Friday, June 27, 2014

Munchkin Invasion!



Cats and Dogs 


(It’s slow in GSE land; summer always is. So I am examining some recent issues and personalities and adding one or two additional perspectives. But the major reason for this approach is that “Camp Maloni” began four days ago. That’s the annual, three week event when 6 Maloni grandchildren—three from the west coast and three from the east coast--arrive to delight and bedevil Gram and Grampa. We go swimming, horseback riding, tent camping, eat a thousand popsicles, go berry picking, go to the toy store about 40 times, make “Somemores,” suffer minor injuries, fight with one another and drive up Grampa’s blood pressure, but also produce some loveable and unforgettable moments making it all worthwhile. Unless something earth shattering happens, the blog will go on a brief vacation at least until Camp Maloni ends.)


Scott Garrett Performs for the FSR 

I don’t know Rep. Scott Garrett (R-NJ), Chairman of the House   Financial Services Committee Subcommittee on Capital Markets and Government Sponsored Enterprise. He arrived on the scene, after I left. But people I respect said—despite being very conservative--he was a pretty smart guy and “good on housing issues.” 

I looked forward to reading his speech delivered last week to the Financial Services Roundtable, hoping to see some enlightenment or even some progressive thinking.

Nope, didn’t happen, wasn’t to be; my friends are/were wrong. I was disappointed when I went through his prepared remarks.

He Ignores Similar Chamber Actions

In addition to bad form dumping all over a recent committee colleague, former Rep. Mel Watt, Garrett’s words displayed very little analytical content, quite the contrary.

Garrett just threw red meat to the bank lions. 

The Congressman hurled the obligatory partisan brickbat at the Senate D majority and its leadership for the Senate Banking Committee’s failure to report the CWJC legislation with enough votes to drive it to the Senate floor.  

He blamed liberal Senators for not backing the legislation to do away with Fannie and Freddie, but seemed to miss a gaggle of very conservative committee R’s, as well, who opposed the CWJC bill. 

Less than adroitly, he then tripped over another uncomfortable fact. 

After eviscerating the Senate and Leader Harry Reid for not passing the CWJC bill, Garrett bragged about the bill his full House Committee produced, the so-called PATH ACT, sponsored and shaped by Committee Chairman Jeb Hensarling (R-Tex.), which would end F&F and turn the mortgage world over to the banks.


Rep Garrett, despite all of the abuse he heaped on Reid and D Senators, glazed over or forgot that his Banking Committee barely approved PATH and with insufficient votes to propel it to the House floor, virtually matching the Senate committee’s shortcoming.  

Both Banking Committees approved a mortgage reform bill but neither had their bill go to the floor. Goose and Gander? And the Senate’s margin of victory was far greater than the House’s votes for PATH. 

So what does that say about Boehner, Garrett, Hensarling and his House R colleagues, who exist in far greater numbers and majority percentages than the Senate Democrats? 

Say Less and You Won’t Look As Foolish 

Garrett just should have sucked up that bicameral common lack of success and headed in a different direction couching his criticism in less haughty terms. 

But instead, the Capital Market and GSE Subcommittee Chairman waded in, repeating every hoary F&F tale for the bankers and their cohorts, using every phony GOP allegation and buzz word (“ACORN” and  “Obamacare”…huh?) including one dear to my heart, when he said:

“Their (F&F) whole corporate model, which was based on shifting risk to the public, maximizing bonuses, and corrupting the political system, was shown to be bankrupt.” 

Gotcha, Mr. Garrett! 

As I done before, I challenge Rep. Garrett (and/or his staff) to prove that Fannie’s corporate model was based on “shifting risk to the public.”  

(Before they were taken over in 2008, can he/they cite one instance where F or F asked the “public”—I assume he meant taxpayers—to pony up for any corporate loss?) 

What’s his evidence of “risk shifting?”

And “corrupting the political system?” How, exactly? 

If he was addressing the situation years ago when Fannie and Freddie were renown for lobbying prowess (excuse me, while I bow to myself in gilded memory), where and how was that illegal and what did we/they do—involving Congress—that corrupted it (any more than it already was)?

Garrett’s observation, I think, may have been a greater indictment of the Congress than F&F. 

If he was discussing recent history, where has he been for the past 6 years when neither F&F--because of the conservatorship implementation—were permitted to have corporate lobbyists?  (Isn’t that a violation of someone’s First Amendment rights?) 

Fannie Mae and Freddie Mac today, or for the past half dozen years, can do nothing but respond passively to congressional inquiries, since both are denied any permissible ability to advocate or “lobby.” 

“Bonuses?” Buzz word, Congressman. 

