Friday, January 31, 2014

Get TH While You Can!


To Hill People Seeking a F&F Change
Here’s My Best, “Can’t Miss” Advice


Do I have a deal for you!
It’s free, comes with no strings attached, and is the kind of thing at which smart people--who are “on their game”--will leap, especially if they are honest with themselves about the enormity of their task and the hurdles they’re encountering.

Everyone drafting a mortgage finance reform proposal runs into the same rat’s nest of issues.

No matter what your ideology or political leaning, it is not easy trying to design a U.S. mortgage finance system, which features efficiency, fairness, ease of access to lenders, builders, Realtors, consumers, utilizes the latest technology, makes mortgage products (loans) standard across the country, and does so in a way that minimizes the risks involved to borrowers, financial institutions, and the taxpayers. 

Back to my point.

Republicans and Democrats alike should make every effort to sit down with Tim Howard, Fannie’s former Chief Financial Officer, and take advantage of his mortgage finance career spanning 30 years and then pick his brain like hungry birds attacking popcorn. 

Having just heard him address a group of interested folks, I can assure you that the one thing he won’t say to anyone is “revive Fannie and Freddie” or “make no changes to the current system.” 

Let me repeat that for emphasis, Tim will not argue for the status quo, with few or minor changes.

He will explain the necessary component parts of any functioning national mortgage market, like ours, which has a set of primary market lenders, secondary market guarantors, and the all-important capital market investors, and likely try and guide you—no matter your ideology—through how best to string together the parts to achieve the laundry list of systemic benefits I spelled earlier, bearing in mind, the current splintered political terrain.

If you sit with this sophisticated former Fannie executive, you won’t be selling out to the enemy or risk coming down with GSE-itus. 

To the R’s, check him out with some of your Wall Street and big banks acquaintances--from the operational side of the institution—and see what they say about Howard’s financial acumen.

He also won't tout his book, “The Mortgage Wars,” which has been very favorably received, save one ridiculous off-the mark-review (which I will address later) in your discussion of future mortgage market models (unless you press him to discuss it). 

Anyone reading my blog knows I think that many people at work on these bills--whether it’s Hensarling (R-Tex.), Corker R-Tenn.)-Warner (D-Va.), the new effort by three House D’s, the forgotten Capuano (D-Mass.) proposal-- have very little idea of the complex history of mortgage finance, let alone Fannie and Freddie. 

I suspect also they don’t realize—in the GSE halcyon days more than a generation ago--dedicated and incented people labored judiciously trying to come up with a Fannie/Freddie substitute, which hit all the systemic value points I enumerated. 

Staff for Senators Johnson (D-SD) and Crapo (R-Idaho) reportedly are close to finishing their work and looking ahead, possibly, to a March mark up. Even with that timetable, it's not too late for them to benefit from Howard. 

People should know—in my 21 years at Fannie—Howard worked on three major variations of that same “find an alternative” challenge, under Fannie’s most successful Chairmen, David Maxwell, Jim Johnson, and Frank Raines. 

Fannie (with Tim always present) turned the GSE model upside down, inside out, shook it, stressed it and occasionally kicked it to see what could be superior approaches. 

Indeed ideas not part of today’s Fannie and Freddie emerged, but they fell victim to pragmatic political and industry compromises which produced the inevitable mush, sinking the efforts. 

The last effort was over a decade ago, but Tim was there for all of it and worked with a variety of outside consultants and insiders charged with the same undertaking. 

My point is that Howard has thrice been through all of the issues and problems, complete with systemic, industry and congressional politics, and could be a beacon for those now trying to do the same thing. As noted, he won’t call for the simple resurrection of F&F, although the Congress could do (and has proposed) a lot worse. 

Having written his book, Tim’s objective now is meeting with as many people working on this Herculean legislative task, who will meet with him, and share his experience. 

Don't forget, he is an expert and successfully ran the nation’s largest credit risk/interest rate risk and global financing mortgage corporation. (It's necessary at this point to remind readers  that Fannie Mae's entry into major private label subprime (PLS) purchases occurred in 2005, after Howard, Raines and Spencer departed the company.) 

Capitol Hill D’s and R’s won’t encounter too many sources more intelligent, more capable, and more indulgent in responding to any idea raised by any audience.

Oh, and if you do invite him in, don’t sit too close to him, he is a major “hand waver,” swirling both paws in ways that many of us first thought were anatomically impossible until we viewed him do it more than once!

There Once Was a Reporter
Named Kathleen Day,
Who Would Sit and….


Former Washington Post journalist, Kathleen Day—who now toils for Johns Hopkins University business school—recently bragged to a bunch of DC private school kids about what a superlative reporter she had been, breaking big financial stories left and right. 

