"Money, that’s what I want...whole lotta money"

Franklin D Is Spinning in His Grave!

 

 

As a “Big Foot” believer (guess I should fess up about UFO’s and Nessie, too), I don’t dismiss eerie stories, easily. 

So, it was with an open mind that I listened Friday night to an account about a lost trekker. 

As this story goes, it was a dark and stormy frigid night, lightning, thunder, rain, even the threat of snow. The traveler--lost in the dark and foul weather--stumbles by President’s Franklin Roosevelt’s grave in Hyde Park, New York, and notices press releases and copies of media reports of Fannie Mae’s 2013 earnings strewn everywhere. 

 

It was then, the frightened wanderer reported sounds of crystal goblets clanking and raspy voices singing, “Happy Days are Here, Again.”

 

The hapless visitor swore he heard tributes being exchanged between voices which sounded like Roosevelt’s and ghostly visitors Harry Hopkins, and Harold Ickes (the original), three men who had their hands all over the New Deal elements which, among other things, created the original Fannie Mae in 1938. 

(Billions in financial success can produce that jocularity in humans and the dead or their spirits.) 

The storyteller also claimed at least two of the eerie voices laughingly and in unison sang out, “Bleep you, Corker-Warner!” (Apparently, even historical cemeteries have rules of decorum, as well as access to the latest mortgage finance news.) 

This hellish take sounds real to me and if it isn’t true, I want it to be.

 

Fannie 2013 Earnings, Huge 

Yes, Fannie Mae announced final 2013 earnings of $84 Billion (What do you think of those apples, Mike Stegman?) and now will pay an additional $7.2 Billion to the Treasury in fourth quarter 2013 revenue. 

Freddie will post its 2013 numbers any day now and will shuttle more GSE cash to Uncle Sam, putting the two entities firmly and forever on the plus side of repaying the taxpayers more than the $187 Billion invested in the two in 2008. 

The many times excellent WSJ reporter, Nick Timiraos, delivers again, with the story, below, detailing Fannie's financial achievements.

 

http://online.wsj.com/news/article_email/SB10001424052702303636404579396700697415902-lMyQjAxMTA0MDIwMzEyNDMyWj 

 

Not bad F&F work, taking only three years to pay back what most people thought was lost forever to the taxpayers. (Yes, the first two years involved borrowing $40 Billion to pay back Treasury which had first borrowed the $40 Billion and.....oh, more on that farce in a future blog.)

 

Yes, I know the principal technically can never be repaid—until some Secretary of Treasury explores his authority and changes that circumstance—but most Americans looking at the facts only will understand that F&F received $187.5 Billion and will have paid back over $200 Billion and rising. 

Fannie’s execs suggest 2014 earnings will not be as robust because of market reasons, but what also is likely is Fannie (and Freddie) will continue to produce positive numbers into the near future.

 

What’s It Really Mean?

 

More noise causing congressional doubt,  more attention to the “how did we get here,” with an eye toward all of those who want to launch dramatic and untested solutions to what may be a much smaller problem than most think. 

It won’t end the GSE controversy and the misstatements. But it could cause some greater number to suggest, “Maybe, we should just fix them up, not blow them up.” 

But, not enough will feel that way, in the near term, to make a difference. 

This is a positive story for the Obama Administration, which loves the F&F revenue but apparently little else about them. 

The earnings will permit the White House to ride both sides of the tracks, i.e. talk of mortgage reform and getting rid of F&F but raking in billions from the two golden geese it doesn’t want sacrificed any time soon.  

Fannie’s and Freddie’s success also allows Mel Watt, their safety and soundness boss, to ease into his new responsibilities and have the luxury of exploring ways in which he—utilizing F&F--can soften some of the tougher new borrower credit challenges and even explore ways to help underwater mortgagors. Neither of which—in the new Obama spirit du jour—requires congressional blessing.

 

Confusion in the Senate?      

As Sen. Bob Corker (R-Tenn.) was busy threatening his Tennessee constituents against voting for union representation at the Chattanooga Volkswagen plant, his Corker-Warner (D-Va.) legislative proposal abolishing Fannie and Freddie hit some Senate bumps in the road.  

Banking Committee Chairman Tim Johnson (D-SD.) may have encountered problems trying to produce a bipartisan package which can satisfy his ranking senior GOP colleague Mike Crapo (R-Idaho).