Read the papers Rep. Garrett, the Veterans Administration—which today everyone seems to revile--among other government agencies pay bonuses to their top people. 

F&F were created by Congress as “private companies,” no matter how much you disdain that reality. So, they certainly were within their corporate rights to offer bonuses as part of compensation. 

Simple question: “Since when did federal agencies trade on the New York Stock Exchange as both F&F did?” (Even today, post  conservatorship,  F&F currently “de-listed” common stock still gets reported in the Washington Post’s business section if/when either’s daily or weekly growth (or loss) merits inclusions in the “top performers” list. 

Explain that away, please.

Some Uncomfortable History for Garrett

Your very Subcommittee owns that legacy. Then known as the Housing Subcommittee of the House Banking Committee, it wrote that  Fannie Mae enabling legislation in 1970, by design, shaping Fannie Mae in a far different guise than the existing Department of Housing and Urban Development (HUD).  

Congress wanted the new Fannie to operate like a private company and its successes for the next 30 years (Freddie Mac joined it almost 10 years later) reflected that bipartisan wisdom. 

I’d have a more respect for you if you straightened out your own understanding and history of two major players over which the subcommittee--which you lay claim to proudly chairing--has primary jurisdiction.

To bring this all up to date for you, because of the sensitivities of your Financial Services Roundtable audience, maybe you didn’t want to discuss—or just don’t know—the sorry mortgage lending history of the big banks just 7 years ago? 

I’ll keep it brief. 

The $2 Trillion plus garbage private label subprime securities (PLS) those banks sold in 2006 and 2007 infected world markets and produced more than three times the losses of the combined Fannie/Freddie red ink, which itself was $186.5 Billion.


GOP: Banks Can Do No Wrong 

When will the GOP ever get over its love affair with the nation’s major commercial banks and its unwillingness to recognize depository culpability for major parts of the 2008 financial debacle? You can't pretend--although most do--that the banks messed up, big time. 

Check out the table later in this blog which shows that F&F have repaid--with an expanding $15 Billion overage--the 2008 federal funds infused in them. There are, however, a lot of banks and mortgage companies, which have yet to repay the TARP (Troubled Asset Relief Program) dollars Treasury gave them. 

But those specifics don’t fit with your narrative, just like the House’s failure to pass the Hensarling PATH Act didn’t. 

Your PATH action floundered because the extreme Right in your House GOP Caucus wouldn’t bless it, since the big banks don’t want the solitary job of offering conventional mortgage loans without the federal government providing them with loss guarantees. 

As a gentle reminder, the principle provision in the Senate bill, on which you waxed semi-eloquently, was a new federal subsidy, i.e. federal insurance on bank mortgage security losses. 

Maybe you can save discussion of those truths for your next honorarium opportunity!

(If the Congressman's office would have responded to my request to supply one, below would be a link to the Rep. Garrett’s remarks to the Financial Services Roundtable meeting. But they didn’t. I also couldn’t find one at the FSR site, the full Committee site, or online.)


TARP Money Given and Repaid

Here is a current list of all of the financial institutions which the Treasury began helping following the 2008 financial implosion and the amounts those entities have sent back to the Treasury (the taxpayers)!


Petrou’s Post-Facto CWJC Analysis

I long have admired Karen’s Shaw Petrou’s work and (and I am jealous of) her successful career as a financial services expert. We disagree sometimes, but she’s very good at her job.

Karen has worked for the big banks, but—beyond that grievance—she brings a sharp analytical insight to issues when most people just tickle the surface or rant. (See Maloni!).

Hoping she is spot on, I especially wanted blog readers to see her article produced, at the end of last month, which contains her stark congressional worries for the behemoth banks. 

KSP's article was shared with me by friend and former Fannie/Freddie colleague Rob Zimmer, who now represents a group of community lenders and closely watches big bank machinations.

(Coincidentally, Rob also was the source of the TARP repayments link employed above. Thanks, twice.)




Maloni, 6-27-2014















Monday, June 23, 2014

Where do they grow these guys?



Oh No, Not Another One!! 


Last week,  blog reader “Anon/JM” sent an opinion/question to the blog’s “comment” section, wondering why/how people can continue to be so dense, obstreperous, and wrong about Fannie and Freddie issues? 

I suggested most of those critics didn’t know any better and believe all of the false rhetoric the GSE enemies built around lots of distortions and a few real F&F mistakes (PLS!). But other haters, either for business  or ideological reasons, want to get their DNA into whatever succeeds F&F—if something does.
Think “huge scalp/coup” complete with big financial rewards. 

David Fiderer, the Hebrew Hammer,” dubbed the years long assault, the mortgage market’s “Big Lie.

