I am "Two Gun," Hear Me Roar, Ooops!

One issue that came to light, last week, during the House consideration of legislation to create a new regulator for the housing GSEs, was the judgment of Fannie Mae’s and Freddie Mac’s current regulator, the Office of Financial Housing Enterprise Oversight’s, James Lockhart.

That’s important, because Lockhart—either with tacit White House agreement or possibly congressional support—has acted like the new job will be his, if President Bush ever gets to sign GSE regulatory restructuring legislation.

The OFHEO Director’s arrogant and aggrandizing regulatory behavior is well known to the two companies. But, it largely flew under the Capital’s media and political radar, until the House took up the GSE legislation and evidence of Lockhart’s unsuitability surfaced.

Lockhart’s truculence, repeatedly telling the world how he really feels about the GSEs’ business operations and portfolio and what his regulatory ambitions would be, if given the tools, led a House bipartisan to loudly approve (it was a voice vote) the Bean-Negebauer amendment, which altered the Financial Service’s Committee’s bill and narrowed the new regulator’s oversight scope.

(The House plans votes on final passage, possibly today. If that happens, some Member may seek a recorded vote on the B-N amendment.)

Lockhart’s act was the equivalent of spilling his meal all over himself and his agency. From the Bush Administration’s perspective, Lockhart’s behavior weakened the House legislative product.

Why would the Congress want this person to be in charge of the bright, shiny, “independent” GSE regulatory agency, which must oversee Fannie Mae and Freddie Mac, as well as the Federal Home Loan Bank System?

It’s the President’s right to appoint whomever he wants to the job, especially if he is a “friend of W’s,” as recent history has shown. But the Senate has to approve the candidate. In getting it right this time, the Congress should want to have the best and most qualified person leading the new agency.

His public persona suggests that “Two Gun Lockhart” is not the “most qualified person.”

Assuming House passage and the Senate Banking Committee planning additional hearings on GSE legislation, the Senators should consider language that would prohibit the current OFHEO Director from heading the new regulatory agency.

There is ample reason to want some fresh faces in a new oversight regime. The case against Lockhart and his bias already has been made. Moreover, several current OFHEO officials are individuals, who were on the Hill or in the Reagan Administration and worked on the “losing side” in the original 1992 legislative conference.

Following those professional setbacks, some of these individuals managed to get jobs at OFHEO and have tried mightily, but clumsily, to wreak their own form of GSE sabotage.

Those early hires contributed, mightily, to OFHEO’s 10 years of oversight failures, which missed early problems at both Fannie Mae and Freddie Mac. That’s hardly the basis for promotion. These “regulatory children” should be left behind.

Message to Congress: Building a “de novo regulatory structure,” rather than fixing the old one, is sometimes necessary and desirable. But, if “termites” from the old house come along to the new address, the results will be the same.

Maloni 5-22-07

Hoof N' Mouth

It had to happen and thank you, Barney Frank.

“Two Gun Jim Lockhart,” the new GSE sheriff in town, wanted--early on--to draw a distinction between himself and his predecessors, whom he saw as weak and too close to the GSEs, so he talked a lot of tough regulator talk. But, recently, he got called out because he was talking too much about “his” intentions as GSE regulator.

Shortly after he was nominated, Lockhart, who got his new job--in part--because he was a “friend of W’s,” started lambasting the GSEs, their operations, their leadership, and whatever else he could gets his words around. He boasted of his intention to manage Freddie’s and Fannie’s portfolios, when it was unclear whether he had the legal authority.

As justification for his verbosity, Lockhart was quick to cite the Federal Reserve’s “systemic risk” studies and his own agency’s work, re the GSEs’ mortgage portfolio risk. He threw in each company’s recent accounting problems, as well.

But, those issues have been losing cachet, both in fact and as this Administration and many of its appointees have had been exposed for their willingness to step over, beneath, around, and through, the laws of the land.

(When you read the media reports of Andrew Card trying to con a bedridden AG John Ashcroft into violating his oath, remember in which blog you read the possibility that an unhappy Card--or some other senior White House politico---- may have “sicced” the SEC on Fannie Mae, in 2004, when former Fannie Mae officials got too identified with the then surging Kerry campaign.)

This week, in commenting on pending House floor action on his legislation to create a new GSE regulatory bill, House Financial Services Committee Chairman Barney Frank pointed to Lockhart’s public statements and GSE threats as the primary reason why a bipartisan group of House Members plan to support the “Bean-Neugebauer” amendment to Frank’s bill.

