Monday, September 30, 2013

Put Them in Jail?

Budget Issues and Mortgage Matters



Tea Party Plays with Fire and Gasoline;
 Doesn’t Care Whether It Starts an Inferno

The bad news is the House GOP is controlled by its crazy caucus, the Tea Party. The worse news is that they are so single-minded in their disdain and belligerence that they think they can shut down the government for a few days and nothing bad will happen and then go onto force the US to stop paying its bills, with similar marginal repercussions. 

They are batshit daft! 

They‘ve been told and lectured by major business experts, lobbyists, and their own Republican economists that you can’t screw around with the US debt rating and not have horrendous consequences which will reach into every one of their politically safe tri-cornered districts and drive up prices across the board for their constituents and the rest of us. 

Actions do have consequences and these petulant, simple-minded and mostly GOP Representatives seem unaware of anything which occurs outside their little coven. 

Initially, part of me admired the TP's consistency and non-deviation from what they perceive was their constituents’ priorities. But that glow wore off soon, because also they also were elected to participate in a  broad democratic governing exercise--called the United States Congress--which impacts far more than “George and Harriet back home in Mayberry” (or wherever they’re from). 

Shutting down the federal government for a few days is now small potatoes, but If the conservatives force the government to miss paying its bills, because they oppose new healthcare laws, not only will there be an immediate actionable short term response but the future likely will produce an interest rate “event risk” hike from institutional investors, who buy US government securities. This market will want higher yields to protect them the next time these wool headed wingnuts go off the reservation. 

And don’t look for more than an occasional constituent retribution against the TP’s foolishness, because the real value of all of those GOP state legislative victories insure that most of the Teapartiers  will come back to Congress, if they can stomach it, or be replaced by even more reactionary elements. State Capital gerrymandering made most of the districts which produced the current crop of right wingers heavily conservative. 

What I predicted five weeks ago about the GOP “circular firing squad budget exercise” is coming about, with the House passing something destined to lose and the Senate passing some short term fix to bail out the nation’s ass.

I don’t envy John Boehner (R-Ohio) and Eric Cantor (R-Va), but they made their political beds and now….  


Totally idle Maloni fantasy, but a few weeks ago—looking at the above unfolding—I wondered if the Treasury, given how “helpful” earlier Fannie and Freddie dividends eased the revenue crunch, might want to ask each company to somehow prepay its quarterly Treasury obligations (which is a sweep of all cash earnings, minus capital), with cash on hand, to provide the government additional flexibility if the same squeeze occurs in a few weeks. The exact earnings, while not certified likely can easily be estimated. 

I suspect that such a plan doesn’t need congressional blessing. Treasury also could encourage Freddie to use its Deferred Tax Account (DTA) proceeds to up the current payments, too, which could mean an additional $40 Billion or so (because of the DTA) coming to Treasury mid-October, as things get tight on the debt side for Jack Lew and the nation.

A lot of obstacles to this occurring, but bureaucrats have a way of getting very creative when absolutely necessary. 

It’s all just Maloni “geezing,” no substance to any of it. If it ever did happen, F&F wouldn’t get any credit for doing it, just more back of the hand. But the irony of F&F riding to the government's short term rescue is delicious.


Speaking of “a few weeks ago,” a few weeks ago—along with my ongoing warnings to keep a careful eye on all of the big bank mortgage machinations-- I speculated that folks enamored with the new private label jumbo lending (do to get a jump start when F&F regulator FHFA shaves the size loans they can acquire/securitize), better be wary because lack of liquidity and the absence of F&F standards scream “caution.” 

As if to underscore the concern I offered then, the following article appeared last week in Inside Mortgage Finance. 

By Brandon Ivey

Moody’s Investors Service warns in a new report that some of the hard-to-analyze features seen in non-agency MBS issued before the financial crisis are starting to make a comeback in new jumbo deals.
The features include super senior support bonds, exchangeable securities, principal-only bonds and pool interest-only bonds.
The rating service notes that the features allow issuers to offer senior bonds with a variety of cash flow allocations to match investor risk appetites and yield requirements. Moody’s says the features introduce complexity to the growing jumbo MBS market.
“These securities pose analytical challenges because their risk profiles are affected not only by the absolute level of losses and prepayments but also by their timing,” Moody’s writes. For more details on the complexity of new jumbo MBS, see this week’s upcoming issue of Inside MBS & ABS.

