I stumbled over the term “staycation” this weekend, referring to those people who chose to stay home with families, because of the cost of driving and the other headaches of Memorial Day travel.
Holidays along with home and family always blended together for me, long before gasoline went to $4 a gallon. With that thought in mind, I decided to resurrect a blog which I failed to publish originally because of a computer breakdown. The blog was meant for publication last Monday, May 19, a day before the Senate Banking Committee’s Tuesday GSE markup. With Memorial Day’s theme of honoring our war dead and subtler themes of home and family, I’ve decided to go with what I would have put out a week ago, which--in part--laments what I anticipated (accurately) would happen at that mark up and why I thought it could hurt housing aspirations for those who don’t yet own their own homes.
Note that neither company has truly complained about the Senate Committee bill, in the manner I have, nor have investors chosen to madly sell off their GSE stocks, based on the legislation’s ugly implications, although both stocks have fallen since last week.
Since my blog is more opinion and less newsy and my opinions haven’t changed, I have no problem publishing it post facto. I have one lingering doubt about the Senate work, which I will save for future blogs should my analysis of this proposed legislation be wrong and it becomes a major GSE “positive.”
WRM 5-27-2008
Can Batman survive the canny machinations of the Joker? Will Lex Luther con Superman into wearing a kryptonite necklace? Can Indiana Jones find the skull before the forces of evil vanquish him? Will the GSEs, this week, survive the latest GOP legislative attacks which have been reported in the popular media??
None of those Hollywood good guys seem ever to suffer in the end, but the betting is off on whether the Bush Administration can whack Fannie Mae and Freddie Mac and restructure the residential mortgage market, especially now since the Bushies have some active help from Senate and House Democrats, marching arm and arm with Senator Richard Shelby (R-Ala.) and his big banks allies.
Are Risks to the GSE For Real?
Is the risk to Fannie and Freddie hyperbole and overstated, like those facing Batman and Indiana, or is it legitimate?
If the nattering nabobs can be believed, it’s for real!
The GSEs hoped tomorrow’s Senate’s GSE consideration would produce nothing worse than the House passed bill. But it looks now like far more damage is looming and they might come out of the Senate—where there once was a coterie of GSE allies--looking like one of those Christmas trees on which people stick holiday wishes for needy children
But these wishes all represent new congressional mortgage market mandates, added GSE operational difficulties and new costs.
Bad Things for the GSEs in a Senate Bill?
The scuttlebutt now is that the Congress (some combination of House and Senate D’s and Shelby) wants the companies to do even more mission work, but at the same time seems bent on be taking away their managerial options, requiring greater capital, asking them to bail out the FHA and, oh, “put some more money into affordable rental housing,” the latter of which the GSEs will have no underwriting or managerial control.
In effect, these combined actions would deprive the GSEs of necessary market tools, needed revenue, and also drive up their business costs.
If the D’s go ahead and make these GSEs changes to appease the three headed Shelby/Administration/Big Banks “monster,” then some prominent Democrat should own up and admit that the two companies will need to increase costs across the board to pay for everything, not the least of which is the regulatory interference, that now will be mandated in statute.
Pretending that nothing will change and that the mortgage finance system will be better, cheaper, and more transparent under this scheme would be disingenuous. But seldom does anyone—certainly not Senators or Congressmen--ever consider the consequence of weaving everyone’s pet project into legislation or “adding a little legislative thing here, putting something over there, and a adding touch there, and……” Someone will figure it all out!
The GSEs Made the Primary Mortgage Market Work for Consumers
About 15 years ago—when the GSEs current regulator was created--Congress acknowledged its own failure to force the nation’s primary mortgage market lenders (commercial banks, savings and loans, independent mortgage companies, and credit unions) to finance affordable housing for low income families by requiring Fannie Mae and Freddie Mac to assume the task and invest half or more of their annual business in such loans. Congress’ best effort until that point was the toothless Community Reinvestment Act, which had great PR value for banks—complaining about federal interference—but helped very few low income families get homes.
The GSEs in turn leaned on the recalcitrant primary mortgage lenders, using market incentives and muscle, and encouraged them to make more loans to the desired families, loans which Fannie and Freddie then bought or securitized removing most of the lenders’ financial risks.
Until “subprime” shook the Congress and the mortgage finance system, that model worked fabulously because the GSEs were free to impose Congress’ will and priorities on the broader primary market and, as a result, the number of homeowners in the nation grew, especially among lower income and minority families. Mortgages became standardized as they were packaged and sold as securities. Consumer prices for mortgage finance generally were kept down, innovations came regularly (often forced on the reluctant primary market lenders), and things seemed to be fine, unless you were an anti-GSE ideologue (and they existed in droves).