The amendment, which the Administration opposes and which Frank will vote against, is sponsored by Financial Services Committee members, Melissa Bean (D-Ill.) and Randy Neugebauer (R-Tex.).

Their proposed change would provide the GSE regulator with interdictory powers similar to those of other federal financial regulators, not the more open-ended authority the White House sought. The two Members would prevent the GSE regulator from using issues outside the ken of the two corporations, as justification for taking regulatory actions against them.

Frank pulled no punches in pointing to Lockhart as the reason why this one feature--in a bill on which the House Chairman cooperated closely with the Administration--could be altered on the floor, despite Frank’s and the Administration opposition.

Not that it requires translation, but Chairman Frank was telling Lockhart that he overplayed his hand and worried both sides of the aisle with his threatening rhetoric.

Whether Bean-Neugebauer passes or not (or the Senate decides to adopt the idea in its GSE draft), Barney Frank called attention to a problem. Jim Lockhart has acted less like a thoughtful regulator and more as de facto Chairman of both companies, which he isn’t and can’t be.

With great self-justification, OFHEO, under Lockhart, has been making decisions for the Fannie and Freddie on issues which, heretofore, had been the exclusive province of management.

Twenty five years of House and Senate floor statements and report language, telling the GSE regulator not to get involved in the ‘day to day’ business decisions of the GSEs, seemingly have been ignored by Lockhart.

Irony of ironies would be if Lockhart’s braggadocio and chutzpah resulted in legislation too weak for the Administration to support.

That would leave OFHEO and Lockhart--with his public record stating what aggressive actions he would initiate against Fannie Mae and Freddie Mac—still facing, not just the unhappy House and Senate authorizing committees, but their appropriations committee counterparts, as well.

In retrospect, I wonder if President Bush ever advised his friend, “Buckaroo. Don’t do like me. Keep that hoof out of your mouth?”

Maloni, 5-17-07

Big Day?

Fannie Mae and Freddie Mac could enjoy a big day, later this week, when the House takes up legislation to create a new Government Sponsored Enterprises (GSE) regulatory structure, which also would oversee the Federal Home Loan Bank System.

The bill, shaped by House Financial Services Committee Chairman Barney Frank (D-Mass.), also features a new “Housing Fund,” to which Fannie Mae and Freddie Mac, annually, would contribute a percentage of their annual earnings to support new construction for very low income families. It is estimated that this fund could produce from $350 million to $500 million, every year.

There is little doubt that the Chairman’s bill will pass.

Most attention, “inside the Beltway” and among the GSE cognoscenti, however, is focused on a bi-partisan floor amendment, which will be offered by committee members Reps. Melissa Bean (D-Ill.) and Rep. Randy Neugebauer (R-Tex.).

Bean-Neugebauer, essentially, would give the new GSE regulator interdiction authority, similar to that of other federal financial regulators. The regulator would be required to focus on safety and soundness issues which could impact the companies, not the more amorphous language, currently in the Committee bill, which would allow the regulator to act against the companies because of problems elsewhere in the financial services system, if the regulator somehow believes that there is a nexus.

It’s been reported that Chairman Frank will vote against the amendment, but doesn’t oppose the new language. That is what smart Chairmen do, when faced with a reasonable amendment, but one which challenges a legislative package--based on a series of mutual compromises--which he crafted with the Administration.

White House spokespeople already have threatened to withdraw Administration support for the bill, if the Bean-Neugebauer amendment succeeds. Most people realize the difference between that statement and a threat to veto.

But, Bean and Neugebauer supposedly have struck a responsive cord, among House members, who seem to feel that the two have a viable solution to a real problem. That view is shared by enough Democrats and Republicans to see the pair successfully move their amendment on the House floor.

From the companies’ perspective and those of their allies, on the Hill and off, the proposed new language makes less onerous some of the provisions, which the Administration, in their anti-Fannie/Freddie zeal, insisted on having in the House bill.

On many policy issues, recently, including: Iraq, the firing of the US Attorneys, immigration, and others, the White House can’t seem to find supportive votes from the GOP rank and file. The Bean-Neugebauer amendment just might be the next one, where the Admin faces a setback.

If that provision passes and the bill gets sent to the Senate, the Bush Administration could face an even tougher crowd, i.e. Senators unwilling to buy into further hamstringing of the GSEs.

By being so politically greedy and insisting on multiple legislative limitations on the GSEs, presumably to help the secondary mortgage market become large commercial bank dominated, the “Bushies” might well over play their hand and wind up with no legislation.

