Monday, February 22, 2010

DeMarco?

Why is Ed DeMarco still employed as the acting director of the Federal Housing Finance Agency (FHFA), the ostensible federal regulator for Fannie Mae and Freddie Mac?

I note “ostensible,” because DeMarco, like his immediate predecessors, is taking his orders from the Administration in power, but DeMarco is and always has been a Republican. Clank!

He has been a Fannie and Freddie antagonist, from his time at the Bush Treasury. Clank!

Yet, he is opining regularly on GSE policy, allowing those uninformed to write about his pronouncements as if he really has some control and influence.

For the Obamaites, Fannie/Freddie service is considered politically heinous, since they refuse to choose any ex-GSE employee for a job which requires Senate approval. (The one major WH appointee, with a heavy and extensive Fannie history, didn’t need Senate blessing.)

But, isn’t the ying to the yang that Fannie/Freddie bashers should be given the same back of the hand employment considerations?

If working for a GSE disqualifies you, why should hating GSEs qualify you?

DeMarco’s continued employment in this post is just another poor reflection of the Administration and how unprepared it is to use Fannie and Freddie in a more responsible way or to plan for their federal release or atomization. He should be shown the door.

There are others at FHFA who deserve similar treatment, but I suspect that they have burrowed into the infrastructure and probably gotten themselves “civil servant career status,” making them impossible to blow away. However, a properly motivated Administration still could make major personnel changes that would improve the regulatory product.

Why torture the companies with the Mickey Mouse FHFA regulatory team featuring a guy at the top who spent part of his career trying to neuter them?

Last week DeMarco suggested that Fannie and Freddie should cease buying loans for their portfolios.

Institutional investors across the world are cutting back on their fixed income purchases, who is going to buy all of these MBS, unless they are deeply discounted or enhanced by some other part of the federal government? Is this really the time, Mr. DeMarco, to advcoate no GSE portfolio pruchases?

DeMarco then took the dais at the Women in Housing Finance luncheon to sing the praises of the Federal Home Loan Bank System, opining that the system “worked” during the crisis.

It may have and I am happy for my friends who work there or represent the Banks and the institutions and people they helped. However, anybody who understands the Bank System understands the trouble those regional banks face, but I guess Ed wasn’t going to criticize them, since he’s their regulator.

But, there still are plenty of people around town, Mr. DeMarco, who remember you—pre FHFA--as being quite antagonistic toward the Bank System (and Fannie and Freddie). You were a major critic of the Banks when Builders, Realtors, their members and the small business community--to whom they lent money--loved them.

You don’t want to say anything good about Fannie and Freddie—despite the Administration’s reliance on them--because that’s near political suicide, but you are complimentary regarding the Bank System, having been very negative in past years.

Which Mr. DeMarco should we believe, if either?



The Fed Bows Out of the Mortgage Securities Business?


I want to share an interesting observation, which comes from a very smart mortgage finance guy, regarding the Fed’s recent announcement to back out of its mortgage security purchases business and begin selling same.

He wrote:
The book is not closed on the Fed's GSE debt and MBS holdings. The Fed is scheduled to stop purchasing these securities at the end of March. It will then have to start working off its $1.2 trillion in GSE securities. It faces an interesting conflict of interest since its major risk of losses is an increase in interest rates which would reduce the value of the securities (though it could avoid any such losses by holding the securities until they pay off). It presumably does not face credit risk since the GSEs will cover any such losses with backup from the Treasury.

This is a fascinating fact by itself, but the Fed, unlike others, will “make money” on the F&F security sales, only because the Treasury--picking up any GSE red ink--will make the central bank whole.

Hearings to Replace Fannie and Freddie

If anyone on the two Banking Committees or their staffs read this blog, it should begin to open your eyes to the real world of mortgage making and “agency securities,” how they really are being handled by the Fed and Treasury and a world of other matters which I am sure most of you won’t comprehend when it comes your time to “abolish Fannie and Freddie” exercise.

How many of you understand the relationship my colleague notes in describing why a mortgage security portfolio might drop in value when rates go up, not because families default on the pooled loans?