Maybe Congress should look again at how the GSEs generate capital. “Capital,” the unencumbered cash which can be utilized for any corporate emergency—and the stuff of which everyone says Fannie and Freddie need more--usually is a product of earnings. When a company generates positive earnings, whatever isn’t spent each year on operational overhead or paid to shareholders as dividends generally goes to a company’s capital account to protect against future losses.
If GSE earnings get further directed to FHA bailouts, state housing finance agency funds, more set asides for loans put on their books, and who knows what else, what will the GSEs use to cover their new capital costs, burdens, mission changes and the rest of Dick Shelby’s Christmas wishes?
Bad Chickens Coming Home
If the news stories are accurate, Fannie and Freddie will come out of this Senate GSE legislative exercise more heavily controlled by their new regulator, with less managerial ability to chose and bring new products to market, greater capital charges for what loans they can finance, regulatory control to set GSE capital at any number for any reason, paying out of profits for a low income affordable housing fund--controlled) by non-profits--and, following last week, backstopping the FHA historically less than efficient pursuits of new business activities.
Wow! Is this every ugly chicken coming home to roost that the GSEs spooked for the past 20 years?
The finance-the-FHA-losses “gem” reportedly is the contribution of Senator Shelby (R-Ala.), who claims this mechanism will prevent the “American taxpayer” from sharing in FHA losses. (Psst, blogger to the senior Senator from Alabama, Fannie and Freddie pay some pretty hefty federal taxes, but why let that fact ruin your headline?)
Let’s review the Federal Housing Administration plan. First, Congress wants to turn the FHA, a HUD department which never has been bathed in glory or efficiency, into Fannie’s and Freddie’s direct competitor, letting all three finance $700,000 mortgages? (It must be noted that the FHA often aims its federal agency government subsidy at riskier lower income families, some with credit problems, meaning those unable to meet conventional market standards (non-government guaranteed or insured).
And then, in “Shelby-land,” he wants Fannie and Freddie to pay for FHA’s mistakes. That makes as much sense as Congress telling McDonald’s to price its hamburgers at 50 cents and requiring Burger King to cover Mickey D’s inevitable red ink. Even the non-GSE friendly Washington Post cast a skeptical editorial eye at the equity of Shelby’s financing mechanism.
FHA Losses and Higher Costs
When the FHA losses occur—and, with due respect to Daniel Day Lewis, there will be FHA losses—wouldn’t it be more equitable to ask the 50 or 100 largest FHA users to pay a fee to cover any red ink, since it is those lenders, acting as FHA’s agents to insure mortgages on behalf of the government, whose mistakes will produce the red ink?.
FHA doesn’t have any field staff. Private lenders use FHA guarantees to underwrite and approve borrowers, with the FHA on the hook. If any errors result in FHA insurance losses, it would likely be because some lender made a mistake making them directly or indirectly responsible for any FHA financial problems?
Why should Fannie and Freddie be held financially liable???
If Congress persists and this giant GSE crap sandwich becomes law, will the D’s accept responsibility for higher mortgage costs since they will have provided the R’s with the votes and given the pen Shelby to author his anti-GSE venom??
I could be wrong in my prediction about what might happen to the GSEs if all of the bad ideas which have been discussed actually wind up in a GSE/Housing legislation wagon train sent to the President, but I doubt it.
Despite what Congress thinks it knows, it seems to have forgotten that for more than 30 years Fannie and Freddie kept down systemic mortgage costs, standardized mortgage products, and introduced operational efficiencies--which the market elements abhorred and fought, but for which the GSEs pressed--and aided millions of lower income families to become homeowners.
Bath Water Removal
Congress should get over its subprime angst—congressional hearings showed the GSEs largely blameless—help those mortgagors stuck with bad loans, but forget about destabilizing Fannie Mae and Freddie Mac. Bath water and baby, Democrats, remember?
If the Congress wants the GSEs to walk another housing mission mile, it should embrace Fannie Mae and Freddie Mac not “kneecap them” first.
Congress can’t possibly believe that the commercial banking community will take up the GSEs market slack. Didn’t the banks show their colors when the subprime mess hit the mortgage market and the virtually all of them, including the biggest, headed for the sidelines, where some still hide?
What are Senator Chris Dodd (D-Ct.), Rep. Barney Frank (D-Mass.) and the other Democrats thinking? Yes, Barney likes Hank Paulson, but what does either Chairman owe George Bush, who will be long gone if this time bomb goes off?
I still am waiting for the first brave Senate Democrat or his House counterpart to say, “I agree with Dick Shelby and President George W. Bush. We need to help those big banks get more competitive, throttle Fannie and Freddie, and make qualifying for home mortgages more difficult and costly. Consumers will love us and it will be our legacy!”
Bad legislation cannot pass, without active Democratic help.