A promised Johnson-Crapo legislation unveiling, supposedly relying on parts of Corker-Warner, now may emerge only as common principles, and not detailed statutory proposals.  

That’s not good and doesn’t make me happy; it reflects the problems that any person or group faces in trying to satisfy so many conflicting housing and mortgage finance interests. 

As I’ve blogged before, I’d hope the Senate committee leadership comes up with something and puts it out there for debate and amendments, forcing Senators and their industry supporters to vote up or down a package. 

(Wouldn’t it be something if Corker’s anti-union antics caught the attention of the Senate’s D leadership, which decided it wasn’t going to help Corker do anything? I am not chortling, really, I am not!)

 

Beware…..Imposter

 

To anyone using a “Yahoo Fannie Mae” message boards, someone has been masquerading as Tim Howard and offering advice and commentary, pretending to be the former Fannie CFO. 

It’s not “our Tim,” but a poser. Anyone encountering the fraud using that ID don’t follow his/her investment advice.

Speaking of Tim Howard, this past week, the Fed made pubic reams of its meeting records from the 2008 financial meltdown and now everyone is using their 20-20 hindsight to suggest which sitting Fed Governor was a seer, a mensch, a dummy, etc. etc. (See Morgenson at the blog's end.) 

I won’t go there, but I will reveal something about the US Treasury which astounded Tim Howard and many Fannie Mae folks, several years ago when they carried out a Frank Raines strategic request in 2000. 

Raines decided that Fannie needed to do a much better job of explaining to Administration regulatory officials exactly how we conducted our business, since so many casual encounters with US regulatory officials proved them pretty uninformed, if not shallow, in what the company did and how it did it. (Keep thinking of the Fed 2008 minutes.) 

So, a squad of Fannie’s top people conducted “Fannie Mae 101” for the senior folks at the Treasury, but came back stunned at the combination of inaccuracies and  plain “dumb heads” they encountered in policy power positions at both locations. 

Many of those traits still were on display in the 2008 Fed minutes and the confusion, hearsay, and plain inaccuracies that those solons threw back and forth at one another.

 

A Maloni Video From the Past,

(Thanks to Tim Sokol for unearthing this 2010 bit of history.)

https://www.youtube.com/watch?v=WmW6t79nmyA

What Others Are Saying

 

--Ruth Martell in Marketwatch discusses Fannie’s 2013 earnings.

http://www.marketwatch.com/story/political-legal-hopes-buoy-fannie-freddie-rally-2014-02-14

--The NYT’s Gretchen Morgenson’s suggests Fed was unprepared for 2008 crisis.

http://www.nytimes.com/2014/02/23/business/a-new-light-on-regulators-in-the-dark.html?ref=gretchenmorgenson&_r=0

--Ralph Nader uses Reuter’s to answer Bethany McLean’s column.

 

http://blogs.reuters.com/great-debate/2014/02/21/fannie-and-freddie-are-more-complicated-than-that/

--Speaking of Ralph Nader, writing in Forbes Magazine, Jon Entine examines the plight of F&F common and preferred shareholders.

http://www.forbes.com/sites/jonentine/2014/02/21/with-fannie-and-freddie-debt-repaid-to-taxpayers-will-uncle-sam-turn-shareholders-into-zombie-investors/

Nick Timiraos scores, again, this time on the fortunes of major common investor Bill Ackman

http://blogs.wsj.com/moneybeat/2014/02/23/ackman-sees-big-upside-to-fannie-freddie-bet/

I could have written this, but didn’t. Maybe I have an acolyte out there, a mini-Maloni!

http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-sen-mark-warners-hypocrisy/?utm_source=twitterfeed&utm_medium=twitter

 

 

Maloni, 2-24-2014

Gretchen to the Rescue

 

Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend.   Gretchen Morgenson

 

 

Gretchen Morgenson Column Says

Treasury Misled F&F Shareholders

 

 

What’s next, will the Chicago Cubs win the National league playoffs and go onto triumph in the 2014 World Series? 

I am referring to Gretchen Morgenson’s astounding article in Sunday’s NYT business section in which this long time GSE critic—in an about face-- declares that the Obama Treasury may have violated the rights of Fannie Mae and Freddie Mac common shareholders, when it failed to make public a crucial Treasury document, written in 2010 and unearthed this past month as Treasury defends itself against various GSE lawsuits. (See link below to Ms. Morgenson’s column.) 

