Monday, January 31, 2011

Heat and Light

Now that the Maloni’s have our heat and electricity back, after almost four days without either, I honestly can say to the Potomac Electric Power Company (PEPCO), “#%*&^%$#@ you!”

My four PC-less days screwed up plans to immediate blog about two articles which came out about a week ago, the first by Gretchen Morgenson in the New York Times and the other, coming a day later, by Zach Goldfarb in the Washington Post. The news stories covered a few issues but both mainly were lurid “tax payers pick up Fannie/Freddie legal costs” themes and then went on to discuss the amounts the companies were paying lawyers to defend the GSEs against law suits and the same for some former officials.

It seems to me the more that is written about the GSEs the less some people seem to know about the companies. Unfortunately, the deficits often are with those who write the articles and later their readers.

I am going to resort to a very lengthy blog, broken into two segments, one coming out today and the second on Wednesday evening, to try and establish my perspective. I hope you find both parts informative and provocative.

Every time something of a GSE corporate nature arises, we get the Washington and media equivalent of Claude Rains’ classic portrayal of Inspector Renault, in Casablanca, announcing that he is “shocked, shocked” to find out there is gambling at Bogart’s saloon, as Renault hurriedly pockets his own winnings.

GSE Foes=Ideology and Money

Now, let me clear some hot air out of this faux balloon.

The reasons that Fannie Mae and Freddie Mac have been attacked and vilified first were ideological but later became all about money!

The conflict started in 1983 when the Reagan Administration, led by David Stockman, opposed Fannie’s federal heritage and history and wanted to weaken the two GSEs by charging them —and no other financial or commercial businesses—a 25 basis point user fee or “homeownership tax”, as it became known, on every dollar the two borrowed.

That “chestnut” always was resurrected—although it never passed—and new issues got added to the assault in later years when several large financial institutions--GE, Wells Fargo, AIG and others--wrongly fearful the GSEs efficiency and cost cutting could induce Fannie and Freddie to enter the “Bigs” secure markets.

The big banks and their allies joined up because they thought then and still believe they can make more money from consumers if Fannie and Freddie were/are diminished or destroyed.

In my view a few major elements lay against the recent newspaper articles, but you didn’t see them covered.

Bitch All You Want, the GSEs are Private

Whether the town’s new conservatives like it or not, Fannie and Freddie were designed by the Congress 40 years ago to be unique private/public institutions. The reality is that they were far more private than public, which is why in 1970 after President Lyndon Johnson sold off Fannie Mae, a federal agency created in 1939, the newly privatized Fannie Mae because privately owned and managed and traded on the New York stock exchange, where it still trades, albeit lightly.

Government agencies don’t get traded on the stock exchange, private companies do. So that is 40 years worth of history that the one dimensional GSE critics just can’t explain away.

Before the Bush Administration nationalized Fannie and Freddie two years ago, neither company ever sought nor received one penny of taxpayer’s money. Nada. But once Hank Paulson made his questionable decision to take over the two GSEs, the federal government because responsible for every dime the companies spend, over and above what their corporate revenues generate annually.

So, why didn’t Ms. Morgenstern or Mr. Goldfarb mention Fannie and Freddie utility costs, wages, healthcare, lawn maintenance, travel costs, cafeteria food, housekeeping, pens, pencils and paper or hundreds of other things on which companions spend money?

I guess you don’t get front page, lead column in the NYT writing about the cost of 40 pound bond paper, Eagle #2’s and Sharpies.

But the two articles provide a wonderful opportunity to closely examine just what did happen in 2004—it’s another poorly understood era where simplistic answers don’t cut it --as the entire US financial services world had to implement a new Financial Accounting Standards Board (FASB) “mark to market” rule.

FASB 133

FASB 133 required businesses to establish real time values for all of the securities on their books—whether they were up for sale or not—and despite the fact that mortgage backed securities might see values change any number of times during a daily trading period or not at all, if there was no demand.

Fannie, Freddie and lots of large financial companies balked at the proposal. The same institutions submitted long public comments about why the proposal made no sense, if the goal was giving investors more accurate information on securities and how those markets actually worked, making accurate continuous valuations difficult and near meaningless.

OK, fans, friends and enemies, let’s look very carefully at this “Fannie accounting scandal” charges which were the crux of the NYT and Wash Post news stories.

In an effort to provide more information to market investors and a better analysis of value, the Financial Accounting Standards Board (FASB), in 2003, proposed a controversial rule (FASB 133) and sought comment on the regulation requiring mortgage investors to “mark to market” on a continuous basis, the value of those securities, if they were going to be sold or not.