How about “TBA,” the “to be assembled” mortgage pools, where prices for pre- sold mortgage securities set the rates that consumers pay for their home loans, what happens to the TBA when F&F are abolished?


Your biggest task will be to maintain equal access to low and moderate income families, who experience shows will be shut out if nobody in the primary or secondary mortgage markets are given that task by statute. And I don’t mean the completely worthless Community Reinvestment Act, which banks have fought for years and has the same impact as putting a band aid on a major cut to the jugular vein.

Next will be how to maintain the “conventional 30 year fixed rate mortgage,” which will become history unless you create a believable implicit Federal guarantee for them.

I don’t care who offers to originate them. If there is a federal guarantee involved, then the loan isn’t “conventional” or the money private.

I don’t think the American public will have any faith in Wall Street or large commercial bank promises for years to come, following the recent financial debacle. So, as you go through your “abolish” exercises, keep some of these issues in mind, although there are many more which you’re hearing witnesses will reveal.

And, if you are a Democrat, maybe you can answer, “Why is Ed DeMarco still holding that FHFA job?”


Maloni, 2-22-2010











Why is Ed DeMarco still employed as the acting director of the Federal Housing Finance Agency, the ostensible federal regulator for Fannie Mae and Freddie Mac?

I note “ostensible,” because DeMarco, like his immediate predecessors, is taking his orders from the Administration in power, but DeMarco is and always has been a Republican. Clank!

He has been a Fannie and Freddie antagonist, from his time at the Bush Treasury. Clank!

Yet, he is opining regularly on GSE policy, allowing those uninformed to write about his pronouncements as if he really has some control and influence.

To the Obamaites, Fannie/Freddie service is considered politically heinous, since they refuse to choose any ex-GSE employee for a major job which requires Senate approval. (The one major WH appointee, with a heavy and extensive Fannie history, didn’t need Senate blessing.)

But, isn’t the ying to the yang that Fannie/Freddie bashers should be given the same back of the hand employment considerations?

If working for a GSE disqualifies you, why should hating GSEs qualify you?
DeMarco’s continued employment in this post is just another poor reflection of the Administration and how unprepared it is to use Fannie and Freddie in a more responsible way or to plan for their federal release or atomization. He should be shown the door.

There are others at FHFA who deserve similar treatment, but I suspect that they have burrowed into the infrastructure and probably gotten themselves “civil servant career status,” making them impossible to blow away. However, a properly motivated Administration still could make major personnel changes that would improve the regulatory product.

Why torture the companies with the Mickey Mouse FHFA regulatory team featuring a guy at the top who spent part of his career trying to neuter them?

Last week DeMarco suggested that Fannie and Freddie should cease buying loans for their portfolios.

Institutional investors across the world are cutting back on their fixed income purchases, who is going to buy all of these MBS, unless they are deeply discounted or enhanced by some other part of the federal government? Is this the right time, Mr. DeMarco, to suggest no more purchases?

DeMarco then took the dais at the Women in Housing Finance luncheon to sing the praises of the Federal Home Loan Bank System, opining that the system “worked” during the crisis.

It may have and I am happy for my friends who work there or represent the banks and the institutions and people they helped. However, anybody who understands the Bank System understands the trouble those regional banks face, but I guess Ed wasn’t going to criticize them, since he’s their regulator.

But, there still are plenty of people around town, Mr. DeMarco, who remember you—pre FHFA--as being quite antagonistic toward the Bank System (and Fannie and Freddie). You were a major critic of the Banks when Builders, Realtors, their members and the small business community--to whom they lent money--loved them.

You don’t want to say anything good about Fannie and Freddie—despite the Administration’s reliance on them--because that’s near political suicide, but you are complimentary regarding the Bank System, having been very negative in past years.

Which Mr. DeMarco should we believe, if either?


The Fed Bows Out of the Mortgage Securities Business?

I want to share an interesting observation, which comes from a very smart mortgage finance guy, regarding the Fed’s recent announcement to back out of its mortgage security purchases business and begin selling same.

