not all, in “Lincoln’s party,” have played this game. There have been several free thinking Republican stalwarts, over the years, but too few.)

No matter what the current GSE allegations, “too big, too little capital, risky, mission, etc.” for 25 years the real issue always has been MONEY.

Fannie Mae and Freddie Mac make mortgage financing cheaper and more easily obtainable and they do so by forcing out the fat in the system, which traditionally has meant the GSEs have excised items and processes, from which the lenders have made money at the expense of consumers.

It is hardly an accident that the increasing success of the primary/secondary mortgage market model—which the United States, alone, employs so readily—has produced a near 70% homeownership rate, with the fastest growing elements in that number are minority and lower income families.

These current hearings are about creation of a new GSE regulator and the Congress should make haste and produce a new regulator for Fannie Mae and Freddie Mac.

But, in doing so, there is absolutely no need to change the successful workings of the mortgage market and to wrest from the companies their ability to make day to day business decisions. Decision making by stakeholders, not insufficient HUD regulation, is what has allowed our mortgage finance system to serve so many families, especially those with low and moderate incomes, with fairness (a separate article on the non-Fannie/Freddie subprime market is in the offing).

In constructing a new regulator, Democrats should draw a line in the sand and oppose three harmful GOP suggestions and adjust some existing regulatory discretion.

Should Congress give a statutory “green light” to HUD and OFHEO’s successor to “prior approve” new mortgage products, new market initiatives, new hires, their compensation, etc. etc? That answer is a very emphatic, “No.”

Must Congress give new statutory rights to let HUD or OFHEO’s successor decide when, how and how loans should be securitized and sold or put into the GSE portfolios, The answer, again, is “No.”

Between them, Fannie Mae and Freddie Mac, make hundreds of market calls every day, involving billions of dollars. Is this the kind of stuff, where a federal employee, with no “skin in the game” or real accountability—should make crucial decisions?

It's like asking a shoe salesman to conduct brain surgery.

Congress, remembering that there is a reason why HUD has been called “11 floors of basement,” might ask their staff caseworkers, how timely and effectively HUD responds to their own congressional inquiries, before deciding if these same folks are up to making hyper fast multi-million dollar and billon dollar decisions in the world’s debt and mortgage markets.

If anyone really agrees with this Administration that a gerrymandered crew of federal bureaucrats can replicate the GSEs decision making productivity, I have some Justice Department legal opinions on the Patriot Act for you to read, backed up by some Bush Administration findings of Iraqi weapons of mass destruction!!

Finally, Congress needs to revisit whether the new regulator should be able—without specific congressional approval—to dramatically increase GSE capital. Absent explicit congressional approval, Congress should say “no” to this authority and retract whatever regulatory exists to do this, now.

Given the entire one sided comments from the Administration, the Fed, OFHEO, and the Wall Street Journal (over 40 anti-GSE editorial, in the past few years)—and the fact that most people are afraid to speak up in support of the GSEs or their structure—Congress may be confused about secondary mortgage market risk.

Fannie Mae and Freddie Mac are not “undercapitalized.” (Did anyone else notice how Chairman Bernanke, recently, couched his GSE risk description with “potentially,” not the more damning “actually” or definitively?”)

All GSE debt—no matter how much and who owns it--is backed by home mortgages and mortgage products, from every region in this nation. For the GSE mortgage portfolios to lose significant value, a titanic economic failure—which the world has never experienced, including in the “Great Depression”—would have to critically strike every single community in the nation and for a sustained period.

How many Senators and Congressmen, on the committees of jurisdiction, know that this exactly is the statutory “financial Armageddon” which the GSEs have sufficient capital to survive? And, by law, that fact is attested to, quarterly, by OFHEO.

The two GSEs are the only federally chartered financial institutions which already have in place, under law, a “risk based” capital requirement---a stress test, which both companies surpass—based on a combination of dire financial circumstance happening, simultaneously, and for prolonged periods. The capital they possess (the difference between their assets and liabilities) is their current capital base.

The current regulator, employing his discretion, using the spurious smoke from the “accounting scandals,” has forced both companies to post an additional 30% capital.

He can hide behind his “risks concerns,” all day. But, this “friend of W’s” knows that the additional capital burden slows GSEs efficiencies and adds to the companies’ overhead, something very much desired by the anti-Fannie/Freddie crowd, the Bush Administration and its GOP predecessors.

The Republican game plan is to bury the GSEs under additional cost and regulation. The only real question is are the Democrats handmaidens to this plan or do they, justifiably, crush it?

When it completes work on a new GSE regulator, only a majority doing some very un-Democratic things, turning our nation’s efficient national mortgage finance system upside down and playing footsie with the big banks, would take away Fannie and Freddie management’s discretion, burden them with unneeded costs and capital and—in the process—do major damage to aspiring homeowners.

Saturday, March 24, 2007