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html 

 

The Treasury document discussed the Obama Administration’s GSE policies, including a heretofore unknown plan to not allow the two companies to make any money, profits which might have boost common stock prices.

 

Ms. Morgenson argues the information would have been material and essential for the public to know at the time the policy was promulgated, since many investors continued buying F&F common stock in 2010 and 2011, when GSE revenue prospects were dim. 

“A material fact is an occurrence, event, or information that is sufficiently significant to influence an individual into acting in a certain way, such as entering into a contract.” (Source Legal Dictionary.) 

Below is the critical excerpt from Ms. Morgenson’s column: 

The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the undersecretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.” 

A glorious 2012 financial turnaround allowed F&F to make huge profits--because so many other investors had abandoned the mortgage finance market—and initiate a now virtually complete process of returning to the Treasury every penny invested in them. (Even though that is technically impossible, under the deal Hank Paulson forced on them, it does exist in a common sense manner.) 

One irony here. 

F&F preferred shareholders--many of them, but not all, hedge funds--sued both the Bush and Obama Treasury Secretaries over the original 2008 action (Bush)--to put the companies into “conservatorship”--and later, in 2012 (Obama), because Treasury changed Fannie’s and Freddie’s repayment terms from a 10% dividend of their federal debt outstanding to a total sweep of all quarterly profits each generated. 

Some 18 of the latter court cases currently are pending. 

(Elsewhere, Ms. Morgenson calls this profit sweep dividend change, “punitive.”) 

Now the common shareholders, with possibly mammoth investor Bill Ackman leading, may have major cause to go to the trial lawyers, again, and sue Uncle Sam for failing to disclose its plan to cripple F&F revenues. 

With the exposure of this document, Morgenson also noted a certain financial perversity in the 2008 conservatorship action, because—under the same statute--Treasury also implemented a warrant policy giving the federal government 79% ownership of Fannie and Freddie, with the warrant values (Uncle Sam’s) going up as common stock values stayed low. 

(Hypothetical discussion between Treasury Secretary Jack Lew and his boss. “So, let me get this straight Jack, if Treasury effects this, our warrants go up in value but the common stock doesn’t, right, and we are the only winners?”) 

As one prominent observer noted about the bubbling cauldron, sarcastically understating, “the plot thickens!”

Let me enthusiastically welcome Ms. Morgenson, the NYT storied financial columnist, to the “good guys” side of the F&F ongoing discussion, which I hope isn’t a premature acknowledgement and—for her—will be a long term stay.

Come on in, Gretchen, the water’s fine and the story is even better! 

(Oh, and if your pen stays sharp and pointed in the right direction, I’ll forget the AEI-driven, hatchet-job book you and Josh Rosner wrote about Jim Johnson and Fannie Mae.)

 

Who’s Making/Speaking F&F Policy?

HUD Secretary Sean Donovan, last week, spoke on mortgage finance reform predicting prompt Senate action on Banking Committee mortgage legislation. 

One observation: That development won't be particularly surprising as this blog predicted that possibility some weeks ago. 

But to imply a bill which can pass the Senate could get through the House Banking Committee and onto the House floor, without being “Tea Partied to pieces” is highly unlikely. 

But, Donovan--a loyal Admin guy--is just saying what his bosses want. 

What surprised me most about Donovan’s comments is that they weren’t being delivered by FHFA’s Mel Watt? 

Who—not working in the US Treasury--carries the GSE portfolio in this Administration? 

Is it the former 20 year plus, House Banking Committee veteran who had to scuffle to get Senate approval and now oversees Fannie and Freddie, or is HUD, the Cabinet agency which has the lowest profile, no matter which party controls the White House? (It’s been suggested that D’s sends their duds to HUD and R’s shuttle their liberals to those posts.)

 

Mel Watt might ask, “Why make me sweat and fight for this job, Val….er, I mean Mr. President, if you are going to give my portfolio to the guy whose building is called ‘11 floors of basement?’ ” 

On a more positive note, FHFA Director Watt has started reaching out to housing and mortgage finance industry groups, which report positive meetings and kudos for the Director.