Maloni 5-19-2008
Tuesday, May 27, 2008
Thursday, May 8, 2008
Veto! More Grief for the GOP!!
Veto threats are common in Washington, although this President Bush has seldom made good on his threats. (Maloni to production room, that's "veto" with an "e," not Vito with an "i," which is material for a future blog.)
But, the White House is playing predictable “veto threat games” with the Democrats’ housing bill, intended to help victims of the subprime debacle.
One WH official, Keith Hennessey, says things can be worked out, while the next day the President vows a veto.
Good cop, bad guy. Cajole and threaten.
That is predictable duplicity and manipulation, but I hope someone in the D leadership remembers getting jacked around “on housing” when the subject turns to the same church different pew GSE reform legislation.
Negotiations on several bills, produced either by the Senate Banking or House Financial Services committees, have something in common. They all are related to fixing the mortgage market operationally or helping homebuyers stuck with bad loans. But most of all, they are about how to politically position Democrats and Republicans on these important consumer issues for the coming 2008 elections.
Chairmen Rep. Barney Frank (D-Mass) and Sen. Chris Dodd (D-Ct.) should stay strong and steadfast on their respective housing bills and on the GSE issues, as well. Nowhere are the "Red and Blue party lines" more starkly drawn than on the broad issue of housing and mortgage finance policy.
Regarding a Fannie Mae and Freddie Mac regulatory restructuring bill, which cleared the House but is birthing in the Senate, the Administration and its Hill allies want the same legislators--whom they today threaten--to help them minimize the companies market impact, limit the GSEs portfolio investment activity, and take away their managers’ discretion, in the of process overloading them with excess capital demands.
Neither President Bush nor his Senate shock troops will own up to the fact that the public doesn't want a large commercial bank dominated mortgage market, which naturally would follow this deconstruction of Fannie and Freddie. Nor, I suspect, would a majority of Congress if they understood what happens after all of those anti-GSE pieces are put together.
By sticking to their guns, the D’s can achieve the seldom achievable, i.e. making good policy and doing well politically.
Let the White House and Dick Shelby explain to the American people--now underwriting an Iraq war costing $4 billon a week--why that $2 billion annually to help families burdened with crippling subprime mortgages is unacceptable to President Bush and his Hill Republicans.
(Blogger's note: Congratulations to Andi Hedberg Maloni and Jason Maloni on the birth of their first child, Daryn Kelly Maloni, who checked into Sibley Hospital @9 PM on Tuesday, May 6, weighing 7 pounds and 12 ounces, and having a 21 inch length. Daryn’s grandparents, uncles, aunts, and cousins, can’t wait to spoil, I mean to spend time with her!)
Maloni 5-8-2008
But, the White House is playing predictable “veto threat games” with the Democrats’ housing bill, intended to help victims of the subprime debacle.
One WH official, Keith Hennessey, says things can be worked out, while the next day the President vows a veto.
Good cop, bad guy. Cajole and threaten.
That is predictable duplicity and manipulation, but I hope someone in the D leadership remembers getting jacked around “on housing” when the subject turns to the same church different pew GSE reform legislation.
Negotiations on several bills, produced either by the Senate Banking or House Financial Services committees, have something in common. They all are related to fixing the mortgage market operationally or helping homebuyers stuck with bad loans. But most of all, they are about how to politically position Democrats and Republicans on these important consumer issues for the coming 2008 elections.
Chairmen Rep. Barney Frank (D-Mass) and Sen. Chris Dodd (D-Ct.) should stay strong and steadfast on their respective housing bills and on the GSE issues, as well. Nowhere are the "Red and Blue party lines" more starkly drawn than on the broad issue of housing and mortgage finance policy.
Regarding a Fannie Mae and Freddie Mac regulatory restructuring bill, which cleared the House but is birthing in the Senate, the Administration and its Hill allies want the same legislators--whom they today threaten--to help them minimize the companies market impact, limit the GSEs portfolio investment activity, and take away their managers’ discretion, in the of process overloading them with excess capital demands.
Neither President Bush nor his Senate shock troops will own up to the fact that the public doesn't want a large commercial bank dominated mortgage market, which naturally would follow this deconstruction of Fannie and Freddie. Nor, I suspect, would a majority of Congress if they understood what happens after all of those anti-GSE pieces are put together.
By sticking to their guns, the D’s can achieve the seldom achievable, i.e. making good policy and doing well politically.
Let the White House and Dick Shelby explain to the American people--now underwriting an Iraq war costing $4 billon a week--why that $2 billion annually to help families burdened with crippling subprime mortgages is unacceptable to President Bush and his Hill Republicans.
