Advice
to WH and Mel Watt
(I
wrote this before Mel Watt announced his
decision, last week, to have F&F fund their two rental housing funds. My
counsel makes more sense now.)
A President, hoping to burnish his legacy--thinking his WH
advisors misled him about Fannie and Freddie--should issue an executive
order, now, allowing the two to retain a sliver/small percentage/scosh of their
earned revenue for capital purposes, thus protecting the two from the
slightly greater business and political risks they face because of
Administration dictates. It also would position F&F well for future
productivity.
I don’t think the 3% down loan (and now the rental program,
which has constraints) portends huge GSE risk but GSE foes will spin it that
way.
Act to
Pre-empt Their Arguments
An executive
order letting F&F keep a bit of
their revenue for capital purposes would serve two operational monsters, stave
off political complaints and still allow the feds to feed the General Fund, as
long as F&F stayed profitable.
It would blunt some of the claims
F&F have no cash protection against losses and therefore should not conduct
any expanded lending.
Of course, GSE opponents seldom if
ever the facts right when they argue that F&F might get risky again.
GSE detractors ignore the
substantial loan loss reserves (Fannie @$50 billon and Freddie about $22.8
billion) which each has to protect against credit losses and the fact that both
have private mortgage insurance (PMI) on many of their loans.
But that won’t stop antagonists
from alleging F&F are too risky, engaging in bad old habits with little
capital, and need their discretion minimized and should only finance higher
quality credits (families).
Adversaries will point to the pre-2008
disaster, when F&F did not have the same tight operating rules they have
now or current limitations on securitizing lower quality mortgages.
They’ll be wrong on several fronts.
Banshees
Jump on 3% Loans & Rental
Some
elements of the anti-GSE press—including one prominent Wall Street Journal
(WSJ) reporter—weeks ago began warning F&F could stop being profitable in
the near future and might have to, again, borrow money from the taxpayer,
meaning the US Treasury.
That put this meme in the water.
The fear--“OMIGOD they will lose money and again start
down that horrible slope to financial perdition, taking the taxpayers with
them”--reared its ugly head
this week when FHFA Director Mel Watt directed both entities to begin funding
two moribund rental housing funds. The rental programs have been on their books
for 6 years but never were activated because F&F didn’t generate the
necessary income.
Obviously, Watt believes the GSE penury is over and his
rental "call to arms" came just weeks after he told F&F to begin accepting 3%
down single family loans.
The predictable wailing voices rose (See Sen. Bob Corker,
R-Tenn. and Rep. Ed Royce, R-Cal., later in the blog) and the GOP threat
machine started spewing.
Relax, Congress folks.
I offered my advice to the WH/Watt at the blog’s beginning
(which could be unnecessary, if as some people think, i.e., TimHoward717, the Obama Admin is already
close to where Maloni would send them).
There is no reason—absent a mortgagor-crushing return to
the bad old pre-2008 days (where the new GOP Congress never would lead us,
right?)—that either F&F’s “new” 3% single family lending or two rental
housing funds (which could garner some $300 million in annual GSE cash) will
lose rather than make F&F money.
The companies have too many other quality, performing
assets on their books and are very closely monitored/regulated. FHFA is not
going to preside over aberrant lending which shakes F&F safety and
soundness and (growing?) political support.
Watt’s actions speak to his and the WH’s belief that
F&F can do more to help increase homeownership and rental shelter to those
who have been denied.
That’s not to say that F&F’s political and business
opponents won’t overreact and bellow threats. I had to laugh when Ed Royce
(R-Cal.) came out channeling his best ”Bob Corker” and ranted that F&F
haven’t yet paid back anything to the federal government.
That’s the crazy ultra
conservative crap we’ll see loads (appropriate quantifier and measurement)
in 2015.
Congressional extremists might
also notice there are plenty of savvy and powerful Washington interest groups--
beefed up by the affordable housing/rental groups (community and
professional)—which applaud these Watt moves and will vigorously fight
political opponents in DC or back home.