He wrote:

The book is not closed on the Fed's GSE debt and MBS holdings. The Fed is scheduled to stop purchasing these securities at the end of March. It will then have to start working off its $1.2 trillion in GSE securities. It faces an interesting conflict of interest since its major risk of losses is an increase in interest rates which would reduce the value of the securities (though it could avoid any such losses by holding the securities until they pay off). It presumably does not face credit risk since the GSEs will cover any such losses with backup from the Treasury.
This is a fascinating fact by itself, but the Fed will “make money” on the F&F security sales, only because the Treasury--picking up any GSE red ink--will make the central bank whole.

Hearings to Replace Fannie and Freddie

If anyone on the two Banking Committees or their staffs read this blog, it should begin to open your eyes to the real world of mortgage making and “agency securities,” how they really are being handled by the Fed and Treasury and a world of other matters which I am sure most of you won’t comprehend when it comes your time to “abolish Fannie and Freddie” exercise.

How many of you understand the relationship my colleague notes in describing why a mortgage security portfolio might drop in value when rates go up, not because families default on the pooled loans?

How about “TBA,” the “to be assembled” mortgage pools, where prices for pre- sold mortgage securities set the rates that consumers pay for their home loans, what happens to the TBA when F&F are abolished?


Your biggest task will be to maintain equal access to low and moderate income families, who experience shows will be shut out if nobody in the primary or secondary mortgage markets are given that task by statute. And I don’t mean the completely worthless Community Reinvestment Act, which banks have fought for years and has the same impact as taking an aspirin to stop a major arterial cut.

Next will be how to maintain the “conventional 30 year fixed rate mortgage,” which will become history unless you create a believable implicit Federal guarantee for them.

I don’t care who offers to originate them. If there is a federal guarantee involved, then the loan isn’t “conventional” or the money private.
I don’t think the American public will have any faith in Wall Street or large commercial bank promises for years to come, following the recent financial debacle. So, as you go through your “abolish” exercises, keep some of these issues in mind, although there are many more which you’re hearing witnesses will reveal.
And, if you are a Democrat, maybe you can answer, “Why is Ed DeMarco still holding that FHFA job?”

Maloni, 2-22-2010

9 comments:

John M said...

Excellent stuff, which I fully intend to pirate overnight ;-)

One quibble, although I think you came close to addressing this toward the end. It's the question I raise in my post earlier today "Crack of Doom: Fannie & Freddie are Two Titanics holding up a Lead Iceberg": "... someone (hint Mr. or Mrs. US Taxpayer and '10 election voter: 1- locate mirror; 2- look at) will have to take responsibility for all that leftover Agency Debt."

And by the way, you guys aren't in the path of another snowstorm this week, are you?

Bill Maloni said...

Pirate away.

Hey, you have to lighten up on Volcker. He's one of my personal heroes and should have been named Treasury Secretary, instead of Geithner.

I don't pretend to hasve an answer for the debt, save let Fannie and Freddie run their businesses like a business, which might allow them to make money and repay the Treasury for what they borrowed.

The obvious "wish," is that in a few years, the real estate market settles and business sense
returns.

Hopefully that will occure before Phoenix runs out of developed lots. (Note: Housing Doom says the City has nine years worth.)

John M said...

Technical question: in the paragraph where you are quoting your anonymous source, when the italics end (next text is "This is a fascinating fact by itself ...") is what follows in the paragraph his words or yours. In the re-post I'm guessing yours, but will correct that if I'm wrong.

Bill Maloni said...

Everything in italics came directly from him (verbatim email message).

Everything else is mine.

Bill Maloni said...

For those who notice these things, I responded incorrectly to John (and so informed him last night). When structuring the blog, I inadvertently italicized not only my friend's entire message to me, but one line of my own commentary, which should have appeared in its own paragraph and not have been part of the text, which I put in italics.

Anonymous said...

Your italicized friend's observation is mostly correct. Reversing the quantitative easing of so large an amount will be tricky.It's not correct that the Fed can simply hold to maturity and realize no losses. I don't know the accounting but in terms of economic loss (real cash flow loss over some time period), the Feds oculd lose money. Think of it like the old S&L of yesteryear. Remember, they got into trouble partly because they were financing long term 30 yr fixed rate mortgages with short maturity debt (CDs and the like). As market rates rose, so did the debt costs to those S&Ls. After a time the debt costs exceeded the coupon on the same fixed rate mortgages they were stuck with.