According to my source, a parent to one of the students, the kids were taken back and turned off by the braggadocio. 

When I heard that story, I thought, “Yep, a legend in your own mind,” because of the strong suggestion that Ms. Day may have been manipulated by former OFHEO officials, who hoped that she and colleagues would write inaccurate and anti-Fannie stories based on the pap the regulator supplied – with a goal to belittle and embarrass Fannie executives (Frank Raines, Tim Howard, and Leanne Garmon Spencer), making them more pliable. 

Ms. Day surfaced again this week, in USA Today, writing a snarky and dismissive review of Tim Howard’s book, with Ms. Day seemingly focusing on everything but what he had written.

Below is a letter I sent to the publication, after reading her review. 

Kathleen Day should have recused herself from writing about Tim Howard's book. 
It strongly has been suggested that she was one of the favored reporters receiving and using Office of Financial Enterprise Oversight (OFHEO) spoon-fed anti-Fannie and Freddie propaganda. The providing OFHEO officials hoped their guerilla tactics would drive down the F&F stock price and cower their officials into accepting the oversight agency's less than thoughtful rulings. (See 2004 report of HUD Inspector General into OFHEO practices, which should have produced a recommendation to the Department of Justice for violations of law.)

Indeed it was OFHEO which started the totally fallacious rumor that Howard, Fannie CEO Frank Raines and Comptroller Leanne Spencer, committed securities fraud, a charge which forced the three from their jobs. (I wouldn’t be shocked if the record showed that Ms. Day authored some of those articles which abetted a politically vicious attack and a partisan drive-by shooting.)

That “securities fraud” allegation was the basis of the 2004 lawsuit, which 8 years later Judge Richard Leon dismissed saying that he could find nothing in the  "65 million pages" of hearing records which would allow any jury, anywhere to convict the defendants of the charges made against them.

What did Ms. Day think about that Bush Administration’s scurrilous behavior? What did Ms. Day think about the many, many reports which declared that Fannie and Freddie were not the cause of the 2008 financial debacle?
What did Ms. Day think of the fact that major New York banks and investment banks went around the Fannie and Freddie systems, because the latter couldn’t be manipulated, and produced and sold worldwide more than $2 Trillion in poorly underwritten and falsely rated, private label mortgage backed securities (PLS) which promptly failed making the US real estate softening an international financial Armageddon?
Everything I’ve pointed to was in the Howard book, but Ms. Day--still hung up on her anti-Fannie attitudes--must have missed it all, since she reports there was “nothing new” in Howard’s account.
Of all people, why did Ms. Day seek quotes from the AEI's Peter Wallison, an avowed F&F critic, whose own work has been intellectually shredded by the Fed's staff, the President's Financial Inquiry Commission report, and dozens of financial reporters of all political stripes?
I've joked that Wallison and his AEI colleague Ed Pinto have been rolled over by so many sources, their suits have permanent tire marks on them.
What did she expect Wallison to say about Howard's book? 
Bad review and bad choice of reviewer. 

Fannie and Freddie in the SOTU

Ho hum, not to be dismissive of our President (again!), but anybody reading any “get tough on F&F” intent in his Tuesday remarks is over reading it. 

His delivered remarks were benign, while a prepared statement, more elaborate on many items, contained (paraphrasing) “change Fannie and Freddie, as we know them.” 

It’s the wrong year for that, there is a lack of objective consensus, as well as serious doubt about procedure, especially with F&F earning the Feds so much money and successfully undergirding the nation’s mortgage market.


Maloni, 1-31-2014






Sunday, January 26, 2014

What Was Mike S. Trying to Do or Say?


January and February Are Dull, But..


At a Las Vegas housing conference speech, last week, Treasury’s Mike Stegman—an Administration a point person on mortgage finance reform (and former Fannie consultant, but who wasn’t?)--raised eyebrows with remarks which, charitably, were mixed F&F reviews or very lame Admin anti-GSE propaganda. 

I link his speech below and also repeat a comment I sent to the media following Stegman’s appearance.




"I just don't understand Mr. Stegman's tone or objective.

"Stegman--or maybe it's the Obama Administration--sounds somewhat fearful that people could think Fannie and Freddie have a systemic revival in their futures because of their recent solid financial performance? 

"Fannie/Freddie didn't make up their revenues, or the tax laws and accounting rules, which created the DTA (Deferred Tax Asset). They didn't invent GAAP (Generally Accepted Accounting Principles) which required the exercise of their DTA.  

