Monday, April 29, 2013


I Remember “W”...

...and his Slanderous, Feckless Financial Regulators

Last week's opening of the George W. Bush presidential library—I won't make any jokes about books with crayons—produced nostalgia galore, especially among the nation's conservative commentators.

Ignoring the fact that he seemed cowed by the office's responsibilities and almost naive about other power/political exigencies, I remember this President Bush as taking a two year Clinton Budget surplus—produced when Frank Raines was the head of OMB and some sharp guy named Jack Lew worked for him—and pissing it away on tax cuts for those who didn't need them and a phony Iraq war based on highly questionable “intelligence,” massaged and shaped by Dick Cheney and Don Rumsfeld.

Messrs Cheney and “Rummy” had their own agendas which were far more advantageous to military and oil and gas interests than the nation's well being.

As bad a president as he was, I have little doubt that W would have been a decent guy to football tailgate  or play poker with, if he plays. In other words, someone who could laugh and joke and not take anything too seriously.

And, therein lies the rub.

Fannie and Freddie

But I also remember an upbeat enthusiastic George W. Bush who, in 2002, joined senior Fannie and Freddie executives at the historically black Bethel AME church in Atlanta—along with dozens of invited national “housers” and other dignitaries--to endorse the need for more affordable mortgage finance for all Americans and to urge and support the two former GSEs to step up and do more to that end.

But the euphoria of a GOP President actually endorsing, if not cheering, the works of Fannie Mae and Freddie Mac either didn't penetrate the White House bureaucratic walls or W just was patronizing Atlanta's and the nation's low income audience and the assembled, building, real estate and advocacy interests.

The WH demand for more from F&F came through, but the necessary required GOP attitude adjustment among the bureaucracy and conservative/Republican opponents outside of government, never matched the President's personal rhetoric and never made the trip back to DC on Air Force One.

If anything, as I have written about in the blog and others have memorialized elsewhere, the attacks on Fannie and Freddie—directed by somebody important and likely a resident of the Bush White House staff—built, culminating with a scathing and fatuous 2004 regulatory report from the Office of Financial Housing Enterprise Oversight (OFHEO), then Fannie's and Freddie's regulator, accusing senior Fannie execs of violating securities laws and cooking company books for personal game.

When the Bush SEC head weighed in and agreed with OFHEO, the political fight was lost and the mortgage finance system began unraveling, although it would take the Bush “hear no evil see no evil” financial regulatory indifference before the Wall Street subprime orgy brought the nation to its knees.

Here is some additional perspective, which I tripped on while doing some research.

My memories of George W. Bush are not fond memories. His primary interaction with the GSEs was duplicitous, he talked a positive game while his posse simultaneously conducted mortgage finance malevolence.

I wish President Bush well with his flourishing nascent painting endeavors. But if he ever chooses to paint the housing finance scene he helped produce, it won't be a very pretty picture.

Other Fannie/Freddie Matters


The exceptional Barry Ritholz had an excellent piece last week discussing his perspective on a major lender ripoff of Fannie Mae.

I think lender chicanery, where Fannie and Freddie got duped, happened more than people think or want to believe, but it happened, as several successful law suits proved.

See what you believe after reading Mr. Ritholz's work.

Excessive Loan Loss Reserves?
In one of my recent blogs, I noted the future possibilities of Fannie Mae (and Freddie Mac) generating even greater earnings (cash for the Treasury hopper) if they can secure judicial relief with lawsuits they have pending against major lenders.
But, along with Fannie’s and Freddie's rosier financial future—which does not mean concomitant political relief, except in the minds of a few of us—I suggested both entities were over reserving for dwindling anticipated losses, losses which likely will lessen even more over the next few years. By all reports which F&F and their regulator are revising downward because of general economic improvements and less red ink from seasoned loans on F&F's books.
That could add heft  billions or so to their 2013-14-15 bottom lines and therefore more for the Treasury’s General Fund and the taxpayers.

(I also like to think that it repays their debts to Treasury faster but we know that's impossible because Hank Paulson seemed to forbid that with the convoluted accounting in his 2008 takeover deal.)