(Blogger's note: Congratulations to Andi Hedberg Maloni and Jason Maloni on the birth of their first child, Daryn Kelly Maloni, who checked into Sibley Hospital @9 PM on Tuesday, May 6, weighing 7 pounds and 12 ounces, and having a 21 inch length. Daryn’s grandparents, uncles, aunts, and cousins, can’t wait to spoil, I mean to spend time with her!)
Maloni 5-8-2008
Tuesday, May 6, 2008
Senators: Do No Harm!
Pucker Time
If you listen to some in the chattering class, this week in GSE-land will feature a lot of tight sphincters as the companies’ fates could be decided by the congressional Democrats in power and the Bush Administration, which is a supplicant on the issue of dramatically jacking up GSE capital and regulation.
The companies and their allies (they still have allies, don’t they?) are worried about all sorts of horrible things happening to them and none look mission or business helpful.
Fannie Mae and Freddie Mac seem most concerned over the possible Senate resurrection of a provision--overwhelmingly knocked out in the House--that would give a new ugly regulator unbridled authority to set new capital requirements anywhere it chose and to maintain them for any reason under the sun, related or unrelated to GSE events.
In their chamber, House Financial Service Committee members Melissa Bean (D-Ill.) and Randy Neugebauer (R-Tex) led a highly successful floor effort (bipartisan vote of 386-33) to kill this new capital setting authority, for which the Bush Administration still longs.
The GSEs fear that Sen. Richard Shelby (R-Ala.) will raise it anew and/or try and utilize it as a bargaining chip in a grand construct of a multi-provision bill which Committee Chairman Chris Dodd (D-Ct.) and others could fashion.
If the Senate D’s cuddle with the White House and accept the Shelby “nail the GSEs to the wall” demand, the thinking is that House Banking Chairman Barney Frank (D-Mass.)--who initially approved the capital provision, before it was kayoed on the House floor--willingly will accept it “in conference” on behalf of his friend, Treasury Secretary Henry Paulson.
If this proposal ever became law, the GSEs could find themselves in an unprecedented capital and regulatory box. Frank might seek this result despite the fact that his colleagues specifically rejected it by a margin of more than ten to one.
Have the GSEs Been Abandoned?
If any of the GSE fears are real, not just the normal “what ifs” which occur before legislation is marked up, one has to ask why Fannie and Freddie might be forgotten by their Hill allies, those who so long have supported them and so long have watched their constituents benefit from the companies market presence.
The answer could be that the Hill has just OD’d on the GSEs and their issues. Everyone involved easily could find some reason real or imagined to turn a deaf ear to the companies, especially since the Administration, the Wall Street Journal, now the Washington Post, the conservative think tanks, some trades, and the large PAC-heavy commercial banking community, all are singing to the Congress the same “Fix the GSEs” siren song. That alone should alarm somebody! (Of course, there always are those 386 House D’s and R’s who might agree with the GSEs, since—on the day the bill passed the House--they recorded their opposition to what Barney might be asked to accept despite their voted objections!!)
The past eight years of Bush appointees trying to scuttle the very GSE companies they regulate, however, should give Congress some reason to pause. This same era also provides Congress with a glimpse as to why the GSEs always opposed unbridled OFHEO regulatory authority over capital, new products, mortgage investments, etc.
The mortgage giants understandably want Congress—whose constituents most benefits from the GSEs success and their efficiency—to have some word in proposed draconian regulatory moves. But, it’s this capital discretion that the Congress would cede, if the Bush Administration, Shelby, et al prevail.
Unprecedented Authority
No financial regulator in Washington has this authority to set capital and to increase it, for any reason under the sun, and to keep that rate at new levels until he or she ever decides to rescind it. But that’s what the Admin wants for Fannie Mae and Freddie Mac.
Why is this necessary with the GSEs? They haven’t and can’t be blamed for the subprime mess. Quite the contrary. Fannie Mae and Freddie Mac were the only major investors which stayed in the markets, despite the fact that using existing authority, the Office of Financial Housing Enterprise Oversight, (OFHEO), had tacked on a 30% capital hit; in addition to the statutory risk based capital each company has to hold. That’s like the referees forcing your star quarterback to play the game wearing a 20 pound barbell on his throwing arm.
For more consecutive quarters than I can recount, OFHEO also has monthly reiterated that the GSEs have sufficient capital to do their mission work.
And, until OFHEO recently backed off the demand because of the craziness of the mortgage market, Fannie and Freddie still were trying to invest 55% of all of their business in low, moderate and middle income housing finance. Something they have largely done for most of the past 15 years and which no other mortgage investor comes anywhere near matching.
What problems will this new regulator fix that the old one can’t overcome?? Or is it that both chambers are so far along saying that “a new GSE regulator is necessary” that they can’t distinguish between regulatory incompetence and the need to start all over again?