"All that Fannie and Freddie do--and most certainly everything in their earnings statements--is closely scrutinized, indeed controlled, by the Federal Housing Finance Agency (FHFA) and, likely, the Treasury. So, why the disdain?  

"I think their recent financial performance, likely with additional solid earnings coming next month, suggests their 2008 "insolvency" was far less than meets the eye. 

"BTW, is the F&F that Stegman dissed the same F&F that Treasury noted a week ago helped the U.S. secure a December 2013 over December 2012 revenue surplus?"



More Fannie & Freddie Ramblings
What’s Ahead in 2014 and Beyond


Immediate Horizon: 

--Solid 2013 earnings bring in needed Obama deficit reducing revenue, a flow Admin won’t disrupt;

--despite some barbed rhetoric, no major White House effort foreseen to drive F&F change;

--bi-partisan GSE legislative conflict and confusion continues;

--industry doubts and uncertainty about successor mortgage models pervade;

--new FHFA regulator offers hope of easier credit access;

--tighter credit standards exist, but no current mortgage finance “emergencies” prevail (which dictates whether Congress acts quickly or not);

--“Takings” and  “Administrative Procedures Act" (APA) lawsuits hold specter of dramatic Fannie and Freddie changes owing to rulings and likely SCOTUS appeals.

--and, 2014 is a congressional election year.

All of the above and more, including congressional bloviating and partisan “high stepping,” give mortgage market observers plenty of grist for blogs, laughs, columns, trade association posturing, and media stories, but what’s it all mean for the nation? 

One prominent wire service reporter told me that she sees no F&F legislative changes in “her lifetime.” 

I told her that I couldn’t totally buy into that because some of us have shorter lifetime expectancies than youthful reporters. But, her point was well made. 

Indeed, I’ve joked that we won’t see serious F&F statutory changes “in God’s lifetime.” 

But, let me amend that and declare, “There won’t be any monstrous legislative changes in F&F until, first, we see one party control in the House, Senate, and White House.”  

Practically speaking, that means 2017 at the earliest, even if the GOP wins the Senate this year, which still is not a political slam dunk. 

My opinion doesn’t preclude, as I’ve suggested before, Senate Banking mark producing and getting a bill to the floor in 2014, but it never will get to the President’s desk owing to House resistance.

What Are Policy Makers Missing? 

The obstacle holding back policy makers—who operate with flawed memories of history or no historical perspective at all—is thinking that a national mortgage market with a F&F presence can

Dream, Maloni, dream.

They are fixated on an old F&F which don’t exist anymore.  

I have a message for Democrats and Republicans alike, a Fannie and Freddie in your market model might be the closest and best way to achieve what you claim is your desired mortgage market Valhalla. 

Like them or not, the big banks are a financial fact of mortgage market life.

The good news/bad news is that everyone’s primary and secondary US mortgage markets must include the banks, big and small, with the behemoth depositories dominating.  

I’ve written before I don’t think the current financial regulatory agencies are up to the task of controlling the big guys, especially if the banks choose to cheat, manipulate markets, sidestep rules, or engage in super risky practices. 

In 2013 alone, the number of major banks fined billions of dollars for varied regulatory violations affirms that fact. 

F&F as Mortgage Police?

But—with regard to fair/honest mortgage lending--an active F&F, with skin in the game, owned by shareholders, and managing their own investments, would do a better job than any federal regulator controlling possible bank mortgage lender and investor excesses. 

Before anyone screams, “But 6 years ago, they were part of the problem.” 

Yes, that’s true, but Fannie’s and Freddie’s intervening regulation has laundered and rung out of them, every potential bad practice to which anyone looking back could object. 

Today, F&F can’t buy/securitize loans which are considered high risk; their credit standards also are much higher; their charges to lenders much higher; the FHA not Fannie and Freddie now has most of the low income housing mission; and F&F’s protective capital requirements have been increased. 

Right now, they are a profit making, vanilla ice cream mortgage machines, doing fine work but they could do a lot more. 

I think they could be positioned as a stronger/better cop on the beat than any federal entity with bank oversight, because banks trying to scam would be trying to take F&F’s money and that wouldn’t happen.


Rejuvenate F&F Throughout

Before we go too far down this road, let me point out the two operations--currently masquerading as Fannie and Freddie--are not the entities I have in mind to manage the mortgage finance leadership job going forward. 

Unless they have it well hidden and ready to be tapped like maple syrup from a tree, I think the needed entrepreneurial spirit has been drained from F&F, leaving behind—if talk emanating from and about the two is even marginally accurate—two shells, slothfully going through the boards motions, driven by business people, and controlled not by their boards or competition, but government bureaucrats, themselves conflicted on how they should operate Fannie and Freddie. 