Of course the GSE's regulator—whomever that Director may be in time—would have to bless this sequence as being “safe and sound.”
But, before F&F got their turn, it seems that many of the big banks have started to do the same thing as per a story in last week's Washington Post, written by Danielle Douglass. (See below.)

Senators Brown (D-Ohio) and Vitter (R-La.)

Fannie antagonist Gretchen Morgenson, propounding from her standard perch on the front page of the NYT Sunday business section, had a very positive take on one of the 9000 or so bills which are introduced in every two year session of Congress, but ultimately die.

Morgenson identifies this worthy proposal's killer with her first sentences, the nation's big bank that hate/fear the legislation.

Introduced by Senate Banking Committee members Sherrod Brown (D-Ohio) and David Vitter (R-La.), the bill would simplify and increase large bank capital requirements, divorce the US from the one size fits international  capital accords shaped in Basel, the little Swiss town where the world's financial government and private elite officialdom meet and approach common financial problems.

(As I learned in my three year stint at the Fed, if you really are an insider, you pronounce the place “Baall,” with no “s.”)

Bye Bye Basel?

It's taken more than 30 years for this slightly changing assemblage (people do die over three decades, even bankers and their regulators) to agree on some guidelines. But by the time the international group agrees on anything, the banks are long gone on their slippery ways and those who would catch them in financial skulduggery are arguing over their caviar and sauna bills.

Whether in Switzerland or New York, banks don't wait for “tea time” or “tee time.” They work and innovate 24-7-365 to make those huge earnings.

Brown and Vitter thinks that wrong—and they are right.

The odd couple liberal and conservative further believe that Dodd-Frank doesn't solve any of the major problems and that, too, should change for America's financial institutions and quickly.

Morgenson agrees. If you didn't read her column, check it out.

What Can FHFA Do With a New Director?

Last week's blog called for but did not produce many suggestions about how FHFA, if it gets a new Director and direction, can change Fannie and Freddie for the better, enhancing the nation's secondary mortgage market and its primary market lenders. (All responses appeared on the “comment section” of last week's blog.)

Of course, watching Brown and Vitter explore new approaches to improve the government's risk relationship with the nation largest financial institutions and then seeing Jeb Hensarling (R-Texas), the House Chairman of Financial Services, who refused to allow Consumer Financial Protection Bureau Director Richard Cordray to testify on consumer related financial issues--”because in my opinion he doesn't hold the office legally”--suggests why any efforts to restructure the nation's. mortgage market will go nowhere, until the White House and both chambers of Congress are controlled by the same party.

Oh, did I note that the nation's banks really dislike the Consumer Financial Protection Bureau and likely Cordray, too.

Hello Hillary Clinton in 2016!!!

Maloni, 4-29-2013

Sunday, April 21, 2013

God Bless and Keep the Residents of Boston

The Muse Temporarily Abandoned Me

I won't fool you, I don't have a lot I want to say this week. The muse  has wandered away from me.

Boston and all that goes with it left me pretty empty. I really can't add anything beyond what I said up top.

On the other hand, the Senate's gutless gun registration vote just angered me. The political cowards.

Nobody discussed anything about “gun confiscation,” but that didn't stop the crazies—mainly but not exclusively on the Right—from whipping enough enough votes to stop a bill to register guns sales from moving forward and, maybe, make it a little tougher for some bad people to get guns.

The GOP and their allies spun all sorts of grotesque arguments against a simple bill which could have had a major impact on Internet and gun show sales.

Recently, I was at a local establishment (casino) along side two gun advocates, one of whom was  a gun dealer who worried about the impact of registration on his “machine gun” collection (we were in Maryland, so state law got him when Washington failed). Barely prompted, he strung together a wild fantasy of gun registration leading to the “Feds” trying to stop cigarette smokers or others they deemed socially unworthy. It was like he was on acid and imagining demons everywhere.
People like him across the country leaned on their Senators to deny a vote on the legislative substance.

Mark Zandi and The Fannie/Freddie World

Back to a little bit of reality.

I want to reverse the blog a bit and have you tell me some stuff which could happen, if.......!