There is a cost to excessive capital and operational interference. Most in Congress can’t fathom what the new capital figures portend or understand how the nation’s traditionally well run and efficient (if you can ignore the subprime excesses) mortgage finance system works or how their actions could injure the very families which sent them to Congress to look out for their interests.
The jihad against Fannie and Freddie, dating to the Reagan presidency, always has been designed to increase the firms’ business costs and stifle the standardization/efficiency they foster. It has been driven by ideological Conservatives, who claim that the GSEs are systemically risky and that the commercial banks and other mortgage investors can do a better job.
Demand for GSE Help is Growing not Shrinking
In recent months, Fannie Mae and Freddie Mac, which traditionally owned or guaranteed 25% of all US mortgages written, now handle 50% or more of that shrinking number— meaning the primary market lenders is using them even more. (The New York Times today reported that the GSEs are buying or securitizing 80% of all loans going into the secondary mortgage market.) Yet OFHEO insists on burdening the two companies with capital requirements and investment and product limitations never seen in the GSEs’ histories.
This is but a shadow of the unconstrained authority that Republicans want the Democrat-controlled Congress to take out of statute and give to a de novo regulator, just as the nation tries to dig its way out of an unprecedented real estate debacle, with no undos, redos, “snapbacks,” or anything that would put a governor on a GSE regulator’s “gone wild” performance.
I can’t understand why the Democrats would do this rationally or politically.
The United States cannot rely on the nation’s large commercial banks to suddenly do what Fannie and Freddie have done and can do. The banks either don’t have the stomach or the charter to do that work, which involves exclusively investing in mortgage finance—not myriad lines of commercial debt—and favoring long term fixed rate financing, which most consumers want but few banks and other lenders favor or promote, especially if they can hustle their customers with adjustable rate loans. The banks can provide some type of mortgage market but nothing as low cost or comprehensive as that which the nation has enjoyed.
The GSEs current degree of market penetration should cause every Senator and Congressman to make sure that he or she understands just how their Fannie/Freddie actions will impact the mortgage market since so many of their constituents will be directly impacted by what the Congress does.
The Democrats in Congress—who must bless this pact, if it is to be sent to the President-- should take a long time to sit down and satisfy themselves that they know how a GSE-limited domestic mortgage market would work, with all of the capital increases and company discretion limitations Shelby et al want for Fannie and Freddie? Who holds the debt and mortgage assets, who gets what money, and what will consumers receive and pay?
If the D’s like what that housing future holds then they should willing to stand up and say, “We Democrats are going to restructure the secondary mortgage market and believe that changes we make are better for consumers than what they have now. Our party agrees with the Bush Administration and will stand behind these changes and deal with any consequences!”
If they don’t like the picture, then they shouldn’t follow Pied Piper Shelby or the Administration.
Solving Problems that May Not Exist
If Congress backtracks (remember the capital authority in question was soundly defeated in the House) and approves this language, I believe that it will have given into a GSE lynch mob and produced a solution in search of a problem.
But, hey, that’s not the Hill’s dilemma. The Congress legislates. Congress may feel that the prices of everything are going up, including food, gasoline, education, health care, so who’s going to notice some price increase or inefficiency in the mortgage markets??
It’s no accident that in the past few weeks given international mortgage problems two European countries have discussed creating their own Fannie and Freddie. The secondary mortgage market model works.
Maybe Congress just should do a 180 degree turn and narrow it’s scope and not create a new GSE regulator, but add significantly to OFHEO’s work force and make sure that the people who toil at the agency are up to the job, don’t have major political agendas, and haven’t already signed up with those who stand to benefit financially if Fannie and Freddie are turned into regulated utilities.
OFHEO, properly managed and overseen, given more resources appropriately deployed, finally might be able to do whatever job the Congress wants done, especially if its ugly partisan teeth are pulled.
Maloni 5-6-2008
If you listen to some in the chattering class, this week in GSE-land will feature a lot of tight sphincters as the companies’ fates could be decided by the congressional Democrats in power and the Bush Administration, which is a supplicant on the issue of dramatically jacking up GSE capital and regulation.
The companies and their allies (they still have allies, don’t they?) are worried about all sorts of horrible things happening to them and none look mission or business helpful.
Fannie Mae and Freddie Mac seem most concerned over the possible Senate resurrection of a provision--overwhelmingly knocked out in the House--that would give a new ugly regulator unbridled authority to set new capital requirements anywhere it chose and to maintain them for any reason under the sun, related or unrelated to GSE events.
In their chamber, House Financial Service Committee members Melissa Bean (D-Ill.) and Randy Neugebauer (R-Tex) led a highly successful floor effort (bipartisan vote of 386-33) to kill this new capital setting authority, for which the Bush Administration still longs.