If properly incented, unshackled, and given a few new faces—and with both operations slimmed down to commercial effectiveness. i.e. they each have  too many bodies doing very little—I think F&F easily could step up to the task and generate all of the market benefits they once did (defined as pre-2004), plus be more nimble, less costly, and more efficient and better regulated.

That’s good for the Congress because it saves them years of hot air and wasted hearings, even potentially fouling up a market which needs less tinkering than most understand; good for the home buying public; good for F&F’s future owners; good for the government’s coffers (tax revenues and efficient secondary markets); and especially good for the mortgage finance system’s businesses, including the big banks.

To the latter, Fannie and Freddie would bring welcomed standardization, familiarity, reliability and –most important--risk transference.  

The TBTF financial institutions have multiple ways to generate revenue, but few are as low risk as F&F securitizing their bank’s mortgage production. (Are you listening Frank Keating, Tim Pawlenty and John Dalton?) 

I’ll leave it to others to debate the need for ongoing federal financial support. 

Few will accept what I believe, which is to start this process the two only would need access to their future revenues, once the Treasury and taxpayers have been repaid all they infused in F&F.

Major Changes Without Congress

I mentioned the pending court cases, with plaintiffs challenging the federal government over possible violations of the Administrative Procedures Act (APA), first in 2008, following Bush Treasury's “conservatorship,” and later the Obama Admin's  2012 machinations. 

The lawsuits alleged the Treasury expropriated shareholders’ funds, first in 2008 and again in 2012, the latter when Treasury changed the F&F repayment agreement, that year, from a 10% annual dividend tariff to a “sweep” all revenue generated by each entity over minimum capital set asides.

(See link below to richly argued “Epstein paper,” justifying plaintiffs “takings” actions.) 

While nobody knows when an initial court decision will be made on either of these matters, one could speculate that if plaintiffs win either lawsuit could produce major structural changes to F&F operations, given the range of options the presiding Judge has in both cases. Plus the losing party could appeal to the SCOTUS, because of the sums involved.

One prominent industry publication—Guy Cecala’s Inside Mortgage Finance--speculated whether it’s time for Congress to examine if the government acted lawfully when the major Treasury actions--challenged in the lawsuits--were taken in 2008 and 2012? (Link to the article follows.) 

With all due respect to the Congress, I suspect most serving Senators and Members just deferred to Treasury Secretary Hank Paulson and later to Secretary Jack Lew on the actions, which now are targeted in 17 lawsuits. 

Maybe Darrell Issa (R-Cal)—“Congressman Oversight”--and/or the two Banking Committees might want to spend some time looking at and understanding those issues, before rushing off to abolish Fannie and Freddie.

What Others Are Saying 

--Sen. Mark Warner (D-Va.), last week in the Richmond Times Dispatch.

--Former OMB Dir. Jim Miller, same day in the same paper.


--Another major F&F knock on the Admin from the Right in National Review, delivered by Ike Brannon, a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm based in Washington, D.C.


--Ryan Chittum, writing in the Columbia Journalism Review, smacks Bloomberg for carrying more Wallison/AEI “big lies.”

--The WSJ’s Nick Timiraos, writes about Mike Stegman’s F&F putdown in Las Vegas. 


Maloni, 1-26-14


Monday, January 20, 2014

The W Post Comes Up Short, Again

“Wonder of Wonders”

That was the subject line I attached on an email last week sent to friends, former colleagues, and others for whom Fannie and Freddie still are important matters. 

I was heralding that the Washington Post was going to review Tim Howard’s book, “The Mortgage Wars,” in its Sunday (1-19) business section. 

That’s the same Washington Post which, over the years, had published about two dozen editorials blasting, putting down, and bitching about Fannie’s business, leadership, operations, politics, or activities. 

To my very pleasant surprise, the Post—or more specifically Steven Pearlstein, a former Post economics/financial reporter, who now pens (laptop’s/pc’s?)  twice monthly columns for the Steve Bezos’ owned Post--did a fabulous job with his review. (See link below.) 

Pearlstein nailed the critical role played by the nation’s major banks and investment banks 2008’s international financial disaster in 2008 and the fact that Fannie and Freddie did not cause that crisis (echoing dozens of other reports). 

He didn’t exonerate F&F, but wrote their purchases of private label securities (PLS)--originated and issued by the behemoth financial institutions, with unrealistic credit rating—went bad twice as much as their own mortgage backed bonds. (Between 2005 and 2007, the big banks and Wall Street firms issued more than $2 Trillion worth of poorly underwritten PLS and sold them worldwide.) 