Suddenly, we have a new born again GSE critic, a very contemporary example of someone—despite his educational achievements or maybe because of them—who exposes himself as a GSE-hater, by repeating bullshit conjured by the American Enterprise Institute and others on the Right. 

Meet David Brat, the guy who shocked many in the nation by defeating House Majority Leader Eric Cantor in Virginia’s Seventh Congressional District’s GOP primary. Chances are very good in November’s general election Mr. Brat will become “Representative David Brat (R-VA).”

Facts? Hey I’m Running for Office

Who knows why how/why the GSEs came up in this internecine GOP primary election in the Richmond area, but Brat sought points telling his possible future constituents that all of the problems of the 2008 financial meltdown were caused by—you guessed it—Fannie Mae and Freddie Mac. 

How can a supposedly intelligent individual suggest the commercial bank lenders did everything right and F&F did everything wrong, as Brat did?  

Both suggestions are foolish and reflections of a simple mind. 

Um, Dave, go back and check this out. The nation’s large commercial banks issued almost $2 Trillion in near worthless private-label subprime mortgage securities, in 2006 and 2007, selling them all over the world with inflated bond ratings maced from their friendly bond rating agency business partners.

Banks’ garbage PLS generated three to four times more mortgage losses that Fannie Mae and Freddie Mac securities did. The latter quickly righted their houses and repaid taxpayers over $200 Billion with a still increasing surplus. Banks still are skittish about lending for mortgages. 

How did Brat conflate all of that information? Simple, he lied! 

When the AEI first authored those same falsehoods, its arguments—formally and in writing--were shattered then rejected by Federal Reserve staff commentary, the President’s Financial Inquiry Commission report, and dozens of writers, columnists, and think tanks.

But that didn’t stop David Brat from repeating all of the inflammatory talk, serving up the bogus AEI drivel, repeating variations, and perpetuating the F&F lies and myths, ignoring that much of what he claimed was wrong. 

This from a college professor and a purported trained economist, but so far, he got rewarded? 

I doubt the GSE issue, alone, got him over the top against Cantor, but will Brat now let some facts creep into his narrow intellectual band width as he campaigns for the Cantor seat against a Democrat? 

Austin Kilgore’s article in the National Mortgage News this week, discussed Brat’s distorted F&F views of what led up to the nation’s 2008 economic and financial blues. 


Mortgage Sidestep: Dick Cheney 

Is Dick Cheney a “lying sack of sh--?” (See Urban Dictionary if you need a precise meaning.)

Go quietly into a dark corner, Mr. Cheney, and stay there until God or the Reaper takes you.

For reasons selfish and egomaniacal reasons, including feeding more BS to his party’s crazies, Dick Cheney and his daughter--in a Wall Street Journal op-ed last week—sought to project the Bush administration’s egregious foreign policy errors onto the current President and blame Barack Obama for Iraq’s recent setbacks.  

I believe the US never would have invaded Iraq if it wasn’t for you, Mr. Cheney, and your lying/stealing corporate oil-sucking buddies taking advantage of a very naive President George W. Bush. You then doubled down and made sure your military industrial complex Goombahs got monstrously rich on taxpayer dollars.
Shame, shame, shame on you Mr. Cheney. 

Back to Mortgages: Rosner 

Josh Rosner has enjoyed a fascinating odyssey, to which I am sure he will attest, from Wall Street financial analyst to co-authoring a book, with the WSJ’s Gretchen Morgenson, critical of Fannie Mae and its then Chairman, Jim Johnson.
Rosner's and Morgenson's book relied on AEI “research” (see above), which has been debunked by most intelligent observers.  

Completing his circuit, Mr. Rosner is managing director of Graham Fisher & Co, and now has become an ardent advocate and supporter of a Fannie/Freddie revival. 

Check out this Bloomberg video of a recent F&F investor conference, where Rosner discussed the virtues of a F&F mortgage market rebirth and the very flawed and hardly lamented CWJC legislation. 


 DeMarco’s FHFA Was Messed Up

Here is a little bon mot from the always excellent Inside Mortgage Finance (IMF) publication that reported the departure from FHFA of a man who had a strange set of responsibilities, which I bet doesn’t exist at any of the other federal financial regulatory agencies (at least I hope not). 

The IMF article:

“Manoj Singh, a top official at the Federal Housing Finance Agency, has left the agency for the private sector. According to associates close to Singh, he has accepted a position with American Express and will serve as a market risk oversight officer. At the FHFA he was involved in strategic planning to help attract private capital to the mortgage industry, a key goal of former Acting Director Edward DeMarco.” 