The GSEs fear that Sen. Richard Shelby (R-Ala.) will raise it anew and/or try and utilize it as a bargaining chip in a grand construct of a multi-provision bill which Committee Chairman Chris Dodd (D-Ct.) and others could fashion.
If the Senate D’s cuddle with the White House and accept the Shelby “nail the GSEs to the wall” demand, the thinking is that House Banking Chairman Barney Frank (D-Mass.)--who initially approved the capital provision, before it was kayoed on the House floor--willingly will accept it “in conference” on behalf of his friend, Treasury Secretary Henry Paulson.
If this proposal ever became law, the GSEs could find themselves in an unprecedented capital and regulatory box. Frank might seek this result despite the fact that his colleagues specifically rejected it by a margin of more than ten to one.
Have the GSEs Been Abandoned?
If any of the GSE fears are real, not just the normal “what ifs” which occur before legislation is marked up, one has to ask why Fannie and Freddie might be forgotten by their Hill allies, those who so long have supported them and so long have watched their constituents benefit from the companies market presence.
The answer could be that the Hill has just OD’d on the GSEs and their issues. Everyone involved easily could find some reason real or imagined to turn a deaf ear to the companies, especially since the Administration, the Wall Street Journal, now the Washington Post, the conservative think tanks, some trades, and the large PAC-heavy commercial banking community, all are singing to the Congress the same “Fix the GSEs” siren song. That alone should alarm somebody! (Of course, there always are those 386 House D’s and R’s who might agree with the GSEs, since—on the day the bill passed the House--they recorded their opposition to what Barney might be asked to accept despite their voted objections!!)
The past eight years of Bush appointees trying to scuttle the very GSE companies they regulate, however, should give Congress some reason to pause. This same era also provides Congress with a glimpse as to why the GSEs always opposed unbridled OFHEO regulatory authority over capital, new products, mortgage investments, etc.
The mortgage giants understandably want Congress—whose constituents most benefits from the GSEs success and their efficiency—to have some word in proposed draconian regulatory moves. But, it’s this capital discretion that the Congress would cede, if the Bush Administration, Shelby, et al prevail.
Unprecedented Authority
No financial regulator in Washington has this authority to set capital and to increase it, for any reason under the sun, and to keep that rate at new levels until he or she ever decides to rescind it. But that’s what the Admin wants for Fannie Mae and Freddie Mac.
Why is this necessary with the GSEs? They haven’t and can’t be blamed for the subprime mess. Quite the contrary. Fannie Mae and Freddie Mac were the only major investors which stayed in the markets, despite the fact that using existing authority, the Office of Financial Housing Enterprise Oversight, (OFHEO), had tacked on a 30% capital hit; in addition to the statutory risk based capital each company has to hold. That’s like the referees forcing your star quarterback to play the game wearing a 20 pound barbell on his throwing arm.
For more consecutive quarters than I can recount, OFHEO also has monthly reiterated that the GSEs have sufficient capital to do their mission work.
And, until OFHEO recently backed off the demand because of the craziness of the mortgage market, Fannie and Freddie still were trying to invest 55% of all of their business in low, moderate and middle income housing finance. Something they have largely done for most of the past 15 years and which no other mortgage investor comes anywhere near matching.
What problems will this new regulator fix that the old one can’t overcome?? Or is it that both chambers are so far along saying that “a new GSE regulator is necessary” that they can’t distinguish between regulatory incompetence and the need to start all over again?
There is a cost to excessive capital and operational interference. Most in Congress can’t fathom what the new capital figures portend or understand how the nation’s traditionally well run and efficient (if you can ignore the subprime excesses) mortgage finance system works or how their actions could injure the very families which sent them to Congress to look out for their interests.
The jihad against Fannie and Freddie, dating to the Reagan presidency, always has been designed to increase the firms’ business costs and stifle the standardization/efficiency they foster. It has been driven by ideological Conservatives, who claim that the GSEs are systemically risky and that the commercial banks and other mortgage investors can do a better job.
Demand for GSE Help is Growing not Shrinking
In recent months, Fannie Mae and Freddie Mac, which traditionally owned or guaranteed 25% of all US mortgages written, now handle 50% or more of that shrinking number— meaning the primary market lenders is using them even more. (The New York Times today reported that the GSEs are buying or securitizing 80% of all loans going into the secondary mortgage market.) Yet OFHEO insists on burdening the two companies with capital requirements and investment and product limitations never seen in the GSEs’ histories.
This is but a shadow of the unconstrained authority that Republicans want the Democrat-controlled Congress to take out of statute and give to a de novo regulator, just as the nation tries to dig its way out of an unprecedented real estate debacle, with no undos, redos, “snapbacks,” or anything that would put a governor on a GSE regulator’s “gone wild” performance.
I can’t understand why the Democrats would do this rationally or politically.