 

What Others are Saying 

Al Jazeera feels deeply about Fannie and Freddie.

http://america.aljazeera.com/opinions/2014/2/fannie-mae-freddiemacprivatizationobama.html 

 

Chuck Gabriel discusses Donovan comments.

http://www.capalphadc.com/wp-content/uploads/2014/02/2014-2-12-CG-Donovan-GSE-Reform.pdf 

Barclay’s says C-W requires beau coup fresh capital and may need a decade and a half to get it. 

 

Key excerpt from the above referenced report:

“We estimate that $400-450bn of private capital is needed to absorb the credit risk of all $4-4.5trn in government- guaranteed GSE mortgages, assuming a 10% first-loss piece. The private markets cannot raise this amount easily. In our view, a government retreat will need to be spread over at least 10-15 years, not the five years proposed by Corker-Warner.”

 

Biting the Hand that Feeds the Hand, or..? 

In checking on something else, I stumbled upon this surprising story, which is about three months old. But I missed it when it first appeared. 

Generally major fundraisers do not dump on the legislative projects of those for whom they raise funds. It could make possible campaign contributors think your candidate is a lightweight.

But that didn’t stop Tim Pagliara, the CEO of Cap Wealth Advisors, and a main Bob Corker (R-Tenn.) cash guy.

http://confoundedinterest.wordpress.com/2013/11/21/et-tu-brute-corker-fundraiserdonor-savages-corker-warner-gse-reform-bill/

 

Maloni’s Movie Opinions

Leonardo DiCaprio and Jonah Hill deserve best actor and best supporting actor Oscars for “Wolf of Wall Street.”

 

Lone Survivor is a gritty and excellent movie.

 

 

Maloni, 2-16-2014

Mel Watt, Save Taxpayers $$$, End the CSP Farce

 

 

CBO Garbage In, Garbage Out

 

The Congressional Budget Office (CBO) provided material for a bunch of scary headlines earlier last week when it opined—and then kind of clawed back—it’s belief, 10 years down the road, Obamacare might cost more jobs than it generates because some people,  able to acquire low cost health care, could abandon their employment. 

The GOP jumped all over it and heavily breathed that it has been right (no pun intended) about Obamacare. 

I try to avoid all Obamacare comments, six weeks of Fox News on 24-7 (yes, even when my mother in law sleeps she has it on) will do that to you. 

But more specifically, I think it is way too soon to evaluate the effectiveness of the plan, which has so many moving parts and will take time to show its success.

Right now, commentary from either side is just so much hot air and partisan fodder. 

But, I also doubt CBO for other reasons and those are more Fannie Mae centric. 

The CBO’s data often sucks and it’s all about their methodology, which is not consistent with other agency forecasting. 

CBO never was a Fannie fan and seemed consistently to produce contorted reports which always concluded there was no value in its operations (ditto Freddie) or that the “implicit subsidy” was going to shareholders and not home buyers (even the Fed disagreed on that), and CBO then provided analysis to support their opposition, which often was wrong—as it has been recently. 

That’s not changed, even today. The CBO still contorts its annual discussion of Fannie Mae/Freddie Mac. 

Go back for the last two or three years and review how CBO employs its “Fair Value” accounting methodology, to suggest that F&F’s federal “subsidy” actually costs the federal government money and then, when the two generate earnings in the coming year, the CBO does an about face, offers an equivalent, “Oh, forget about it” and goes onto report the earnings over cost as a revenue surplus to the federal government, in effect canceling what it said several months’ earlier. 

As it has in past years after F&F pulls in earning CBO uses the more accurate cash in and out formula, which the Office of Management and Budget employs, its F&F errors “misterpear,” as my grandkids say. 

However, if the past two years are a guide, CBO next year will drag out “Fair Value,” again say F&F cost the government money and then wait for 2014 corporate earnings to cause them to eat their words, again. Talk about not being smart enough to come in out of the institutional rain. 

So, I am not going to do nip ups at the Congressional Budget Office Shrine. It’s cracked and much worn.

 

IMF Bags Prescient Mortgage Quote

 

Background: Ed DeMarco and his Federal Housing Finance Agency (FHFA) posse seemed to believe they had two missions, the first being statutory, i.e. financial conservatorship of Fannie and Freddie, and a second agenda, self-identified and ideological, diminishing the entities, substantially, so any future congressional action would encounter the resistance of butter to a hot knife. 

