What
I Think and Why?
My last blog about the President's speech stirred up a lot of static, which was my
hope, plus generated a challenge from a long time industry observer whose
opinion I value.
I’ll shorthand his comment—and throw in something he
didn’t say but I suspect he thought—and that was, “Why all of this talk of Fannie/Freddie
history? People want to know what you think
about Fannie and Freddie going forward, since nobody believes they can be
resurrected as they were and, frankly, few want that.”
Fair enough, although I’ll just say “maybe” to his last
point.
My complete response is to remind readers that to
understand what you want to build in the future, you need to comprehend what
happened in the past.
In the past few months, I’ve described my mortgage market
of the future and what a revived F&F might look like and do. But, it never
hurts to repeat it.
Let me start with something which should be obvious to
those who read my blog.
Concentrated commercial bank power, no matter what the market
endeavor, sets off my alarms, because I don’t think anyone—or certainly any US regulatory
agency—can stop the banks when they choose aberrance.
The PLS debacle--only a few years ago--proves that, as do
the more recent violations which I noted last week, manipulating LIBOR,
laundering Mexican drug cartel funds, cornering commodities to inflate prices,
and having financial dealings with sworn US enemies in the Muslim Middle East.
Control
the Banks
Banks exist to make money, nothing more. We need them,
they are near indispensable in a democracy.
But, as long as our nation and its public officials lack
true governors to control industry excesses, bank behavior requires vigilance
and scrutiny.
The US doesn’t have quality financial services regulation.
It may never have because the banks are too nimble, the regulatory process too plodding,
and some bank regulatory staff just act as industry cheer leaders and guardians.
I don’t want to get rid of bank home mortgage lending, I
just want it well policed.
So, the trick—for the “get rid of Fannie and Freddie, at
all costs, and let the banks control the market” crowd--is to put in place something
which the large commercial banks must fear/respect to engage in the mortgage lending
game.
Because of their secondary mortgage market position, the “old”
and even current Fannie and Freddie had/have that mortgage monitor’s role, setting
primary market underwriting standards, creating acceptable mortgage products, improving
operational delivery systems, helping create and pricing mbs (mortgage backed
securities) and therefore the underlying mortgages, etc.
That’s why they worked well pre-2005 and why they have
worked fabulously post-2008.
Few Appreciate the Good News
Not many mortgage market observers regularly acknowledge that
the major “problems”--most critics attribute to Fannie’s and Freddie’s
operations/existence--have been stamped out or are proscribed by their current
regulation, which is why the two have performed so well financially.
Wake up Congress! Congratulate yourselves.
The FHFA regulatory regime has solved much of the “GSE dilemma”
and you just don’t realize it. You are fighting issues which haven’t been in
place for years.
Post
2008 Improvements
Since 2008, the Federal Housing Finance Office (FHFA),
F&F’s current regulator has:
--- prohibited F&F from securitizing or dealing in
below market quality mortgages=no possible subprime investments:
---ordered F&F to reduce their existing portfolios by
5% annually=shutting down their riskier business activities and pushing them
into safer mortgage securitization;
---overhauled and reduced the onerous and confusing housing goals (which at one time required each to invest
55% of their business in mortgages serving “low, moderate and middle income
families, or those living in underserved areas”)= removing the role which few
policy makers understood or appreciated but which acted as a lightning rod for
critics and enemies;
--- Required Fannie and Freddie to increase their guaranty fees charged lenders (and ultimately
consumers) and the two now must hold higher capital, ironically which may be
too high given their tiny loss rates=more loss protection on their books to
deal with any business problems, which seep through stricter regulation, and create
more financial space for other mortgage investors.
These important operational changes are the reason for
F&F’s solid financial performance (ironically, with commercial banks
employing them happily and heavily) and F&F now sending billions of dollars
to the US Treasury.
--Even the old Democrats and political activists--who once
twisted GOP panties in a bunch--have long since moved from Fannie (and didn’t
exist at Freddie). Upwards of 60% of current staff are new since 2008.
And, I certainly haven’t heard complaints that there
isn’t plenty of fixed rate financing available for mortgagors from any lender
which does business with F&F.
How I
Would Remake F&F
To give the two entities and the nation’s home buying
public what will work for each, I would separate
F&F from the federal government and “reprivatize” them.
--Disjoin them from the federal government, over some
reasonable time period, and allow them to stand on their own (much like a bank
or insurance company), employing their own capital.
--Let Fannie and Freddie truly repay Treasury whatever they owe, a mechanism which Treasury
Secretary Jack’s Lew can approve on his own.
That functional crossover event will occur naturally in
the next few quarters, but Hank Paulson’s takeover deal prohibits GSE repayment.