The United States cannot rely on the nation’s large commercial banks to suddenly do what Fannie and Freddie have done and can do. The banks either don’t have the stomach or the charter to do that work, which involves exclusively investing in mortgage finance—not myriad lines of commercial debt—and favoring long term fixed rate financing, which most consumers want but few banks and other lenders favor or promote, especially if they can hustle their customers with adjustable rate loans. The banks can provide some type of mortgage market but nothing as low cost or comprehensive as that which the nation has enjoyed.
The GSEs current degree of market penetration should cause every Senator and Congressman to make sure that he or she understands just how their Fannie/Freddie actions will impact the mortgage market since so many of their constituents will be directly impacted by what the Congress does.
The Democrats in Congress—who must bless this pact, if it is to be sent to the President-- should take a long time to sit down and satisfy themselves that they know how a GSE-limited domestic mortgage market would work, with all of the capital increases and company discretion limitations Shelby et al want for Fannie and Freddie? Who holds the debt and mortgage assets, who gets what money, and what will consumers receive and pay?
If the D’s like what that housing future holds then they should willing to stand up and say, “We Democrats are going to restructure the secondary mortgage market and believe that changes we make are better for consumers than what they have now. Our party agrees with the Bush Administration and will stand behind these changes and deal with any consequences!”
If they don’t like the picture, then they shouldn’t follow Pied Piper Shelby or the Administration.
Solving Problems that May Not Exist
If Congress backtracks (remember the capital authority in question was soundly defeated in the House) and approves this language, I believe that it will have given into a GSE lynch mob and produced a solution in search of a problem.
But, hey, that’s not the Hill’s dilemma. The Congress legislates. Congress may feel that the prices of everything are going up, including food, gasoline, education, health care, so who’s going to notice some price increase or inefficiency in the mortgage markets??
It’s no accident that in the past few weeks given international mortgage problems two European countries have discussed creating their own Fannie and Freddie. The secondary mortgage market model works.
Maybe Congress just should do a 180 degree turn and narrow it’s scope and not create a new GSE regulator, but add significantly to OFHEO’s work force and make sure that the people who toil at the agency are up to the job, don’t have major political agendas, and haven’t already signed up with those who stand to benefit financially if Fannie and Freddie are turned into regulated utilities.
OFHEO, properly managed and overseen, given more resources appropriately deployed, finally might be able to do whatever job the Congress wants done, especially if its ugly partisan teeth are pulled.
Maloni 5-6-2008
Thursday, May 1, 2008
Don't Give In to the Administration
Republican Senators Dick Shelby (Ala.) and Chuck Hagel (Neb.) hope to force Fannie Mae and Freddie Mac to swallow an Administration designed poison pill and then march quietly to the gallows.
The Senators reportedly are backing a provision—which they hope to offer next week at the Banking Committee’s GSE reform markup--that would give a new GSE regulator unlimited authority to set capital requirements at any level for any reason (authority which doesn’t exist for any other federal financial regulator).
Similar Administration-supported language was knocked out in the House by an overwhelming bi-partisan floor vote of 386-33, before the legislation was sent to the Senate.
That's a lot of House clout to ignore! But the anti-Fannie and Freddie crowd and the Bush Administration insist that a new regulator needs that crippling and boundless power.
I would agree with them, but only if what they want to do is hamstring the GSEs, scuttle the efficient US mortgage market, and allow the large commercial banks to dominate the mortgage market.
LET THEM HOLD THEIR BREATH AND…TURN BLUE!!
My advice to the Senate Democrats is, if the Republicans won’t compromise and back off this new “silent death” provision, let the
Hagel has been an intractable GSE-foe, but former Committee Chairman Dick Shelby once was a cautious legislator, listening to both sides and acting moderately on GSEs issues. I’ve been curious why he now seems so punitive regarding Fannie and Freddie?
THAT ISSUE ISN’T AN ISSUE
As I noted last week in my blog, the Office of Financial Housing Enterprise Oversight (OFHEO) whiffed in its efforts to nail former Fannie CEO Frank Raines for an entire list of sins, related to Fannie Mae’s so-called accounting problems.
Think about it, if OFHEO had evidence of real Raines wrong doing, it would have prevailed. But, it didn’t. The Raines win was clear cut. The OFHEO loss was obvious.
That result begs this question—since so many of the current GSE attitudes grew out of the belief imbedded in the OFHEO charges that Fannie officials (and to a lesser extent Freddie) cooked the books to enhance their own incomes--why isn’t the new reality based on the more accurate read that some hubristic Fannie officers tried to integrate a very confusing new accounting principle and they came up short?
Fannie’s small accounting management team and back office shortcomings—both since rectified--didn’t help the company, when it came to implementing the Financial Accounting Standards Board 133 mark-to-market rule. However, there is a difference between law breaking and not employing sufficient corporate resources to understand and properly apply a new mandatory accounting rule.