Earth
to Ed Royce, obviously orbiting outer space near Uranus:
The Hell you say, Ed! No matter how you try to spin and
distort, there are about $210
billion F&F provided dollars sitting in the Treasury’s General Fund, about
$21 billion more than was infused in them in 2008. That amount grows with each
quarter’s positive GSE earnings. It all belongs to “Uncle Sam” and is his to do
whatever he wants with it. It doesn’t belong to the woe begotten Fannie and
Freddie shareholders, some of whom I’ll bet you represent. Go tell them F&F
haven’t repaid anything to the Feds. Before you do, check out the ProPublica
report below (and which was linked in my last blog) describing recipients’
repayments of 2008 bailout funds. It crushes your angry statement and makes
your argument look like the partisan bullpucky it is.
__________________________________________
A
Slim Hope, R’s Go With Mel?
If the R’s realize they can’t
destroy F/F right now, they can go with the “Mel Watt flow” or revert to form
and try to rollback efforts to allow F&F to serve borrowers with wider
personal credit variations. Or they might legislatively “Bigfoot” F&F and limit the two to just financing sterling
credits and deny lower income families conventional financing.
One reminder for the F&F Detractors.
The business of both shops is guaranteeing the credit risk
on billions of dollars in securities, composed of loans which meet the F&F
tight underwriting standards. Yes, it’s possible they could lose money but only
if—as in 2007-- families started defaulting on those mortgage loans in record
numbers. If that happens, it most likely will be on the GOP Congress bad policy
making.
Before House and Senate R caucuses says, “See, I told you
so,” they might want to understand that—while denied capital via Administration
machinations--both Fannie Mae and Freddie Mac have built up the aforementioned
cash loss reserves, based on frequency and severity of historic default,
applied to each and every one of those loans and as noted primate mortgage
insurance (PMI).
It bears repeating, hip shooting GSE naysayers should
understand that, right now, the Administration is keeping all F&F income
not allowing it to become protective capital. But both institutions have loan
loss reserve buffers, which operates similar to capital.
I am
Rooting for the Tim Howard717 theory
Reader/Consumers of the “not our” Tim Howard 717 blog (I’m
one), will note he’s been strident and—at times teasing—about the F&F
positives he believes are just on the cusp of reality.
Simply
put, 717’s been hinting, that the Obama Administration is going to do some sort
of 180 degree shift on the GSEs and slowly loosen up to the point of possibly
reducing the “conservatorship,” allowing them to build some capital and
even serve as they did prior to 2004, but with better
regulation.
The 3% down financing and the recent activation of the
rental housing funds lean in that direction.
TH717 last week also announced his plan to produce a document to
rebut what he believes are the many lies and GSE history distortions.
Good for him and I hope it’s effective and more broadly acepted than
the work of many of us who have been writing the same things, trying to better
educate a variety of audiences.
While 717 mentioned the name of David Fiderer, as a possible joint
author, methinks the “Hebrew Hammer”
may be hard at work on his own tome and not have time to help TH717 or do
much of anything else.
Dumb,
Dumb, Congress
Blame
the GOP, but……
Save
Some Blame for Dems
Banks
gain in House spending bill; Senate fails to stop them.
Ugly little, often times expensive, policy changes sneak
into every appropriations or spending bill. This week’s $1.1 Trillion behemoth
to keep the government going to next fiscal year was no exception.
But the blatant House GOP giveaway, once again to the big
banks letting them use a limited portion of taxpayer insured dollars (working
capital generated by your FDIC insured checking and savings accounts), to
buy, sell, trade, deal in financial derivatives, was smarmy.
Third quarter bank profits were up over a similar period in
2013, meaning they are making money (when don’t they?).