It reminds me of the time, President George W. Bush proclaimed:
“Fool me once, shame on you….Fool me, you can't get fooled again.”



Regulatory Lassitude

Pretty tough complementary exchange last week on “Yahoo Finance” between Barry Ritholz, whose columns I often link, and Yahoo’s Jeff Macke. 

A "I'm mad and I can't take ti anymore" Macke threw out a thought provoking suggestion about the big financials, which should be clear to anyone was less about JP Morgan Chase—a better managed than most of the TBTF institutions—and was more about how our flabby US financial regulatory regime treats the biggies. 

Our regulators seem to do a fabulous job forcing the behemoth financial institutions to pay fines after the fact, but they are not very good at shutting or slowing down bank recidivism, as I’ve documented in any number of previous blogs.  

As Macke and Ritholz agreed, those heavy financial penalties just become “the cost of doing business.”

Let me follow that up with a TIME magazine column from Nobel winner Joseph Stiglitz. 

The relevance of regulatory talk is to remind Congress, as it tries to reshape the nation’s, mortgage finance system to be aware of the limits of the regulatory regime as well past mistakes which easily could occur again.

Maloni, 9-30-2013


Sunday, September 22, 2013

Let the Diplomats Worry About Syria

Mortgages Only Mortgages, No Syria Talk


Several items caught my attention this week.

First was a question about the Corker-Warner bill asked by a reader and answered in my blog comment section, in which I suggested that the legislation’s requiring private mortgage insurance as the primary source of loss coverage meant that industry—which likely will grow with more companies than the handful now there—would have to raise $100 Billion or more in new capital to cover a $1 Trillion US mortgage market. (In 2012, I believe the markets’ size was north of $2.5 Trillion dollars, but you get the idea. It’s a ton of money to raise.) 

Additionally, I noted in that answer that insurance companies are state regulated. I am assuming that many in Congress—if they turn the primary and secondary mortgage markets over the big banks and the MI’s--will want to regulate the insurers in Washington, not 50 state capitals, which historically have been  amazingly friendly/easy with the broader industry. 

Is Senator Corker and his GOP “states’ rights” allies ready for major fight on McCarron-Ferguson (decade’s old federal statute which sets up state insurance regulation)?


Reducing F&F Mortgage Ceilings

Also this week, the Federal Housing Finance Agency (FHFA’s) F&F regulator announced is a plan to reduce the size loan which F&F can securitize or otherwise support. 

I assumed, in part, this was an to achieve to get “more private capital  into the marketplace” (a BS phrase used by D’s and R’s alike deaf to the reality that any new money coming from banks  results from the current federal deposit insurance subsidy that banks and other depositories enjoy). 

But, imagine my surprise when HUD Secretary Shaun Donovan announced that his FHA looked forward to getting a chunk of those loans. 

Wait, if loans go from Fannie and Freddie, to the FHA—by virtue of the FHA federal guaranty lenders can exercise—how does that represent new private capital, if Uncle Sam stands behind those loans?

With all of the bitching and moaning about the need to get rid of F&F because they dominate the market and are too big, blah, blah, blah, the C-W advocates may be missing some big the trees (which will grow more)  while staring at the forest. 

I came across what I believe are the 2012 mortgage market segment numbers for Wells Fargo Bank, the nation’s largest mortgage lender. 

I won’t quote the exact numbers but will note that in each of 5 major categories:  FHA/VA lending; correspondent lending; second lien lending; originations and loan servicing, Wells share seems to run from 25% to the mid-40% in those segments, meaning a fourth to almost a half of the total dollars in each of those categories last year. Those numbers could change, but the pattern is there.

This is before the C-W bill gift wraps and hands to the nation’s big banks the primary and secondary mortgage markets, when it abolishes F&F.  

I wonder what those market share/domination numbers will look like when C-W finally puts the TBTF financial institutions in the driver’s seat, naturally with Uncle Sam still on the hook at the tail end of any losses experienced by the Federal Mortgage Insurance Corporation (FMIC), C-W’s major legislative creation. 

Corker-Warner’s advocates will rush out with a bunch of answer to these challenges, but—as suggested last week—somebody better get a “Mortgagefax” from C-W, because most of these issues raise troubling questions for which there are no current answers (including why no securitization limits for the major TBTF banks?).