Part of Ed’s scheme—and all reports have him still inhabiting a FHFA office—involved spending millions of taxpayers’ dollars (F&F profits, which if not FHFA claimed would to the  Treasury’s General Fund) on a theoretical “common securitization platform” (CSP), presumably to replace F&F own very successful platforms which their teams update regularly.  

Critics, including his blog, questioned why FHFA needed to go to such elaborate and expensive machinations (think Putin and Sochi!), when FHFA could have directed 20 of its finest employees—without relocating their offices—work with each shop and extract best thinking at both places. 

More questions were raised with what would happen to the “CSP,” once the FHFA believed it had a working model better than either Fannie’s or Freddie’s? Who really would own it, who would operate it, and who would pay whom for the rights? 

This still fledgling FHFA hubristic exercise bizarrely had the agency to rent plush offices in Bethesda, Maryland, build a board room for the yet to exist “board” and seek a FHFA-blessed corporate exec, who still hasn’t been identifed let alone named. 

One of my favorite industry publications, Inside Mortgage Finance, scored an interview with a former—still unidentified—federal regulator, who offered this wonderful opinion, which should cause new FHFA Director Mel Watt to wonder, “Just, why is my agency still wasting money on DeMarco’s whimsies.” 

 

Inside Mortgage Finance, QUOTE OF THE WEEK: “I think everyone from the new team at FHFA to members of Congress are starting to wake up to the fact that shutting down the GSEs and replacing them with a new technology platform and federal agency has huge project failure risk.” – A former banking regulator speaking to IMF News this week.

 

OK, I hope IMF's interviewee is correct. I sense he/she is. And life’s too short to pass up these opportunities, so........I *&%(^%$ TOLD YOU SO! 

 

Senate Banking Players to Watch,

Bob Corker Has His Eyes on Them  

Senate Banking Committee Chairman Tim Johnson (D-SD) and his ranking R colleague Mike Crapo (R-Idaho), reportedly, soon will make public the draft mortgage reform bill on which they have been working. 

It already was described by some as “Corker (R-Tenn.)-Warner (D-Va.) lite,” but that didn’t stop Senator Corker, reportedly, from criticizing his Chairman for being too afraid of “Committee Progressives” to schedule the C-W bill for a markup.

I am going to take a wild guess at identifying those who Corker puts in that enlightened cabal; Sherrod Brown (D-Ohio), Elizabeth Warren (D-Mass.), Jack Reed (D-R.I.), and depending on the issue and his priorities, Chuck Schumer (D-NY.), and there could be others. 

Corker is known for his bravado comments and instant assessments. But in seeking to abolish F&F, he has little to lose in Tennessee where no major F&F facilities exists. 

Compare that to Mark Warner, who—if he has a tough GOP general election rival—may have to walk back or swallow his assertions that his Corker-Warner will “kill Fannie and Freddie,” since that also would mean his legislative effort could kill jobs for 10,000 Virginia residents employed by Fannie and Freddie. 

That’s bad for F&F and all that unemployment equally is bad for Northern Virginia food stores, auto dealers, clothiers, sporting goods, fast food shops, and other community retailers, not to mention state tax coffers which would lose revenue and have to pay jobless benefits. 

Shutting down two local job-generators—even one in DC which hires Commonwealth residents-- usually isn’t a “bragging thing,” when campaigning for office. (Warner’s safer signing petitions to deport Canadian Justin Bieber.)

 

On "Pontius" Warner's Hands? 

Of course, Corker doesn’t have Warner’s constituents worry, so he can shout political defiance all he wants. (Did Warner understand that when Corker first got him to sign onto the F&F proposal?) 

Maybe, Tim Johnson just is smarter than Corker (and Warner) and feels it’s the Chairman’s prerogative to schedule legislation, especially if his name as well the Committee’s senior R’s name are the bill. 

However, my tantalizing takeaway from Corker’s chagrin and lament is that, possibly, there may be four Banking Committee Senators, cloaked in Corker’s “Progressives” epithet, who can swing votes and make differences on Fannie and Freddie matters and other Banking Committee matters as well. 

You always hope the Chairman and his GOP counterpart are with you. But on Senate Banking it helps to have partners among the “work horses” in addition to the “show horses’ who reside there. 

Maybe Bob Corker fears the needed dray horses—who Johnson wisely respects--might not want to sign up for the question generating, pig in a poke legislation Corker and “30-1” Warner, the Senate’s wealthiest man, are hustling.