Let's wave the proverbial magic wand and assume two things, the first is that Mark Zandi well known economist, reportedly a registered D who counseled John McCain's presidential campaign, gets the nod from the Obama Administration to head the Federal Housing Finance Agency (FHFA) and becomes Fannie Mae's and Freddie Mac's latest regulator.

Is he a big bank or Wall Street stooge, as some suggest, or a silent liberal intent on embedding Uncle Sam deeper in the mortgage finance system? Or, is he just a smart, rich guy who has some time to spend on the mortgage Gordian Knot?

Since the original buzz, there hasn't been much on this possible appointment, but that could be because of the intervening events which demanded our national attention.

Initially, there was some talk that Zandi has some strong ideas about reorganizing the nation's secondary mortgage market—which means it's primary market, too—and has hopes to implement those plans, as he oversees Fannie, Freddie, and the Federal Home Loan Bank System, which people need reminded is part of his portfolio.

The story goes that Zandi might want to do this mostly via regulation, not legislation, because presumably this Congress can't agree on much including whether to do away with or employ Fannie Mae and Freddie Mac in some future incarnation.

So let me ask, readers, what do you think Zandi—if he gets the post—does or tries to do??

You can write your answer to my blog “Comments” section and share them with other readers or send them to me at either of the email addresses which grace your “New Blog Out” message. I'll try to summarize in future blogs—without identification if that is your choice--what you recommend. blogs.

Fire away at what you think Mark Zandi might try and do, if he succeeds Ed DeMarco as the new head of the Federal Housing Finance Agency and how willing this Congress may be to cooperate and let Zandi try policy innovation??

Maloni, 4-22-2013

Sunday, April 14, 2013

We're In The Money

Now that the Obama Administration has weighed in adding its heft and knowledge to support what I've been saying for months about Fannie’s and Freddie's ability to generate income (although I told a reporter that the Admin is low balling its estimate that the two will pay @$185 billion over 10 years to the Treasury), watch for some in Congress to try and aggrandize that income for congressional piggy bank purposes.
It's the nature of the beast.

House Financial Service's Committee senior Democrat, Maxine Waters (D-Cal), hosted a conference last week on ways forward to insure adequate and fairly priced housing for the nation. Her staff subtitled the meeting “discussion about GSE reform.”

The discussants included, a number of my former colleagues and friends.

I guess my invitation got lost in the mail, but no worries I can replicate here much of what I would have said.

Trying not to be pedantic with Ms Waters and the half dozen or so Committee members who attended, I would have reminded them that any recommendation they make, ultimately, will take one of three forms: a mortgage finance system (primary and secondary markets) run the nation's large commercial banks, which seems to be the preference of the GOP; a mortgage finance system, where Uncle Sam plays the principal role guaranteeing various players, which is what we have today and everyone claims they want to replace; or a system which blends the strengths of banks and the government, which makes the most sense but screams “compromise,” which isn't done often on the Hill.

The Generic Choices

There really is nothing more beyond those choices and its crucial for Ms. Waters and her peers, as well as the balance of the Congress, to understand the benefits and pitfalls of the options.

BTW, even though there are other lenders in the market, I shorthand “lenders” to “banks,” since the large commercial banks and their smaller regional competitors either originate a majority of today's residential mortgage loans or own subsidiaries which do.

Let me deal quickly with the three options and why I believe two of them are DOA.

Government Only Option

Not even I want the federal government controlling such a huge percentage of the lending decisions as it does today, which is a historical accident generated by both political parties. While things may look rosy now, that could change and “Uncle Sugar” would be on the hook, so ending that arrangement sooner rather than later is desirable.

Banks Only

Most people who've read my blog know I don't think the banks are wholly “private,” because they enjoy major federal subsidies. But, for this review, we'll pretend they don't rely on the federal government for their working capital. (Coincidentally, the House Financial will hold hearings this week on bringing more “private capital” into mortgage finance. I wonder which Member will have the nerve to raise the issue of the deep federal bank subsidies.)

The GOP mortgage market ideal of total bank control without the presence of the federal government is a poor option, with chaos and consumer gouging waiting to happen.