That doesn’t seem to trouble those who want to build a new mortgage finance system by deconstructing the old and discarding the best or maybe just expropriating them from Fannie and Freddie. 

This is an excellent juncture to introduce a superb column by nationally syndicated financial columnist Barry Ritholz, whose work appeared in papers over this weekend.

Ritholz’s material begs the question why must this Congress, indeed any Congress or Administration, need to relearn lessons which should be fresh in their memories? 


Speaking of History…

Some of my Republican friends complain that I am too hard on the major banks and should cut them some slack.

My standard response is that the big guys are not reliable stewards of the nation’s housing mortgage loan market and given the option will run from it, especially when needed most. 

(See Nick Timiraos’ commentary below on what large banks do when rates rise.)


However, while I believe the banks are crucial to the economy and vitally necessary, they have benefited handsomely from Washington and should offer the nation a much higher level of probity and consumer service than they do now, given that taxpayers (and feeble federal regulation) have given them so much. 

But, I am hardly original in my suspicion of bank behavior.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."
- Andrew Jackson
… or
"The system of banking is a blot left in all our Constitutions, which, if not covered, will end in their destruction. I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity is but swindling futurity on a large scale." - Thomas Jefferson
And, finally, from the often insightful (but occasionally irritating), Barney Frank, there’s this.

Oh and I wouldn’t forgive myself, if I didn’t include this Huffington Post article for your pleasure.

Maloni, 3-22-2013

Sunday, September 15, 2013

Show Me the “Mortgagefax ”


There are any number of ideas out there to do away with Fannie Mae and Freddie Mac and “reform” the nation’s mortgage finance system, which I contend needs tweaks, not major surgery.

Senate hearings last week didn’t produce any revelations save some inside the Beltway chatter, which I memorialized—in sarcastic faux form--for a major media source which chose not to cover the genial event. My email reported the following highlights… 

"Blah, blah, I want to thank the Chairman and the ranking minority member for holding these important hearings.....the American people, want, need, and expect fixed rate may be untested but it's time to do something different and break up this system which creates private benefit and public risk....Don't forget the poor and those who can't afford to buy mansions.....I once lived in a house...let's, too, thank Chairman Hensarling for suggesting the US step backwards 80 years, his input is important, without leaders like him.......and don't forget my Little League coach, as well as my Aunt Sally and the ‘little people’ of my state.” 


Here are the current "replace F&F ideas," with their primary interest group sponsors where they exist: Corker (R-Tenn.), Warner (D-Va.), Bipartisan Commission; Hensarling (R-Tex), Flat Earth Society (sic); Maxine Waters (D-Cal.) bill, unknown; Senators Johnson (D-SD)-Crapo (R-Idaho), C-W lite; and Obama Administration (um, er, ah, “Mulligan, please”). 

But all are short one major component. None has a “Mortgagefax.*” (*Maloni’s self-invented, ripoff of the famous Carfax report, named for the corporation which provides a comprehensive automobile history review for the use of used car buyers, dealers, and others in the automobile marketplace. For many, an unblemished Carfax report is an extremely positive sign.)

Absent a Mortgagefax or the equivalent, these ideas are just wishes, hopes, and dreams. Don’t confuse advocate’s rhetoric for observable fact or history. 

There is no easily obtainable, verifiable operational history for these replacement systemic models. No reliable data on when and how they performed or if they even will work. 

A Fannie and Freddie “Mortgagefax” exists, in their years of recorded history. People have a very good idea how they operate and what they can do and what a possible future for them as revived private companies might look like, based on performance and regulation today.  

Again, there is a narrative account—grandeur and success, as well as warts--which is why recent GSE regulation and productivity bodes so well for the public and the Congress. And, importantly, it’s there for all to see.  

Look at the competing models and try and answer these questions, with specificity?

How would the principal elements in any of the above mortgage system ideas provide consumer benefits or interact with other market participants? What is their systemic division of labor and the cost for same? Who will provide what “necessary/desired services” and what “desired services” won’t be offered? If it’s all based on a beefed up MI industry, where will the capital come from and who will federally regulate these crucial insurers, since MI now is regulated by the 50 different states? 

Beyond, “trust us, it will be just as good,” none of this is available for any of the enumerated pretenders, because everything being proposed is based on speculation and hope.