Why did the banks need this
statutory change, why did the Congress give it to them, why wasn’t there
hearings and discussion, why was it done stealthily—although the subject was
pushed in the House by three junior Republican Members, so it wasn’t a total
surprise—and where were the financial regulators, the Fed, Treasury,
Comptroller, and the Federal Deposit Insurance Corporation, saying,
“Derivatives are risky; we need to limit their use; the same players have
mishandled their use in the past, why give the banks the public’s money to
possibly do it, again?”
A few stalwarts stood up, but not enough.
Bankers,
1, taxpayers, O (again)!
Personal
Pledge
If I am wrong and these actions are not an aggressive harbinger of GOP congressional actions in 2015:
carrying water for the “haves;” continuing to assail F&F; slashing existing
rules to support more for the financially well-heeled and less for those in the
bottom 99%; I will apologize to the majority congressional Republicans,
cease criticizing them, and writing this blog.
Repeat Reminder for
Newbies and Oldsters
For those wanting
banks to replace F&F, don't hold your breath.
The big banks don't want to run the
nation's secondary mortgage market (Fannie's and Freddie's current job) absent
being given massive new federal subsidies to go with their
existing massive federal subsidies, so why keep discussing changes to what is
working, screw up and harshly disrupt our national mortgage finance system (see
2014 CWJC fights)?
Banks and their allies talk about
securitizing mortgage loans and selling the mortgage backed bonds to investors.
That practice doesn't exist, unless the securities carry Fannie and Freddie
guarantees—which, um, require Fannie and Freddie to exist--because nobody will
buy a bank guaranteed bond, since the more than $2 Trillion of those failed in
the buildup to the 2008 meltdown.
Fannie and Freddie lost money
pre-2008 on their mortgage bonds, but the big banks lost three times as much money (later mostly
ponied up by taxpayers) when the financial
institutions issued their own bonds, so-called private label securities or PLS. (Because it ruins
their financial fairy tales, most conservatives never discuss or even recognize
PLS failures.)
In contrast, F&F have been
tightly regulated since 2008 and have returned more to the Treasury than any of
the "bailed out" financial institutions of that era (no matter what
Ed Royce says!).
Fannie and Freddie, today, have very
high quality loan portfolios, with very low credit issues, and only can
"guaranty" credit worthy borrowers. Those are major constructive
post-2008 changes and important issues for critics to understand.
What
Others Are Saying
GOP
Corner (Corker and Royce)
Corker
Harumphing on Rental Fund Decision
http://www.americanbanker.com/bankthink/no-sense-in-keeping-the-gses-undercapitalized-1071607-1.html
___________________________________________________
Ed Royce Harumphing on F&F Not Paying Taxpayers
___________________________________________________
Al-Jazeera on Warren and Weiss
http://america.aljazeera.com/opinions/2014/12/wall-street-treasuryantonioweissandrewrosssorkinelizabethwarren.html____________________________________________________
Yves
Smith writing in Naked Capitalism
____________________________________________________
Les
Christie in CNN Money
____________________________________________________
Ho Hum, Deutsche Bank Accused of US Tax Fraud (another big one caught)
___________________________________________________
Economist: Russia’s
Wounded Economy
____________________________________________________
Ahhhhhh!!!
(Jingle Bells, Jingle Bells……)
NYT—“A Home of One’s Own”
____________________________________________________
Nouriel
Roubini on 2015 Geo-Political Risks
____________________________________________________
Barack
Obama Channels Steven Colbert, Hilarious
___________________________________________________
Congressional
R’s tear roof off Political Spending
____________________________________________________
Borowitz in the New Yorker “peeps” Citi’s HQ move.
____________________________________________________________
David Sims Sees Strong
F&F Future
___________________________________________________
Maloni, 12-15-2014
The blog likely will
stay quiet until next year—unless something really dramatic happens--so I want
to wish each and every one of you and all of your loved ones a healthy, Happy
Chanukah and/or Merry Christmas, and a healthy, bountiful, and successful New
Year.
(Rex,
Tiegan, Daryn, Rocco, Seaver, and McCoy, Grammy and GPC love you and your
parents and uncles! You know who is watching!)