(End of Part 1; Part 2 will apear on Wednesday, February 2, 2011.)

Maloni, 1-31-11

Monday, January 24, 2011

Who Will Say “No” to the Big Boys

The Biggest Financial Institutions, the Banks and Investment Banks

Three years after their near collapse and resurrection by the Bush and Obama administrations, there is no group showing more political clout and influence in the nation’s capital, right now—not to mention the international economy--than the behemoths in the financial services industry?

The banks and their political allies may not agree, but it sure is hard to argue this isn’t the case.

The reasons are several.

--despite their active role in the financial an economic collapse of 2008 large banks and their investment banking subs (making them bank holding companies) did not suffer greatly in the Dodd-Frank legislation designed to put new controls on them;

--the financial institutions received billions of taxpayer’s dollars under the federal government’s Troubled Assets Relief Program (TARP) and had no reciprocal lending responsibilities in return for getting Uncle’s helping hand. The additional funds helped the banks generate major positive earnings through 2009 and 2010;

-- in an industry wide “political pout,” the big guys decided to throw their financial weight behind the GOP in the 2010 congressional races and helped the Republicans win innumerable 2010 House, Senate, gubernatorial, and state house seats, setting up future friendly treatment at the hands of the GOP.

--the banks, wailing with loaves of bread under their arms, now have brow beaten the Obama Administration into slow walking any financial regulations the business institutions view as negative

--looking at the Dodd-Frank spanking new Consumer Office in the Fed, the bankers seem to have stifled Elizabeth Warren’s chances of a permanent appointment to head the new unit and are also intent on diluting the “Volcker Rule,” designed to reduce bank self dealing and trade. Both provisions survived the behemoths legislative opposition.

And with all of the government blessed, encouragement and financed mergers, since 2008, the banks—with witting regulatory allies—have managed to keep very much alive and make permanent the much maligned “too big to fail” (TBTG) reality, no matter what the law or the regulators say.

(As a gentle reminder, dear reader, the charters of Fannie and Freddie both contained statutory language stating that neither represented the full faith and credit of the federal government, suggesting that this phrase—defined nowhere in federal law--describes the ultimate existential federal power exercise, i.e., “We’ll know a TBTG business when we see it and act accordingly!”)

In 2011, the banks still have their eyes on taking over the Fannie and Freddie functions, once the Admin and Congress sit down to address this pending matter.

Shortly after his State of the Union message, although there are rumors of continued delay and no firm delivery timetable, the Obama Administrate will unveil it “plan” or a serious of policy options for restructuring the nation’s mortgage finance system, following the breakdown of 2008 and the perception that the current Fannie Mae/Freddie Mac secondary mortgage market model must be changed.

Many people—obviously including me—strongly reject that idea Fannie and Freddie should be abolished because they acquired tons of Wall Street created subprime securities, which largely went bad, since that is an activity which can be controlled through regulation (and should have been back in 2005-2007). In fact, in the current F&F interaction, PLS acquisitions already have been ended.

Structire Still in Place

The nation had and still has in place the elements of an efficient and smooth running national mortgage finance system, which insures equitable pricing, products, and efficiency, for mortgage market consumers and businesses all across in the country.

Other regulatory changes in the Federal Housing Administration’s (FHA) main lending program suggest that all future lower or moderate income lending will go through it, not the “private market,” so the GSEs former “affordable housing mission” also has been jettisoned.

Yet the demand for structural change, “abolish Fannie and Freddie,” has less to do with reality than political necessity and there is no guarantee that the latter will produce anything but a large bank dominated marketplace, where borrower needs come second to bank profits.

Why this Congress intent is on creating the confusion, disruption, uncertainty, and delays—all with no guarantee of success—rather than modify slightly the current Fannie/Freddie apparatus and iron out some popularly understood imperfections?

The only honest response is “inside the Beltway” candor—which nobody will utter--i.e. “We have demonized Fannie and Freddie, so there is no way we easily can “undemonize” it without looking foolish, even if resurrecting them is the right housing policy for the nation.”

The January 23 Washington Post

Yesterday's Washington Post was a cornucopia of GSE issues and related matters.

The most obvious was Steven Pearlstein’s column, which is a first in my 25 years of watching closely the GSE topic and that is a prominent Washington based reporter/columnist expressing concern about what the loss of the Fannie and Freddie might mean to the local economies.