An “Abolish F&F” Analogy


To keep the comparison topical, those who would “get rid of Fannie and Freddie and substitute ____ (fill in the blank)” are touting the mortgage system equivalent of Vladimir Putin’s Bashar Assad proposal for Syria to turn over its WMD for “outside control.”  It sounds good, but they are no details, hard timetable, or straight answers to vexing questions.

The only thing that the sponsors and supporters of the destroy F&F proposals can do is first vilify and then theorize about their own schemes.

Hey you on Capitol Hill, interested in a devil that you don’t know instead of a not so devilish one you do? Do I have a few deals for you! 

None of the poser advocates will say many good things about Fannie (despite its 70 years in the mortgage world) and Freddie, even how a limited, but revived F&F might also serve.

My old Fannie colleague and friend Barry Zigas--himself a Corker-Warner advocate and a former member of the Bipartisan Commission which produced the report which led to the Senate bill—showered lots of blog praise on Fannie when he damned recent interest in the maintenance or revival of the two. 

While he strongly supports C-W, Barry also offered many positive comments about Fannie systemic successes, operations in which he toiled tirelessly for years, primarily to make the company’s low income mission a grand success. 

He, too, finds himself advocating for something which lacks precise operational details, but whose champions start with smashing keystone mortgage systems that have their “Mortgagefax” on display for all to see and all to compare. 

In truth, whether it’s Corker-Warner, Hensarling, or any of the newer bills. There is very little “there” there” to them.

The dynamism of our mortgage market means anti-F&F proponents have difficulty truly projecting their plans five years into the future and offering specific details of their replacement mortgage schemes, which means you can’t really get a fair comparison of apple to apples.

Can you say, “Pig in a poke, boys and girls.” 

Non-Conforming Market Develops


There have been several recent articles about growth in the non-Fannie/Freddie conventional market, also called “Jumbo” or “non-conforming” markets). 

This segment will expand further when the Federal Housing Finance Agency (FHFA) decides to implement announced reductions in the mortgage size F&F can securitize, opening an even larger real estate financing bloc exclusively to the big bank lenders. 

(Sorry, California, New York, Boston, you’ve just been screwed via regulatory fiat!) 

Jumbo loans, i.e. loans F&F can’t acquire, recently have displayed rates equal to or below the F&F rate. Historically, jumbos almost always were priced higher than conforming rates. 

But, “Caution Will Robinson,” nothing has occurred recently which revokes fundamental marketplace laws. 

I’d label these lower rates, “teasers,” for now.
At some point, the absence of liquidity (Fannie and Freddie can’t buy them, meaning the investor market is constrained), means prices will have to increase to entice whomever wants to hold those loans.

This is a prescient moment to introduce an excellent reminder of the historic (just six or seven years ago) perils of this particular loan when securitized and guaranteed by the big banks and their subsidiaries. 

This linked article came from the fertile mind of our friend David Fiderer and appeared online in the American Banker. (As you read it, think back to some thoughts I expressed in the previous segment.)



“Russian and Syria are the bad guys. Don’t ever trust the bad guys.” 

Former Israeli military General, quoted in Washington Post, on Israeli reaction to negotiations with Russia and Syria. 

To the certain delight of my blog readers, I just excised 1000 words from this blog of my Syrian commentary and my advice to the President Obama. (True!)
Instead, I’ll swallow my foreign policy bile and anger and devote just a few sentences to it, including a comment about the latest "deal” to have the Syrians provide within a week all of their WMD poison gas detailed information.

Russia is a second rate, trouble making country, run by a dictatorial thug, who lusts for the old days when Russia was a world power.

If you are going to error Mr. President, do so by bombing Syria’s WMD and military fortifications, not in diplomatic delay and chasing the tantalizing lies of Vlad Putin and his posse.

Putin can’t be trusted to do anything in America’s best interest, just his own and Russia’s.

You shouldn’t need me to tell you that Mr. President, but I will. 

A month or two from now, I hope you are not back telling the American people why—despite your honest efforts-- your overtures were rebuffed and we now need to bomb Syria. 


What Others Say about F&F and Big Banks

Thank You, Larry Summers!
(More on this Sunday night development, next time.)


Maloni, 9-15-2013

Sunday, September 8, 2013

Congress Returns to…….???