I thought his Howard compliments were genuine. For a smart and experienced guy, Peralstein admitted how informative he found the Tim’s narrative.  

Pearlstein offered two other opinions which are spot on. 

He suggested the Bob Corker (R-Tenn.)-Mark Warner (D-Va.) bill calls for a huge amount of new private mortgage insurance capital (some estimates are a fresh $100 Billion), which may never emerge (and what happens then?). 

And he notes the big banks—which are the major beneficiaries of C-W--have a lousy track record of mortgage market reliability, moving in and out of the home loan market as greater profits emerge elsewhere, which means it's shaky to rely on them as the steadying mortgage presence. (Excuse me for noting that’s a problem F&F never had.)

But, while Pearlstein earns major kudos from me, the Post just gets continued flak for egregiousness. 

The Washington Post, a major national newspaper, has not and still doesn’t think it’s necessary--before the Pearlstein book review, after the book review, introducing the book review, or in a book review sidebar story--to delineate the catalyst for Tim’s book, the three federal court decisions, issued more than 17 months ago—by Federal District Judge Richard Leon--quashing all charges against Howard, Frank Raines, and Leanne Spencer, who were Fannie Mae’s CFO, Fannie’s CEO, and Fannie Comptroller. respectively.

As his legal decisions proved, Judge Leon showed the Fannie execs were hounded from office in 2004 by a slanderous Bush Administration political assault.

Let me repeat, the oddity which vexes me. The Washington Post, still, has yet to publish one word about the revealing and liberating 2012 pronouncements, authored by then somewhat obscure but now suddenly NSA-infamous, Judge Leon, who has served a dozen years on the US Federal District Court for the District of Columbia.

It was a heroic Judge Leon, who ruled in the fall of 2012, that no jury anywhere could convict the Fannie Three of securities fraud, based on 67 million pages of evidence presented to his court, and then dismissed all charges with a “summary judgment” opinion—eight fraught-filled years for the defendants after the allegations were hurled!

Other papers and wire services wrote about the Leon decisions, but not the Post.

Given all of the phony anti-Fannie rhetoric against the company and its officers—much of it carried in the Post’s new pages, columns, and editorials--one might think local Judge Leon’s definitive rejection of the charges would find their way into a major national newspaper, serving the communities where these well-known individuals lived and worked? 

Was there nothing to report form Leon's ruling?


 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  accounting practices or internal controls were made with an intent to deceive, or were otherwise made without any reasonable basis. 


Plaintiffs' theories on Howard's scienter are insufficient to withstand his summary judgment motion, particularly in light of the overwhelming evidence of Howard's good faith. 


(Leon issued three separate decisions, first on Howard, then Raines, and finally Spencer, but all were based on the same principles.) 

Our good friend, David Fiderer, also wrote about the Leon decision and quoted the Judge extensively. (DF’s work appears in the link below.) 

Late last week, when I heard the book review was coming, I asked a friend, “How do you think the Post will finesse the legal decisions exonerating Raines, Howard, and Spencer?” 

The simple answer, we found out, is the Post ignored them.

I am not complaining one bit about Pearlstein’s review, which I believe was solid, illuminating, very informative, and even gutsy (are you reading and listening Congress?).  

But part of Howard’s and his colleagues’ story was the extreme lengths Fannie’s business and political opponents went to destroy careers and lives, using a shockingly inept but politically potent and scathing regulatory report which then got blessed by the Bush SEC. (Again, all of that is in Tim’s book.) 

The Post, for some obscure reason, may never cover Leon’s Fannie opinions--and shame on it for that  choice--but some of the political shenanigans which Howard documented in “The Mortgage Wars,” are ripe for public sharing and explanations, since those old Office of Financial Housing Enterprise Oversight (OFHEO) records surrounding it’s 2004 report and a HUD IG examination of the agency, are approaching 10 years old and have nothing to do with Director Mel Watt’s Federal Housing Finance Agency (FHFA),  OFHEO’s successor—except as guide for “how today’s agency never should work with its regulated institutions and the media.” ument 

Those old documents, mere history now since the statute of limitations has run out on possible wrong doing, could shed some light on current personnel who worked the Fannie dirty tricks back then and even a few who’ve gone but still hang out in DC. 

It’s something for the new FHFA Director to consider, as well as something which might appeal to and interest a lot of his former congressional colleagues as they go to work charting possible new approaches to providing understandable mortgage credit fairly to all communities in the nation and all of those who can qualify for the same. 

“A lie can travel halfway around the world while the truth is putting on its shoes.” (Attributed to Mark Twain.) 

Maloni, 1-20-2014