Pearlstein expresses this fear as part of the larger issue—which I themed in my opening segment—that the large commercial banks soon could soon overwhelm the former GSEs, if Congress kept Fannie and Freddie alive in any way, shape, or form, while the Congress gives large banks the power to securitize mortgages, with some form of federal insurance or reinsurance, beyond those federal subsidies already meted out to the bank holding companies (BHCs).

Wells Fargo and their Washington allies have been calling for this new federal benefit for months.

Kudos to Pearlstein for not only the near term point, but implicitly addressing the larger issue that no financial institution of set of same could survive if the big bank holding companies truly want to eat their financial and market lunch?

Elsewhere in the Sunday Post Business section was a story—authored by by Anthony Effinger and Katherine Burton-- about successful hedge fund investments in mortgage backed bonds. This article—while certainly not intending to do so--contained this “left handed compliment” for Fannie and Freddie about how their securities activities worked to set limits on Wall Street pricing excess (a fact little understood or appreciated by those Hill folks who would take a sledge hammer to the current market relationships).

“After the (federal government takeover in 2008) takeover, Fannie and Freddie stopped a key activity, Kuhn says. In addition to guaranteeing mortgages, the companies bought and sold securities in order to moderate fluctuations in rates. That also helped control price differences, or spreads, between various types of mortgage bonds, making it hard for traders to find arbitrage opportunities.”
"There weren't a lot of nickels lying around," Taylor says.
“Without Fannie and Freddie trading, the market is rife with opportunity, Kuhn says. But government control of the companies means that traders have to watch for government programs that make it easier for homeowners to refinance. He watches hours of C-SPAN, the cable channel that broadcasts government hearings. Sometimes he records them to watch in the evening.”

A link to the entire article is below.

Any Volunteers?

Just who can or will stop the big financial institutions complete control of all financial services and products?

Steelers Football and the Super Bowl

I’ll take yesterday’s Pittsburgh Steelers’ win over New York—and coming Dallas trip to their eighth Super Bowl against the also victorious Green Bay Packers--but many thanks to the football Gods. The New York Jets showed me a lot and they are the team to be reckoned with in the coming years. Yes, a win is a win is a win, but…! In welcoming the Pittsburgh victory, I note humbly that it so easily could have gone the other way.

Maloni, 1-24-11

Monday, January 17, 2011

Mortgage Warning Clouds and Football

"The British are Coming....."

Have you noticed those ubiquitous signs asking citizens to warn officials if we see anything that is suspicious or otherwise doesn’t look right to them?

Clearly I need to sound the alarm with somebody in Washington’s financial regulatory world and to their attention a development which just doesn’t look right—given our recent national mortgage experience.

In a January 9 Gretchen Morgenson’s column in the New York Times (see link below, I think she found an issue that should curl the toes of many in Washington and around the world, especially those who hope the worst financial news is behind us.

Columnist Morgenson primarily discusses the fact that Bank of America paid off some debts to Fannie and Freddie, based on bad loans the two acquired from Countrywide Financial, the California mortgage company which BofA acquired in 2008.

Morgenson felt that the precedent, if not the actual dollars exchanged, was helpful because it establishes that lenders are responsible for some of the low quality assets that overwhelmed the mortgage finance system in past years, mostly running up to 2008.

500-1 Capital Protection?

But the situation which caught my attention and that would cause me to go “Paul Revere” to the Fed, CoC, FDIC or Tim Geithner is the fact that while paying back $2.6 Billion to Fannie and Freddie is a positive, BofA, along with JP Morgan and Wells Fargo are holding a scant $10 Billion to protect themselves and the nation’s taxpayers against $5 Trillion of mortgage backed securities they issued from 2005 through 2007.

Even with my limited math skills that a 500 to 1 ratio.

These numbers from the third quarter of 2010 are reported by the banks and, presumably, blessed by their Washington regulators and those other Obama Administration officials who monitor systemic risk.

Will The GOP Respond?

How about bringing the reality of that startlingly insufficient capital to the new GOP House majority's attention?

Reprsentatives Bachus (R-Ala), Barrett (R-NU), Hensearling (R-Tex), et al, are yopu cvoncerned with this I nformation?

I know many of the House newbies are learning where their offices and the elevators are, but you don’t have to be expert to know that this is a pretty small financial fig leaf to cover such large “figs?”

Fannie and Freddie used to get beaten up and abused because their capital ratios—with far better mortgage assets—were 50 or a 100 to one.