While Treasury Secretary Paulsen has shown willingness to compromise on some matters, the Administration’s anti-GSE “hard core,” and the GOP’s big financial services contributors, haven’t shown much flexibility.

Even if a House vote on Bean-Neugebauer comes up short, the notoriously independent (of the White House) Senate Banking Committee and it’s new Chairman, Sen. Chris Dodd (D-Conn.), could still adopt it or something similar, when the Committee staff gets around to crafting their “Chairman’s mark.”

Passage of the Frank legislation, with Bean-Neugebauer language, or even with a close, but unsuccessful vote, on Bean-Neugebauer, also will represent another major setback for the anti-Fannie/Freddie crowd, their tag along trade association friends and the conservative think tanks and interests, which succor them.

If that happens, I guess we’ll see if it’s true what they say about “payback!”

Your Money's Worth and Foes and Foes

It seems like the anti-GSE crowd is getting worried that its five year campaign to hobble Freddie Mac and Fannie Mac is not going exactly where they wanted it to go.

Not only has Congress not promptly punished the two companies for sins, real and opponent-manufactured, the GSEs were generating some praise on Capitol Hill and elsewhere for their prompt market response to a national subprime problem (for which they bore no major responsibility, but are in a position to ameliorate).

The old FM Watch crowd--under a variety of names--still wants a bill that would let the MI’s, large commercial banks, and various and sundry others, dominate the secondary mortgage market, the way they now control the primary market. It could happen, but I wouldn’t bet my wife's butter and egg money on it.

Investors in the anti-GSE campaign, basically, have gotten psychic and feel good returns for their money, but little else. The millions they threw in, so far, have not delivered crippling legislation. (Did these guys really pay one perennial “GSEphobe” $2 million in 2006, as the press reported, just to throw some mud on Fannie and Freddie?)

When you consider all of that anti-F/F big business lobbying cash, which produced years of GSE vitriol and distortion hurled at the two companies, the GSEs seem to be doing just fine. Their doors are open, their operational systems are being upgraded, their cultures are changing, their personnel are new (which is not necessarily better, just different), and their futures seem brighter, not to mention some decent improvements in their stock prices.

People like to mock the GSEs over their lobbying budgets, expenses which are public, but nobody knows exactly how much has been spent by anti-F/F crowd and their trade groups allies, like the Mortgage Bankers Association, in their fights with Fannie and Freddie.

All in, it could be as much as an accumulated $20-25 million, over the past few years, and possibly higher. But, the GSEs seem to have learned a few things, from all of that grief.

Fannie Mae and Freddie Mac used to heap huge dollars to curry business and support from the MBA. But Fannie and Freddie woke up to the fact—possibly concomitant with the large bank acquisition of most of the MBA membership--that this trade association hasn’t been friendly for years.

Even though the mortgage banker/Fannie and Freddie relationship is symbiotic, the MBA created the phony “bright line” argument, which claimed that the GSEs somehow had crossed the divide, which separates the primary and secondary mortgage markets, justifying their association’s “grave concern” and animus.

Despite the fact that neither of the GSEs ever wanted to originate a mortgage or given evidence of same--and are comfortable being in the secondary market exclusively, where mortgage bankers must sell their loans--the MBA makes it a practice to draft resolution after resolution, bashing the GSE business model and creating task force after task force, to examine the same issues and reach the same hoary conclusions.

My translation of the primary MBA lament is: “Fannie and Freddie had to drag us kicking and screaming into the 21^st century—and make us employ their cost saving technology—which was great for families seeking mortgages, but it reduced our profit margins. We decided that this very pro-consumer crap crossed some bright line.”

The MBA’s members, in the near term (which could become pretty far term), still need the GSEs. Simply, because their parent banks may not want to be mortgage investors and buy their subsidiaries’ mortgage products, especially when there is more money to be made elsewhere.

Its fun watching the MBA try and dance on both sides of the “Admin’s efforts to hamstring the GSEs” saber, when of subject of portfolio limits comes up.

The MBA can’t really afford to totally support the GSEs or they lose “street cred” with the anti-Fannie/Freddie crowd, which happens to include their owners. But, portfolio or purchase limits can’t be good for lenders, which must sell everything they originate.

The last thing a mortgage lender wants is to limit the number of entities to whom it can sell loans and F/F still are the nation’s largest mortgage investors. But, if some hokey mortgage cap is legislatively set, those mortgage companies might find the GSEs always welcoming mortgage purchase activity, closed to them, just when they need it the most.