Just because it's the government doing it, doesn't mean taxpayers are not vulnerable to a maturity mismatch.In this case the Treasury issues debt to pay for the MBS (the NY Fed actually conducts the program).If the debt is short term (probably is given the temptation to issue maturities where rates are lowest)and 30yr MBS are being purchased along with 5 and 10 yr GSE debt, then a potential similar mismatch may exist. Now, if the Treasury liquidatesits holdins fairly quickly, the mismatch and loss potential pointa are moot. But given your mortgage finance friend's implication of The Treasury needing to hold for a while yet, the problem is real and worth monitoring. Given that GSE mortgage finance people are treated as though they carry the plague, even this administration, thesae realities are not likely to fire the public's imagination.

This topic reminds me that years ago, I had suspected the GSEs were gonna get rolled politically because the "cognitive linquists" on the right wing are superb at their trade; point being, WE at Fannie allowed the politicians to call us GSEs and refer to the banks as "the private sector". We now know they too were/are GSEs in the form of too big to fail. But 5 yrs ago, 20 yrs ago, they were still GSES, not because they and the GSEs were TBTF; they were GSEs too because for decades 40% or more of bank deposits have been insured by the taxpayers. That makes funding costs very cheap for the banks and subject to abuse. Yet, all eyes were on the FN/FR balance sheets, OMG!!! huge risk, blah, blah, blah.

Hey puppet man, over here...Yet, when the yield curve steepened in the early 90s and 2002 early 04, the banks recapitalized by buying long maturity MBS and funding with short term INSURED money. Anyone in the GSE portfolios knew very well how much the regulators and right wingers screamed about maturity mismatches in the balance sheets (rarely more than 3 months). It is a fact that the feds allowed much wider maturity gaps for the banks when they needed some quick spread in the early 90s and early part of the oughts. That is what is happening right now. Cheap short term money funding longer term assets--this time though low appetite for new lending , little to no MBS buying by the banks. So the recapitlaization process is much slower. I remember traders leaving the GSEs to go play that maturity spread game at the banks where it was sanctioned by the regulators and the right wing could concentrate on making the GSEs a red/blue state issue and receive gobs of PAC money from the banks-- in pink ribbons, yet unnoticed by the media trying to sort out the debate. Those goons who demonized the GSEs while leaving the bank story untold have been smart, I'll give 'em that.

Progressive Pragmatist said...

Good stuff.

What do you think of the NAR's proposal to convert FNM and FRE into federal nonprofits?

Bill Maloni said...

I owe two answers, so let me try and respond to both "commenters" in this response, reversing their order.

I don't know what the difference is in the NAR's proposal and the "utility" approach, where profits are managed.

Needless to say, the Devil is in the details.

The good news about the NAR is that they are engaged on the GSE issue (has anyone seen the Homebuilders in the past several months?) and, especially in an election year, NAR engagement will limit the damage Congress is willing to undertake. (I believe that ti will be limited to hearings and maybe some conceptual items tossed about.)

I think that also was made clear when Secy Geithner said this week that the Obama Admin won't be ready to address the GSE issue until 2011.

Now, the longer question/comment on banks describes part of the "sweetheart relationship" the banks have had with their regulators, basically in God's lifetime.

I can remember Fannie efforts (and Freddie's too) where we tried to point out to the media deposit insurance's "explicit federal subsidy" compared to the GSEs implicit subsidy.

But, we either didn't work it hard enough or the media couldn't grasp it or just didn't want to write about "that subsidy."

I even rememebr Alan Greenspan testifying and quantifying it (low balling, I am sure), saying that FDIC insurance was worth 13 basis points in subsidy to the depositories.

Anonymous said...

Not sure where to post this but I wanted to ask if anyone has heard of National Clicks?

Can someone help me find it?

Overheard some co-workers talking about it all week but didn't have time to ask so I thought I would post it here to see if someone could help me out.

Seems to be getting alot of buzz right now.

Thanks