The complicated FASB rule was one that every major financial trade association challenged in its drafting stages.
Hundreds of financial services companies, subsequently, threw up their hands, admitted errors, and had to re-do their books, because of the same or similar FAS 133 implementation mistakes.
The Senate R’s, who still are playing partisan games, might be more reasonable if they understood that their GSE world view isn’t supported by the facts, just a lot of PR and spin?
AVOID REGULATORY OVERKILL
The Congress should create a new GSE regulator.
OFHEO has a sorry and conflicted record of regulating the GSEs, which is why Congress should approve a new GSE oversight agency. The actions that OFHEO initiated and implemented over the years never would occur at any other federal financial regulator. So, the Hill shouldn’t wonder why the GSEs don’t want to see a new regulator with authority to drop 10 tons of capital nukes on them.
Could you imagine if instead of an extra 30% capital, OFHEO’s Jim Lockhart had the authority to require double or even triple that amount? The doors would have closed on the GSEs and their affordable housing mission within minutes. But, that’s the scheme the Admin and its allies are pushing.
We’ve already seen the large banks sprint from the mortgage market when the subprime mess first hit. If Shelby and Hagel are successful pushing their amendment, what institutions take the place of the GSEs, efficiently providing billions in affordable financing to American families? The banks won’t and can’t be in the mortgage business at all times and in all communities, even if they are paid through the wazoo? Does anyone think HUD or the FHA is the answer?
CAPITAL PRESERVATION CAN'T BE PRIORITY #1
The GSEs may not have bathed themselves in glory, recently, when they said “preserving capital” is a primary consideration. But when you are required to hold far more capital than is necessary—except in the mind of a vile opponent—what do you expect? The companies still are putting up an additional OFHEO-imposed 20% capital on top of the capital required by the statutory risk based capital rule to which they also must abide. Why? Just because OFHEO’s Jim Lockhart says they need it. There is no other reason, unless you want to note that before he left office, Alphonso Jackson endorsed this capital scheme, too.
There is a significant negative cost in market service, market efficiency, and mortgage rates, when excessive regulatory capital is demanded. And, when GSE operations are made costly and inefficient, it’s the big banks and their allies that financially prosper. The consumer always is the loser.
When Paul Volcker, Larry Summers and others called on Administration policy makers to free Fannie and Freddie to assist the mortgage markets, you have to ask yourself “from what constraints?”
It’s the very -OFHEO-imposed additional capital requirements and investment limitations which
WHEN THE R’s CONTROLLED, DID THE D’s WRITE BILLS?
The last time I checked the Republicans were not running Congress, with their blinders and biases. Democrats won both chambers for a reason.
I don’t care how collegial the Senate might be, this lame duck Administration and their backward looking Hill allies should not be shaping this nation’s mortgage finance policy for the “tomorrow.” They should not be allowed to neuter the GSEs by permitting future regulators exclusive authority to set unlimited capital requirements. Current GSE capital requirements are set out in statute, with the regulator having discretion to add a heavy dollop of 30% additional capital.
A fully functioning Fannie and Freddie still are part of the answer to get the residential real market back in operation. Burdened by ridiculous capital demands, they won’t be.
A bad turn in the political road could bring to DC a lot of new GOP faces driving the old policies.
Bush policy makers Gonzales, Rumsfeld, Miers, Bolton, Rove, Libby, Taylor, McNulty, Doan, “Brownie” and many more have resigned for cause, not just “to spend more time with their families.” Those names hardly complete the list of early departures. It has been a sorry gaggle of political appointees gathered here for the past eight years, but nothing in politics say they or their ilk can’t re-emerge.
It certainly would help if the GSEs woke up—maybe driven by their boards?--and worked more cooperatively with their supporters on the Hill. To do that, they would need some “blue mission thinking” and “blue mission people.” Think of it as the reverse “K Street Project” principle.
Both Fannie and Freddie boards of directors should look very carefully at the companies’ operations and personnel. It may be that the company leaders--who brought the GSEs through the accounting ills and books cleanups--are not the same officials required to do the necessary mammoth housing mission work. The priorities and the skill sets may be different. Producing massive amounts of affordable mortgage finance--often for people of color--might not be the right task for wonks, techies, accountants, and people who only can get warm and fuzzy with Lockie.
I have heard former GSE managements accused of a lot of things, but their critics seldom could suggest they paid insufficient attention to their housing mission, a charge that applies too comfortably today?
It’s incumbent upon the Fannie and Freddie boards to forthrightly answer a question reportedly asked by a prominent GSE congressional supporter.
(Paraphrasing.) “If you can’t help us now, when the market needs so much help, why do we even need you?”
Bill Maloni 5-1-2008
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