The banks will argue that there is no need for more reserves, while secretly hoping that a rebounding economy will “float all boats” and dramatically reduce potential losses on those residential mortgage assets.

Isn’t that kind of putting all of your chips on “red” and hoping scarlet shows up?

It’s OK for the banks to play that game, but should the nation and the bank regulators take that risk? Wouldn’t it be prudent for those banks—which still have a ton of capital—to put twice or more of the $10 they now have set-aside into loan loss reserves for those older securities.

If no significant losses occur then the banks will have the earnings on their capital. But, if there is another deluge of residential red ink, they’ll have more reserve protection handy to manage that and maybe no need for TARP II.

The Washington Grinch Post

“The moon on the crest of the new fallen snow (yadda, yadda)…..lustre of…
To what in my wondrous eyes should appear…..”

But another crappy Washington Post GSE editorial Thursday, Jan 13, claiming consensus on Fannie and Freddie where there is no consensus, save in the minds of the Post editors.

I’ve conceded the corporate mistakes and Fannie and Freddie purchasing Wall Street originated subprime—which virtually every other large financial institution in the world did, a GSE major foible easily handled through better regulation—but the Post also tries to use that episode to wipe out the preceding 25 years of GSE history of meeting housing finance needs, especially for low income and minority families, where subprime never was a concern.

I’ll waste little breath on the Post savants, save arguing for them to read the many blog links I’ve offered rejecting some of the ideas on which the paper claims “consensus.”

All of those, who choose to pontificate on the former GSEs, just should read the McLean/Nocera “All the Devils Are Here” story of the 2008 meltdown. It might open their minds and eyes.


A few Fannie things to consider.

-Rumors last week had the much discussed Fannie cutback of employees/contractors/consultants beginning the end of this month.

-If the Administration sends up “options” to restructure Fannie and Freddie, rather than advocating a single proposal, it will further cloudy the waters and likely won’t facilitate any legislative action this year and possibly not in 2012, because of the presidential ele3ction.

I hope the Administration advocates a specific GSE policy. Whatever it is, it will meet opposition, but better to do something (single plan) than the equivalent of nothing, i.e. offering multiple choices.

A buffet approach makes the Administration look weak and uncertain.

This Past Football Weekend!!

Ahem, maintaining my less rowdy approach to fierce athletic competition, I merely will note that my Steelers beat Baltimore and the Jets surprised and upset the New England Patriots setting up in Pittsburgh next Sunday a Jets-Steelers American Conference championship game.

The winner of this game will meet the survivor of Green Bay versus the Chicago Bears National Conference championship game on the “frozen tundra” in Chi-town.

I think it only fair to acknowledge that both home teams will face formidable opponents!!

Maloni, 1-17-11

(A little late with this blog,because of a brief weekend hospital visit which threw off my scheduling, not to mention my equilibrium. Better, now.)

Sunday, January 9, 2011

National Tragedy

Will We Learn Anything?

There is little I can add to the millions of words already written about Saturday’s Tucson tragedy.

I hope that politicians everywhere—no matter what level of government or ideology—internalize the reality that this violence truly could have happened to them.

Our national and local external discourse has become so crude and edgy that no matter what the issue, someone perceived to be “on the other side” can get physically harmed or worse by those who disagree.

There was nothing in Rep. Gabrielle Giffords’ (D-Air.) profile—except moderation—to warrant someone shooting her with a nine millimeter handgun loaded with a 30 bullet magazine and then killing six more, including a nine year old girl, and further wounding fourteen.

Both political parties in Washington can help, especially if the early sentiments they all are mouthing at all reflect their future intent.

Public officials should take a deep breath and realize how their daily public comments—especially if insensitive, exaggerated, and angry—give rise to violence in others less buttoned up.

All of the nuts (gun and otherwise) are not on the Right. Crazed liberals angry at whatever could feel justified like some of the more right wing extremists in turning to firearms to justify their beliefs.

If politicians understand this fact, maybe all of them will lower the heat on their hyperbole and impose some controls.

(Prayers for Rep, Giffords recovery and return to office, if she so chooses.)

Bill Daley

Congratulation both to Bill Daley and the Washington Post, the former for being named President Obama’s Chief of Staff—clearly with an eye on the President’s 2012 reelection campaign--and the latter for doing a far better job than it has in the past, with senior appointments, of not ignoring or fudging the candidate’s Fannie Mae connections. (See Daley “diagram/flow chart” in last Friday’s W Post.)