So, the MBA clunky message to Congress really becomes, “We want you to hurt them, but not too much, because we need them to have a successful business.

I love these chickens coming home to roost and hope the Fannie and Freddie managements never forget how “helpful” (NOT!), the MBA has been in the past few years.

About a “million years ago,” the thrift industry was the major GSE antagonist for other misperceptions. The, the S&Ls accused Fannie and Freddie of “competing with thrifts,” because the two companies boosted the market presence of other lenders, buying loans from, guess who—the mortgage bankers.

More than 200 small thrifts, then broke away from the parent U.S. League--the original large thrift trade association--and formed their own, more Fannie/Freddie friendly, “Secondary Mortgage Market Support Group.” These small guys clearly saw the future of mortgage lending and the vital importance of the GSEs and active use of the secondary mortgage market to transfer mortgage risk.

Some smaller mortgage banking groups--eschewing the MBA-- have formed, over the years, but the exodus from the MBA could and should get serious, if the trade association keeps speaking out of both sides of its mouth.

If that “big chicken” ever came home to roost, the MBA, then, could follow the natural order of things and, itself, become a far less costly subsidiary of the American Bankers Association or the Financial Services Roundtable, etc., saving the parent banks duplicative dues.

For some, that would be sweet justice.

TYPO, 5-2-07

Remind chief blogger: Even after spell checking, check spelling!!

The word "undressed," which appears in today's blog, was meant to be the word "hundreds."

The Helpful GSEs

The Helpful GSEs

A small, but significant, turn of events in the past few weeks seems to have cast the first sunshine on the GSEs in years.

The subprime mortgage problems, largely a result of aggressive brokers and lenders, selling, through Wall Street, “private label” mortgage backed securities—backed with crappy loans--seemingly has underscored the quality of the more traditional Fannie/Freddie services and mortgage products.

About two years ago, Alan Greenspan highlighted concerns about “subprime,” but then not only dropped the ball—with zero follow up--but seemed to lose it completely. Then, when subprime borrowers started missing their payments, because of rate escalation clauses and other whiz bang special features, and began defaulting in serious numbers, the Fed couldn’t put out the fire or the GSEs, since there was too much responsibility for the inaction at 20^th Street and Constitution Avenue, where the central bank resides.

Freddie Mac and Fannie Mae, in that order, have emerged from the subprime dilemma, somewhat, as the good guys and part of the solution. Each has pledged upwards of $20 billion to refinance and restructure as many of these loans as practical, saving families’ homes and also, the Congress, which now doesn’t have to figure out how to fix the mess, since the “private sector” now will take it on.

Kudos go to Dick Syron and Dan Mudd.

A Mortgage Market Without The GSEs is….

It remains to be seen if Congress sees the real mortgage finance system message, in the subprime mess.

A mortgage market, without the Fannie and Freddie governance, is as untamed as a lawless, Old West frontier town. The mortgage market gunslingers and con artists--without a Sheriff present--will take advantage of the people, constantly.

That fact is why, as Congress moves to reregulate both companies, it should be very, very cautious in heeding the word of the GSE business opponents, the Administration, the Fed, and the conservative think tanks and their congressional allies, who want the GSEs out of the “A” market, so the large commercial banks can run roughshod over it.

One other aspect of this market event--which the nation will survive, and which will hurt some of the “bad actors,” but won’t deter all of them--are the others excesses in the subprime and regular “A” markets that cry out for relief and which might benefit from congressional attention and greater GSE business involvement.

Three come to mind, appraisals, title insurance, which is a “toughie,” and mortgage insurance. The Congress easily can deal with the appraisal and mortgage insurance issues, but “title” has too many fat piggies at the trough and its regulation is dispersed beyond the states to the communities.

But, there are better ways and far cheaper ways to provide each--some of which the GSEs can do--if Congress was supportive.

Appraisals, title insurance, and mortgage insurance, all necessary--in one form or other--when mortgages are created, could be provided more cheaply, if the laws and regulations requiring them were updated and open to real competition.

Title Insurance

In no particular order of greed, title insurance—which costs from $500 to $2000 a policy, paid at closing—reflects merely a bunch of lawyers covering each others butts, by telling you that nobody has filed a lien against your property and, that the last lawyer who looked at the same data, didn’t screw up.

Nobody wants to purchase a home which had a hidden lien against it, and jeopardize clear title to what you just saved and scrimped to acquire. So, some title review is necessary. But, this nearly $20 billion a year industry, which has annual claims of less than 5%, bitterly opposes all suggestions of consumer friendly changes. The Government Accounting Office (GAO) just has issued a report on this excess, filled with damning numbers.