The Great Depression

We have two major episodes in recent history when commercial banks and other lenders-- not tied to the government--controlled the mortgage market, when bank supervision either was inadequate or didn't exist.

The first was the “Great Depression,” when understandably risk-adverse mostly state chartered banks denied credit to people they deemed not credit worthy and the real estate market collapsed.

Ironically that experience gave birth President Franklin Roosevelt’s creation of the Federal Housing Administration (FHA), the long term fixed rate mortgage insured by the government, and Fannie Mae to buy those new mortgages and provide necessary market liquidity.

It took the Roosevelt action plus the huge economic stimulus of the WWII to get the nation back on it's feet.


The more recent era was 10 years ago, when large commercial banks and their investment banking

clients or subsidiaries, unleashed the subprime investing wave—going around the Fannie Mae and Freddie Mac systems—and created, packaged and sold throughout the world close to a $ trillion in garbage mortgage backed securities.

Those agents assumed that real estate values never would go down and that rising a equity tide would cover all of errors they made in creating the valueless securities.

Fannie and Freddie didn't make those loans but they bought a ton of them from Wall Street and they bled, too.

While the banks and the investment banks had nominal federal oversight, not one federal regulator in the buildup to this most recent financial debacle blew the whistle on the rampant speculation or stopped the hemorrhaging until it was too late. So, in essence, the banks were free to impose on the market whatever standards and discipline they chose. And, as history has shown, they applied very little.

The banks were in control and left to their own devices and the sorry results have been clear for all to see.

Before I argue for the inevitable blend approach, let me say something positive about banks or at least something pregnant with constructive possibilities. The banks are not going anywhere. They are too big and powerful and they have most of the available mortgage lending capital. The United States needs them for mortgage lending and other purposes, but channeled and appropriately regulated.

Get Serious Bank Input

I've been critical of large banks, based on 45 years experience in this town, as a congressional staffer to someone on the House Banking Committee, as an official at two federal financial regulatory agencies, and my 21 year career at Fannie Mae.

Having said all of that, I believe the banks must be comprehensively engaged and asked for their preference for a national mortgage finance system to truly determine what systemic mortgage model they would like constructed.

I might be unhappily shocked but I am not sure that abolishing Fannie and Freddie—or more importantly doing away with the function the two provide—is what large banks would demand.

Nobody should confuse what I am advocating or my goals.

I don't think the former Fannie and Freddie can be resurrected in their old forms, but I believe their important 24-7 utility of staying in the market at all times as the mortgage investor as last resort must be preserved, if for no other reason than to insure that lenders provide consumers with long term fixed rate financing.

Offer that simple statement and most congressional eyes glaze over or just not understand, because most Congressmen and Senators don't comprehend the interest rate (and credit) risk in long term lending and just assume that if there are lenders, that 30 or 15 year option will be there.

I think many bank managements and boards, after soberly considering what's in their institution's best interests would agree that a third party entity, which can take the loan risk from bankers' books, allowing them to make a profit and then service the loans and earn more income, are good things.

But, understanding basics is crucial before Congress-especially in the House—goes through the inevitable “rip out their throats because they are from the other party” debate about the secondary mortgage market.

Now is the perfect time to ask some of the banks since the American Bankers Association will host a major conference in town this week. Lots of opinionated bank officials will be a cab ride away or likely visiting the Hill on their own.

Congress, when visiting or being visited, should grill the bankers on the question. For the public official engaging your local bankers on this question gives you something to say during their visits which is topical and germane to your work and shows you value what they think.

If the banks might go along with some hybrid public/private model then where will the opposition come from, save the Wall Street Journal’s editorial board and the American Enterprise Institute?


Mark Zandi, who was an economic consultant to the Romney presidential campaign, emerged last week as a possible successor to FHFA's Ed DeMarco.

Zandi's has the intellectual credentials but, if the rumors are legitimate, why take this federal job?

Maloni, 4-15-2013

Monday, April 8, 2013

Fannie, Freddie and More Fannie

What he said:

“----* Man,  F&F could ship Treasury $100 billion in revenue over the next two Years!”