Bill Daley is a long time friend of former Fannie Chairman and CEO Jim Johnson, owing to Johnson’s work organizing Illinois for the Carter- Mondale presidential campaign.

President Bill Clinton named Daley to the Fannie Mae board of directors where Daley served for some years.

Daley can help Barack Obama in many ways, since—besides being a sound and veteran Democrat politician—Daley has an excellent rapport with the nation's business community, as was evidenced in many of its comments after the announcement.

Good choice Mr., President!

With Fannie Mae on your resume no longer being a hazard, I wonder of the President might turn to me for help? Just to make his choice easier, let me establish in advance that I won’t take any position which fails to give me total access to the US government’s files on UFOs, Bigfoot, and the Loch Ness monster!

I’ll try and help President Obama get reelected but it will cost him!

Reading the Constitution on the House Floor

I have no problem with the GOP reading the Constitution taking to the House floor and reading the Constitutions, both parties have frittered away far more House time doing far less valuable things.

I suspect that Members, like many others, never have read the Constitution from beginning to end, let alone hear others do so. So, in that context, the exercise was good. I also suspect that any other reading wouldn’t “overlook” two provisions dealing with slavery, as the GOP did last week. (Gee, Speaker Boehner, you and your posse are so sensitive.)

If reading the Constitution makes the new House majority vote and act according to its standards, that doesn’t bother me.

Two things do.

It’s less significant what’s in the Constitution, but it’s how the courts and judges interpret those provisions that are important.

For instance, you’ll not find “school busing” written anywhere in the Constitution or “recount chads.”

It is the latter that provokes me, too, since the GOP traditionally has been all about “state’s rights” and wanting the states--not the evil (and “liberal”) federal government--to make final decisions which serve the Republicans interest.

I believe that Al Gore beat George Bush in the 2000 election, winning in Florida, the final state necessary for Electoral College support.

But decades worth of GOP paens to states rights and the Constitutional support for same went out the window, when faced with the American people’s choice—Al Gore--the Bush lawyers asked the conservative majority on the Supreme Court to quash that exhibit of states right, overrule those state vote counters, and give the win and the next 8 years of Washington control to George W. Bush.

So please, Speaker Boehner, read that hypocritical behavior into the Congressional record, along with the words of the Constitution—where “the end justifies the means” isn’t written—and then ask the America people to decide if GOP actions speak louder than words.

Pearlstein on the Adverb/Adjective “Job Killing”

I won’t bore you with a reprise of Steve Pearlstein’s W Post column, but just will post a link to it and let you read it yourself. What he wrote is something to keep in mind—as well as the speaker—the next time you hear it “job killing.”

For Pro Football Fans Everywhere

It’s the Steelers versus the Baltimore Ravens in the AFC semi-finals, while New England and the New York Jets grapple to see which team will play the winner of the “real game,” in Pittsburgh.

The New England Patriots, right now, are the class of the AFC and better--on paper--than their challengers and should come out on top next week.

If the Jets surprise the Pats (and the world) and beat Brady and company, the AFC Championship will be played in the home town of Steelers-Ravens winner.

Go Pittsburgh!!
The Ravens are a quality group and neither they nor the Steelers will have any easy time prevailing, but one of them will.

(That is evidence of me taking my own advice to politicians and toning down the rhetoric vis-a-vis what I might have said about Baltimore.)

Maloni, 1-10-11

Sunday, January 2, 2011

Some Thoughtful New Year Non-Legislating?

Happy New Year to all and my best wishes to you and yours for a healthy, happy and successful coming twelve months (which—just like 2008--could see the Pittsburgh Steelers and the Pittsburgh Penguins, once again, reach their respective championships in the Super Bowl and Stanley Cup).

That’s the way, uh huh, uh huh, I like it, uh huh, uh huh!!!

A Fresh New Perspective?

The 112th Congress gets sworn in on Wednesday and it might have some pleasant surprises for the “housers” among us.

Waiter, put a hold on that order to abolish the former GSEs, recently put in by Barney Frank (D-Mass) and others.

It seems the “new GSE sheriff in town,” among the Republican leadership on the House Financial Services committee, believes it is impractical to push major mortgage structural changes, until the current real estate market settles down and is given a chance to return to some historical normalcy.

That might not occur for two years or so, acknowledged New Jersey Republican Scott Garrett, the incoming chair of the Financial Services Committee Fannie/Freddie subcommittee. (Months ago when discussing the possible GOP recapture of the House, I noted that Garrett was the smartest of his House committee colleagues re GSE issues.)