Bombast Week and Mortgage Gossip

On doing away with Fannie and Freddie.
“Big banks generally fall somewhere in between. They have long viewed Fannie and Freddie as competitors, but they don't want to lose access to a government guarantee that keeps markets functioning smoothly. Banks have profited handsomely over the past two years by collecting fees for refinancing loans that can be sold to Fannie and Freddie.”  Nick Timiraos, this weekend’s WSJ. 

New Senate GSE Bill??

Rumors are circulating that Chairman of the Senate Banking Committee and its top Republican, Tim Johnson (D-SD) and Mike Crapo (R-Idaho), respectively, are working on a new housing reform bill which could cover Fannie and Freddie issues (ignoring them, abolishing them, wisely keeping them, or something just as wise in the middle?). 

While I can joke easily about what I don’t know, the significance is if the two top guys can agree on a common approach, it will give major momentum to that particular bipartisan proposal. 

It won’t automatically put their draft over the top, because Senators will want changes, because, well…..they’re Senators. 

Again, with no real inside information, it’s likely that whatever the Senators produce, even if the Senate passes it this year or next year?), the House will balk because the legislation won’t be backward looking enough. It would compete with the House Financial Services approved Jeb Hensarling (R-Tex.) bill, which would recreate the mortgage world of the 1930’s, but still hasn’t got a lot of House support.

One thought for Senate staffers working on the reported proposal. Your job should be to come up with something original which keeps the best of what exists today and dumps the worst. If you start with the Corker-Warner bill (as has been rumored), you need to ask the sponsors “why they would abolish F&F,” absent any real justification? 

If you are serious about major reform, your task requires a comprehensive understanding of how mortgage markets really work, not just being familiar with the “buzz words”; knowing where and how money for US home loans becomes available; how the TBA securities markets fits into that; why consumers like the availability of fixed rate financing; and exactly how and why the pre-2008 mortgage debacle came about (look at Fannie and Freddie, but make sure you telescope on the $2 Trillion in near worthless private label subprime securities Wall Street and the big banks created, outside of the F&F systems, and sold throughout the world).

There is much more to understanding the past that just those matters, but getting through those points will set you on the right path. 


It’s not the “congressional way,” to under do matters. But if you look at the US mortgage market today, pragmatically and realistically, less needs to be done than many suggest. (Please read Nick Timiraos’ entire article in the final blog segment.) 

You still can reduce Uncle Sam’s footprint, bring in fresh (commercial bank) money, maintain efficiency and standardization, and preserve the 30 year FRM (and it’s 15 year cousin), with small legislative tweaks to Fannie and Freddie, letting them repay the Treasury and move forward as privately owned companies, heavily regulated—as they are currently--with no ties to the US Treasury—and with curbs to certain asset growth areas.

Fannie and Freddie don't require, demand, or deserve systemic destruction, which could produce far more doubts uncertainty, and financial dislocation.than you now can imagine.
Think "Syria" foreign policy implications, but with domestic US damage spread out over this  $10 plus Trillion dollar mortgage market.
Secure it for the nation, don’t unravel it. 

Talk to your “usual suspects,” but get outside your congressional comfort box and speak to folks who know the mortgage markets, what works and what may not. (Again, as Timiraos writes, the big banks may surprise you, if you allow them to be candid.) 


While we watched some fireworks over Syria in the past several days, the heavy lightning and thunder comes back to town when most of the Congress returns. 

Frank Bruni is worth reading on this dangerous topic.


D’s and R’s will display lots of  raw emotions and utter virulent statements, but the sad result is that the President still has nothing but no-win options facing him.

I still side with those who say “we lose more by not hitting Assad/Syria than doing so” and I hope those attacks are muscular ones, which send additional messages to our foes beyond the bomb tonnage employed and the various means to deliver them. 

What Others Say on Mortgage Matters 

Some unwelcome homeownership developments.


Here is Nick Timiraos' superb update on the current political/mortgage market state of affairs.

Bloomberg’s Lisa Provost, picked up in the NYT. suggests some bad things if F&F are abolished. 

Large bank hanky panky?

Big peak at some big bank gender bias. (Yes Senators, let's give the entire mortgage market to them!)

Not about mortgages, but George Will’s thought provoking column, not surprisingly, disdain for Hillary Clinton, but puts down Chris Christie.


A whimsical Christmas gift for the ladies in your lives?

Maloni, 9-9-2013