--Have F&F pay
back more than they were given. so Treasury has additional revenue and can
argue that the American taxpayer made money from the F&F fix, especially
since most observers have failed or won’t monetizing all of the systemic
pluses F&F provided the nation for
the past 6 years.
--After repaying the Treasury some agreed upon figure
($200 Billion?) and--after paying taxes and allotting capital--permit Fannie
and Freddie to keep excess earnings as a capital
base for the future.
--In reprivatizing
F&F, keep their current regulatory
structure to insure the sufficiency of their capital formation and maintain
current limitation on the types (quality) of mortgages they can securitize;
--Finally, permit F&F to re-enter the mortgage
market—WITH NO FINANCIAL TIES TO THE FEDERAL
GOVERNMENT-- to perform whatever roles the market demands from them.
Despite fears to the contrary, that’s all Congress can
do, boldly make a statement that this Fannie/Freddie are different from the old
ones. The Congress can’t legislate away historical memories.
Why
Demolish a Valuable Asset?
Which Wall Street investment bank or major TBTF bank—with
their DNA all over the 2008 financial meltdown—did the Congress or any
Administration abolish?
The
answer is “not one.”
Why should
the Congress (especially the Democrats in each chamber) destroy the two
facilities which by law were put in place to provide mortgage liquidity to low,
moderate, and income families and have performed that mission quite well?
F&F
have succeeded in the past, they work now, and can continue to work well in the
future.
I noted that major steps already have been taken to
reduce whatever systemic risk their critics see or allege.
There
is no need to do away with Fannie and Freddie, save the Conservatives’ desire
to produce a scalp to wave around and satisfy some bizarre partisan political bloodlust.
The misguided Fannie/Freddie hostility is based on a
tranche of political lies and distortions so deep that the Congress, the media
and parts of the public never will be able to wade through and reach the truth.
Although more and more attention has been given in the past two years to exposing
those spurious political attacks which helped bring down the former GSEs.
If you read the NYT and Washington Post—including today’s
(Sunday) NYT editorial—you’ll see how much campaign money the financial services
industries heaps on Senate and House Financial Services Committee members,
especially the latter.
I worked at Fannie for 21 years and before that another
15 on Capitol Hill and in federal financial regulatory agencies. I know how and
why the various banks, investment banks, MI’s and insurance companies do what
they do. I know what Fannie did and more
importantly, I know what the company accomplished—given the congressional
mission it was given to spur homeownership—which many knuckleheads now try to
paint as tawdry and phony.
Reminder to all rushing to enshrine our nation’s banks as
the overseers of the primary and secondary mortgage markets: F&F were given
the “low income housing mission” in 1992 because the primary market lenders
balked at making those loans.
The 1992 statute put F&F at the “choke point” of the mortgage
delivery system. Congress wanted Fannie and Freddie to use their market pressure
to force banks, mortgage and savings banks and other lenders which were
“reluctant” (that’s the kindest interpretation) to make mortgage loans to poor and
minority families.
It worked, since before that law, all the fair lending and
liberal bleating failed to make that lending happen.
Fannie then was an
industry leader and a ball buster, at a time when that behavior was needed (and
welcomed by many in Congress on both sides of the aisle).
It still is needed and I have no idea if my “new Fannie”
can perform that function. But if future execs run it properly, Fannie still can
be a standard setter and market eyes which won’t allow lenders to cut corners, discriminate,
cheat, and take advantage of mortgagors.
Congress should give them a chance to reprise that role,
as many people start to wake up to the systemic implications of the various
proposals to do away with Fannie and Freddie.
Let
the Dogs Out
Abolishing Fannie and Freddie only serves the Conservatives’ desire to
produce a scalp to wave around and justify some bizarre partisan political
lust.
These now friendly house trained, pets haven’t bitten
anybody in 6 years. They are fenced in, hardly ever bark, fetch the paper,
guard the house, and are very productive.
Why kill them?
Hedgies
and Preferred Investors Take Notice, the Adults Are Here
Everyone knows about the Corker-Warner and Hensarling
bills, but two fresh F&F proposals—reportedly—are somewhere between the
conjuring and drafting stages.
One is from Sen. Jack Reed (D-RI.) and was recently week discussed last Friday in Inside
Mortgage Finance.
The second—according my poker group sources, quoting
senior committee staff--will be a “Tim Johnson (D-SD) and Mike Crapo (R-Idaho)
bill which will be “the only F&F bill
the Senate Banking Committee considers this year.”
Who knows what all of that means, save Reed is a more
potent committee player than either Senators Corker or Warner and, at the end
of the day, Committee Chairman Johnson and ranking member Crapo can control almost any
agenda.
What
Others Say
And, listen to these entertaining real estate guys for facts and laughs.
Maloni, 8-18-2013