After Fannie Mae announced its robust 2012 earnings, that was the observation from someone who does “GSE” very well.

He is the source who alerted me weeks ago to a Fannie's SEC submission—which,then, most seemed to have missed--saying that Fannie was considering use of some $60 billion in available deferred tax assets in its final 2012 earnings statement.

While that document was there for the world to see, few had noticed or thought through the implicit positive financial implications of the bold forecast. They were poised to make a ton of money.

When I blogged the information, multiple things occurred, including a jump in awareness that Fannie and Freddie were growing in financial strength, that they could--if allowed by the Treasury--pay off their bailout debt in a few short years.

Like it or not, understand it or not, the Congress had to weigh this strong suit as it struggled to figure out how, if at all, to change the US secondary mortgage market structure.

Fannie's regulator stepped in, objected, and later blocked the DTA use, at least in the 2012 earnings statement. Although that decision now seems to have been reversed and Fannie's and Freddie's vitality suddenly looks much stronger to the world.

Treasury owns 80% of the two companies through the senior preferred stock it acquired in the 2008 takeover, but the junior preferred stock, which Hank Paulson conned small banks and community lenders into buying and then tanked when Treasury (Paulson) took over the two companies, was bought for pennies on the dollar by speculators. It has since short up 250% or more in value, suggesting somebody thinks they still is market value in Fannie Mae and Freddie Mac.
Yes, my friend could be way off, but he also believes the future payments largely will be revenue/real cash, not tax expenditures (which still would be there  to cover out year income, indicating even greater income).

It all just heightens/lengthens/deepens the problem I cited three months ago, paraphrasing myself, “Congress is confused now about the future of the country's secondary mortgage market, what does it do when Fannie and Freddie start kicking off lots of profits?”

The California Association of Realtors

When I lobbied for Fannie Mae, I built strong personal relationships with Realtors everywhere, but better than with the California Association of Realtors, their chief executive, Joel Singer, and his deputy Leslie Appleton Young. They are people I like and admire.

The group recently asked me to speak to a leadership in LA and I jumped at the chance join my friends.

In a smallish afternoon gathering, I commenced my remarks by telling the mixed group of execs from all over California, “Washington DC and the Congress are all ------* up” and I proceeded to discuss why.

While some might have been taken back by my opening, few doubted my initial observations
when I concluded, after answering a ton of their questions.

Be assured that my “evidence” was even handed bipartisan, bicameral, and touched the Obama Administration, too.

For the most part, these California men and women were the principals of their firms, as well members of an influential state trade association. Many (with an emphasis on “many”) will soon will come to Washington to lobby Congress, agencies, and the White House on their industry business priorities.

The Realtors and I talked about issues, process, personalities and--as smart people--they quickly understood how difficult their advocacy roles are going to be.

As if to underscore what I told them, shortly after I returned home, the Washington Post ran a feature article (well written by Zach Goldfarb) about the stark ideological and personality contrast between House Financial Services Committee Chairman Jeb Hensarling (R-Tex), a vocal conservative, who wants government out of as many segments of the national economy as possible, and Maxine Waters (D-Cal) an equally pugnacious liberal progressive who sees government participation assisting the nation.

Goldfarb's themes will warm the heart cockles of those seek the status quo and no changes or improvements in anything within the Committee’s broad financial services jurisdiction, which includes most things money and housing, including, the federal financial regulatory agencies, Fannie Mae and Freddie Mac, HUD, FHA and the Home Loan Banks.

Pithy comments from an unidentified staffer underscore the Hensarling/Waters differences, suggesting little possible agreement on financial matters most political as well as substantive.