Now, when deeds were filed by hand with the county clerks who hand wrote most mortgage purchase details, there could be some justification for this “lawyer’s relief industry” providing a service, albeit far cheaper.

But, today, with growing electronic recordation of deeds and—more importantly—a huge technology driven secondary mortgage market, insuring “clear title” can be done more simply and for something on the order of $50 a policy. This is where the federal government should step in and make title insurance or its equivalent, a federal requirement, subject to federal rules.

The competition and breakthroughs that would greet Congress stepping up here would knock down the price of title insurance to $100, or less.

But, small relief can occur, until the title process escapes the clutches of state and local regulation, where a “you scratch my back, I’ll scratch yours” ethos controls this hugely bountiful process.

(For more on this little darling, see Forbes magazine, “America’s Richest Insurance Racket,” November 13, 2006. which noted one possible Senate Financial Services Committee roadblock to changing this industry.)

Mortgage Insurance

As originally conceived, mortgage insurance was a superb, consumer friendly idea. The policy made up for what money you didn’t have for a down payment.

The industry blossomed with the creation of the modern Fannie Mae, in 1970, when Congress permitted the now “privately owned” mortgage investor to buy conventional loans, i.e. those not insured or guaranteed by the federal government. The idea was simple and sound enough and based on the 1960’s way of doing mortgage finance, i.e. forty years ago, lenders required much larger down payments.

Congress wanted to make sure that Fannie Mae did not finance (buy for portfolio) loans that were too risky. “Risk” was defined as how much equity a borrower had in his or her home. The Congress determined that 20% was the correct number and said that Fannie could buy loans where the mortgagor had put down 20% or—acknowledging that 20% was a pretty big slug of cash for most borrowers—had “mortgage insurance policy.” That borrower paid policy covered the difference between what the borrower put down and what amount represented 20% of the home’s purchase price. The policy was payable to the “mortgage investor” (Fannie Mae), should there be a mortgage default, with the policy covering a piece of the losses.

For many years, the MI made the difference and allowed people of modest means to buy homes through a combination of what they could afford for a down payment and the 20% spelled out in federal law, which became kind of a norm, whether Fannie (and later Freddie) bought the loan or not.

But, as the secondary mortgage market became more efficient and itself required less and less of a down payment, the MI requirement stayed, because the “small” MI industry (6-7 companies, nationwide, at any time) successfully challenged efforts to change it.

While Fannie Mae and Freddie Mac both looked at ways to do away with MI, since it existed only for their protection, it was Freddie—with the generally more aggressive Fannie, staying on the sidelines—which moved to save the consumer that monthly premium, by initially getting its charter changed to allow the company to provide a cheaper form of mortgage insurance, bypassing the MI industry.

Ultimately, the Freddie effort failed, when the MI industry awakened to what had occurred, and managed to get the amendment dropped.

Ironically, that incident led to the formation of the MI facilitated FM Watch group, which became one of the loudest GSE critics, over the years.

The bottom line is that the GSEs easily can figure out ways to insure or self insure their loan acquisitions and mortgage backed securities, saving the mortgage consumer undressed of dollars annually, but the MIs are holding onto their little piece of inefficiency and doing a good job of it.

Appraisals

In theory, an “appraiser” goes out to examine home for sale, when a potential buyer seeks financing and the appraiser, either an employee of the lender or an “independent operator, “offers a judgment if the home, minus and proposed down payment, is worth what the borrower is seeking.

The practice costs the borrower generally $500 or so. That's way too much for way too little.

Suggestions of collusion between appraiser and lenders has been rife for years, with the appraised value of the home often hitting, right on the head, the sales price.

Fannie Mae and Freddie Mac, both, allow lenders to use the companies’ automated underwriting standard and the plethora of local data and values to produce an appraisal estimate. If a “site visit” is necessary to substantiate that figure, a lender could send an employee or contractor out to look at the house and weigh in on the suggested valuation.

Savings of $400 or $500 on an appraisal, savings of $2,000 on title insurance, and one or two years at a deeply reduced MI premium, possibly saving a family $3000 to $5000 over the life of a mortgage insurance policy, could mean the difference between buying or not buying a home for many American families.

As Congress seeks to shape the GSEs to, in turn, shape the large bank dominated primary mortgage market, it should consider these matters.

(Oddlot: Why is it that I think Jim Lockhart’s nose got longer, when he was quoted as saying that he didn’t mind if Gene McQuade succeeded Dick Syron?)