Obviously, if the market returns in that time frame providing the desirable foundation, we will be in the middle or have had the 2012 presidential and congressional elections.

IMO, Garrett already has indicated a more thoughtful approach to legislating than many of each colleague on both sides of the aisle.

More Dramatic Action?

Two years of “peace”-- while both political parties and the Obama team accommodate themselves with Fannie and Freddie in their “conservatorship” prison and with the strengths and foibles that arrangement offers--could be the interlude necessary for the Congress and policy makers to examine what they have in Fannie and Freddie and get practical.

Stated simply, as I have tried to do for two years, I believe the nation is better served by a better regulated Fannie and Freddie—with some low/mod financing mandate—than any other secondary mortgage structure Congress could create.

Once you get by all of the blame and finger pointing produced by the 2008 trauma, you see a smoothly running system which brought benefits near identical standards across the nation to consumers, lenders, mortgage investors, and yes, to Fannie and Freddie, but hardly egregiously so to the latter, given the responsibilities Republican and Democratic congresses and administrations put on both companies.

For a moment, policy makers should set aside the GSE subprime action, i.e. large purchases of Wall Street issued private label securities (PLS) most of which failed, since that occurred to hundred of mortgage investors and securities companies throughout the world.

Because of the disastrous nature of poorly underwritten first mortgages and corporate guarantees which did not provide investor protection—in part because of specious “ratings,” handed out with no real analysis—new rules have been or will be in place throughout the federal financial services regulatory world to insure that won’t happen again (at least we hope)!

GSE Myths Beyond Subprime

But, it is unique secondary mortgage market issues beyond subprime origination or acquisition that need to be examined.

First off, let’s try abolishing some myths to make the policy making terrain more even, like “the GSEs made profits and had a public mission.” The suggestion being that for 20 years or more Fannie and Freddie used their implied government status—not made explicit until the Bush takeover in 2008—to make profits.

That mechanism—blessed for 40 years by Democrats and Republicans alike is what kept the two companies off the federal budget and paying for themselves, until Hank Paulson’s takeover in 2008.

Hello, why is those critics fail to apply the same “making profits” standard to banks which benefit hugely from the government’s federal deposit insurance subsidy that brings trillions of dollars in low cost working capital (what are you receive on your checking and savings account) into commercial banks coffers?

The banks’ cost of funds—because of FDIC insurance, which has never been fully paid for by banks—give banks a much lower cost of fund (thanks to Uncle Sam) than Fannie and Freddie ever enjoyed. But, one never hears a peep about that, except for the bank defenders who insist of calling those banks “private” despite their hulking federal subsidy benefits.

Goose and gander. At least in F&F, the public got a huge amount of middle income families getting mortgage finance and enjoying the benefits of home ownership.

The latter came about because banks and other lenders refused to do massive low income/minority lending and the federal government, via statutory housing production goals, required Fannie and Freddie to use market forces to mandate that desired lending.

A World Without the GSEs

Some D’s and R’s would just do away or “abolish” Fannie and Freddie and let “the private market” pick up the pieces.

What would that look like? Well, we have a handy living example of that situation, it is called the conventional “jumbo” mortgage market, where Fannie and Freddie cannot compete for that product. For those still learning the rudiments, the “conforming and non-conforming mortgages” (the latter being “jumbos”) refer to the federal law which establishes which loans the former GSEs can acquire or securitize and which are the exclusive province of banks.

That “jumbo” world, with no GSE competition largely becomes an adjustable rate mortgage (ARM) world, exclusively, with fixed rate mortgages generally carrying higher cost to borrowers.

Banks don’t like to originate and hold fixed rate mortgages (FRM), because of the additional interest rate risk, unless they can sell them to Fannie and Freddie.

In a world without the two government-related mortgage investors, what would the banks do? They likely would offer only ARMs on the public or charge outrageously for FRM.

Think about it.

More Fannie and Freddie

In a brief continuation of last week’s pushback against the “FIRC Four,” the GOP Financial Commission members who claimed all things bad in 2008 were the fault of Fannie and Freddie, here’s another column about perfidy for your consideration.

While I am at it, I also want to add a link to the Washington Post’s review of the McLean-Nocera book, “All the Devils are Here,” in which any suggestion that the former GSEs were the cause of the 2008 financial meltdown is thoroughly rebuked (although they do not find Fannie and Freddie blameless.)

Maloni, 1-3-11