 

From One of My Favorite People!

One of the smartest mortgage finance professionals I know offered the following observation, discussing “political bookkeeping,” and the likely fact Fannie and Freddie—in their final 2013 earnings--will reveal healthy profits sometime in the next few weeks. 

“At the end of this quarter F&F will have more than paid back the Treasury. After that, they will be building up a notional (though not formally recognized) kitty against losses. Say they pay $50 billion more than they drew. Morally, F&F could then have losses of $50 billion before the taxpayer is out a penny — just as if it had $50 billion in capital. Course, none of this will be formerly recognized.” 

As I remind everyone who asks, Fannie Mae and Freddie Mac are held to a different standard than any other federally chartered financial institution and-- with the two devoid of political allies--policy makers treat them as “red headed step children” employing whatever tactics against the two with which they think they can get away. 

The 18 lawsuits (an additional one added last week) ,filed against the Treasury and FHFA over possible expropriation of shareholders assets, are all about that principle. 

What Others Are Saying 

Ralph Nader takes on the F&F shareholders cause.

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/06/why-is-ralph-nader-cozying-up-to-a-bunch-of-hedge-funds/ 

 

Community activist John Taylor, writing in The Hill

Newspaper.

http://thehill.com/blogs/congress-blog/economy-budget/197299-gse-reform-fixing-what-worked#

Daily Kos says Rep. Issa (R-Cal) has ”stay behind meeting” with IRS IG. (Sounds like old Fannie regulatory screwing to me.)

http://www.dailykos.com/story/2014/02/07/1275822/-Issa-Busted-for-Secret-Meetings-with-Stay-Behind-IRS-Inspector-General?detail=email

 

Rand Paul says Texas could “turn Blue.”

http://www.politico.com/story/2014/02/rand-paul-texas-could-turn-blue-103292.html?hp=f3

 

 

Maloni, 2-9-2014

Just Put It on Red or Black

 

Hold ‘Em, 21, 3 or 4 Card Poker Anyone?

 

The Ed-ster

 

We’ve seen endless proposals offered by a variety of sources to restructure the residential mortgage market and otherwise get rid of Fannie Mae and Freddie Mac. 

We had the Bipartisan Commission which gave birth to the Corker (R-Tenn.)-Warner (D-Va.) bill; their senior committee colleagues Tim Johnson (D-SD) and Mike Crapo (R-Idaho) are wrapping up their draft; Jim Millstein has a comprehensive idea; Bruce Berkowitz outlined a plan; House Banking Chairman Jeb Hensarling produced a bill which he got through his  committee and there have been several others which earned little official attention. 

So, why not a proposal from “Eddie,” a self-described “degenerate gambler” (not me, another--bet lesser-- degenerate gambler), who discussed this issue with me at the Charles Town, West Virginia, “Hollywood Casino,” where I met him after he lost $500 playing 4 card poker. 

I regularly visit Charles Town to make involuntary contributions to the West Virginal economy, succeeding in generating some branding rights, like the newly named “Dummy Maloni Fish Way,” leading up to the casino! 

Over a lunch, which I funded, Eddie told me that he was a former builder/developer, went bust a few years ago, and was very familiar with Fannie, Freddie, banks and mortgage finance. 

I thought, with Eddie’s practical experience and mine, we could collaborate and come up with some good ideas.

In about 30 minutes, we did. Here’s the distillation.

The Me-ster 

I worked at Fannie Mae for over two decades with dedicated smart people. My addiction and ongoing attraction were Fannie’s (pre-2005, before I retired) stunning achievements. The company utilized the capital markets to produce enviable systemic efficiencies, time/money saving technology, small lender inclusion, mortgage standardization, making mortgages availability at affordable prices throughout the nation, and for a variety of income groups. 

The latter was Fannie’s mission, which meant that mortgage finance was the company’s only product and the outfit, through the end of 2004, was single minded in seeking to improve its delivery and value and I saw it up close. 

So, my guidance to Eddie and others begins with those previously Fannie achieved objectives. 

The  informal Eddie and Maloni Commission report—the product of our half hour lunch—likely makes too much sense for quick acceptance but it starts with certain realities that everyone else beavering on mortgage market design faced, so here are a few thoughts for policy makers and others that keep the best of Fannie and Freddie and welcomes big banks.

 

I pen this thought often, but it is a seminal and needs repeating. (Oh, and Eddie concurs.) 