Contrasting current Chairman Hensarling with his immediate predecessor, Spencer Bachus (R-Ala), the staffer explained:
Under Hensarling, the GOP is more intent on promoting its ideology and delivering a broader message that government is too big, said a GOP aide.
That is a change from the approach under Bachus, who became chairman in 2010 but was term-limited and had to step down and who was seen by staffers as too willing to accommodate Democrats such as Frank.
Hensarling is very focused on making sure the committee puts out a message that’s in line with his ideology,”said the GOP aide, who was not authorized to speak on the record.“There is a lot bigger messaging focus than when Bachus was in charge.”
Or, as I assessed the political environment for the CAR,“Washington DC and the Congress are “...... up!”
Chipping Away at the Fannie Myth 
Reversing belief in a false narrative, which many in the nation's capital hold dear, is no easy chore.
The Fannie Mae mythology suggests it spent years underwriting loans for people who could not afford the financial obligations. Those loans were “subprime” and they led, directly, to the 2007 financial collapse of the real estate market and dozens of financial institutions. In 2004, the myth goes their leadership was forced out because they “cooked the books and paid themselves big bonuses.”(sic.)
I've spent years, with only partial success, correcting the errors in the fallacious scenario above, pointing out the longtime Fannie Mae achievement of its statutory mission; the fact that loans it underwrote from 1990 through 2004 had extremely low default rates and losses and that in 2004, and how it's leadership was hounded from office by a dishonest/dishonorable political “report”--issued by its regulator--suggesting that senior Fannie officials engaged in securities violations for personal gain.
When the SEC piled on in agreement, the individuals and the company were doomed, which, not surprisingly, had been a long time GOP objective.
Some of this myth got corrected last fall--eight years after the fact--when federal judge Richard Leon issued three separate decisions saying the securities violation charges again the three had no basis in any fact presented to his court.

But that didn't stop New York Times columnist Gretchen Morgenson from raising that specter, again, in a recent article when she besmirched a recommendation from the Bipartisan Housing Commission (BPC) for federal reinsurance of certain bank securities.
In excoriating the Commission's recommendation—and noting that some commissioners had ties to the old Fannie or Freddie--Morgenson bloviated and dragged in her Fannie/Freddie prejudices, and employing a guilt by association mugging of the Commission's proposal, while fingering who had nothing to do with the BPC or its policy suggestions.

She wrote:
Among the retirees receiving pensions courtesy of the taxpayer are Franklin D. Raines, Fannie Mae’s former chief executive; J. Timothy Howard, the company’s former chief financial officer; and Leland C. Brendsel, former chief executive of Freddie Mac.

"All three men were ousted from their companies amid accounting scandals —Freddie’s in 2003 and Fannie’s a year later."

Morgenson--utilizing tools from the "Big Lie," carefully avoids noting that Raines and Howard were exonerated in court (along with Fannie Mae Treasurer Leanne Spencer) or that Judge Leon's findings were unambiguous regarding the charges.
From Leon's decisions.

"There is not only no direct evidence that [former CEO Franklin] Raines intended to deceive Fannie Mae’s investors.….

At bottom, plaintiffs make much ado about earnings management, but plaintiffs present no evidence that Raines was ever aware that these transactions may have violated GAAP or, more importantly, were being used for an improper purpose.

Plaintiffs fail to point to any evidence from which a reasonable jury could infer that [former CFO Timothy] Howard believed any of these transactions were improper or sought to conceal them from the public. Indeed, plaintiffs' own expert recognized that earnings management does not necessarily show an improper purpose.
... In sum, plaintiffs offer no evidence from which a reasonable juror could conclude that any of Howard's statements concerning Fannie Mae's accounting practices or internal controls were made with an intent to deceive, or were otherwise made without any reasonable basis.
Myth destruction is never helped when the Washington Post--DC's most widely read publication--never has written one word about the Leon decisions.

The Fannie myth won't go away until people who know better lend their voices and experiences and drown out Ms. Morgenson and others trying to manipulate the facts. But it would behoove the Congress to understand what is real and what is false, if it ever moves to remake the secondary mortgage market.

Icing on the F&F Cake

Looking ahead, there are at least two other possibilities where Fannie and Freddie could add

to their bottom lines, meaning giving more money to the Treasury. Both likely are overcapitalizing for their projected losses—Treasury and FHFA saw something which blessed future use of the DTAs--and both former GSEs are suing large banks for defective loans and mortgage backed securities sold by the banks to F&F.

Maloni, 4-8-2013

(*selected technical terms used in the mortgage and political worlds.)