The nation’s large privately owned commercial bank holding companies can’t be properly regulated to do “the right thing” for the public. The existing federal financial regulation isn’t nimble enough to stop them if they want to go rogue.

But, banks are a reality, a necessary evil especially the major ones and super especially the half dozen or more Too Big to Fail (TBTF) institutions which will dominate any product area they enter. 

So, they have to be carefully “overwatched” and supervised to do the right thing. (Continuously pointing at his eyes and to mine, Eddie says you have to “eyeball them.”) 

Here is one mortgage finance approach--with sanctions and rewards--which might produce what E&MC think is good for the American home buying public as well as the builder, Realtor, lending community, and the always-need-to-be-scrutinized big banks. 

The E&MC Plan 

For now—say the five year horizon in Corker-Warner--let Fannie and Freddie operate just as they are in transition to their next mortgage finance iteration. 

In the interim, have the Treasury (here is where Eddie kicks in and likely starts the controversy) establish a financial “minimum” which any financial institution in the nation interested and committed to taking on the Fannie/Freddie mission, at the end of those five years, bids a dollar price for those rights. 

Once Treasury blesses their capacity to perform the macro job, two or three bidders (but no more) will be declared the “winners”--if they agree to match the top amount bid--and those institutions will be awarded the F&F franchises, with the money going to the Treasury. 

That’s the “buy in” to which the winners must pay an additional yearly payment based on mortgage revenue generated. (The accountants can decide what will be corporate income tax and what will be a “GSE fee and what each winners “share” will be if the successful bids are disparate.)

A new bidding process will occur every few years to determine which institutions (the same original ones if they are the highest bidders?) get the franchises.

I am assuming that the winners almost always will be the TBTF institutions, but some determined “other” might break in.

Going back to what I wrote last week, operationally this new mortgage model would require statutory efficiency, fairness, ease of access to all lenders, builders, Realtors, consumers, utilize the latest technology, make mortgage products (loans) standard across the country, and do so in a way that minimizes the risks involved to borrowers, financial institutions, and the taxpayers. 

Essentially, the successor would provide almost exactly what F&F provides today.

(Eddie, again.) The “buy in,” plus the financial institutions annual fees could provide some sort of pool insurance of guarantees for lender/investor users. 

Operationally, for purposes of this newly sanctioned mortgage activity--which could be portfolio purchases, securitization, or whatever other systemic needs arise-- the “winners” would be regulated by a Federal Housing Finance Agency (FHFA) writ large, employing the same rules and mortgage limitations applied right now to Fannie and Freddie, re quality of mortgage assets supported and operating limits activity. 

Hang Together or Hang Separately 

The chosen institutions could join together and form a consortium with identical underwriting standards and product standardization or they could stay apart and compete (as F&F did in their early years). 

Fannie and Freddie, after their “time runs out,” as per the five years, would become financial institutions with the same access to purchase services from the new mortgage giants/consortium running the future secondary mortgage market. 

What (Eddie and) I have conceived skimps a bit on a financial/insuring role for the federal government to guarantee the availability of the long term fixed rate mortgage, which most people believe requires Uncle Sam’s, but we only had 20 minutes. 

What we’ve opted for is a system, likely run by the big banks, but with F&F standards and rules that could hold down any franchisee effort to scam the system and cut corners. 

In our world, the future Fannie and Freddie would retain the accumulated capital they’ve netted after they repaid the Treasury the $187 billion received, plus some agreed upon additional amount ($20 billion??) and whatever their corporate reputation allows them to raise in the debt markets.

Thank You, Thank You Very Much 

I think this would be a giant opportunity for the large banks to prove they are up to the secondary mortgage market role which--for years--they claim they’ve wanted. 

If they don’t stand up, then Congress still will have a Fannie and Freddie to consider reviving, possibly, in a more robust way than I have described, acting as a fail safe. 

As Eddie observed, as he ordered his second beer, burger and fries, “That puts the banks in, Fannie and Freddie out--slowly but not altogether--and gives a form and shape to federal regulation of the new masters of the nation’s secondary mortgage market.” 

Any other problems you want Eddie and me to work on President Obama, Speaker Boehner, and Leader Reid? 

I am here and Eddie can be reached at Beechwood 4-5-7-8-…..…!

 

Maloni, 2-3-2014