DeMarco’s goal was to end F&F as most people knew them. So did Fannie and Freddie pay the salary of a guy trying to generate business that never would go to them?

Strange position for a regulatory employee to be in, trying to encourage growth elsewhere and not at the two entities his agency is overseeing.

Dems Talk to Watt? Fast, Jam the Lines!

Jon Prior, writing in Politico, reports that a top Republican on the House Financial Services Committee said he's “worried that pressure from Democrats will lead Federal Housing Finance Agency Director Mel Watt to expand Fannie Mae and Freddie Mac's role in the housing market at a time when it should be contracting.”

"Even if Mel Watt seeks a moderate course, I believe it will be very difficult for him to resist the pressure coming from the left," Rep. Scott Garrett (R-NJ) said in prepared remarks for an event hosted by the Financial Services Roundtable. "If he complies, he will be a hero to the Democratic base. If he resists, he will be called a sellout. It will be in his interest to comply.”

My goodness, Republicans worried that Democrats may listen to other Democrats.

Intraparty communication and cooperation? What is the nation’s capital becoming? Next they’ll claim that there is “gambling at Rick’s!”

Of course, consider the venue.



I couldn’t help but include the following article, just for the headline alone.

As a new investor (reportedly about $50 Million in F&F common stock purchases), I wonder on whom Icahn will use his tried and true technique of threatening those who make decisions over his stock shares??

“Jack Lew, this is Carl Icahn and I better get my %^$#@& way or………Hello, Hello!”


“Discovery”: A Smart Man’s Opinion 

I heard from a very wise financial services friend this past week, who read Judge Margaret Sweeney’s comments during the 6-19 discovery hearing on Fairholme Funds, Inc., et al. v. USA. It doesn’t look like the Judge is purchasing what the government is peddling.

Here is that individual’s opinion. 

It seems pretty clear to me that Sweeney isn't buying the government's argument that FHFA should be exempted from discovery because as conservator it's not a federal agency, and that she also believes she can deal with the government's concern about sensitive information by crafting a sufficiently restrictive protective order that will keep potentially market-moving information from being disclosed.  

So, my conclusion is that the documents plaintiffs are seeking to access will be produced under a protective order.  And I strongly suspect that when this happens it will become clear that (a) FHFA was acting at the direction of Treasury when it agreed to the net worth sweep and (b) that the net worth sweep was put in place precisely because Treasury had concluded that without it Fannie and Freddie would begin building capital, and that calls for releasing them from conservatorship would begin in earnest-- something Treasury wanted at all costs to avoid.  Then the fun will begin!

I don’t have a transcript link, but for those interested, a transcript is floating around and something will be publicly available this week. Just read Judge Sweeney’s comments to the government’s lawyers in the first three pagesShe doesn’t sound happy!

(Post publication addition. Thanks to Compass Point's Isaac Boltansky, here's a link to the Sweeney hearing transcript.)


Maloni, 6-23-2014



Monday, June 16, 2014

Admin BS

This and That



White House Reluctance
Afraid to Be Successful?


(I am not sure in what sequence to arrange the following sections, since they all seem to scream the same message and overlap, rather than feed seamlessly into one another. So let me just run them as I wrote them and let you enjoy the prose, mine and other’s.)


I admit to being frustrated by this White House and its approach to mortgage finance reform. 

There are lots of ways to engage in reform. Metaphorically, sometimes reform isn’t blowing a tunnel through a gnarly, granite filled mountain. It just could be posting better directions on how to drive around the elevation.

With mortgage finance, we seem to be at that juncture right now.

No matter what partisan hassling occurs before the 2016 elections--which will produce this nation’s next and our 45th President—Fannie Mae and Freddie Mac likely will be a fact of mortgage finance life through the end of the Obama Administration. 

Some in Congress will bitch and moan, but the nation’s primary and secondary mortgage markets lenders will continue to utilize F&F, much as they have for the past three and a half decades and as they have for the nearly six years following F&F “conservatorship.”

The OMB and Treasury like F&F revenue and the two mortgage giants are here and operationally successful. 

My hope, no matter who controls the Senate after November, who is the next House Majority Leader, and maybe who the next House Banking Committee Chairman is--if Jed Hensarling somehow moves into the House Majority Leader’s job—is that White House policy makers will concentrate on how the Administration—without Congress--efficiently and safely can expand the pool of eligible mortgagors, drive additional homeownership. This also means adding to the inventory of rental housing for those who can’t or don’t want to buy. 

The answer “at the Administration’s fingertips” is greater utilization of Fannie Mae and Freddie Mac. If done thoughtfully and with urgency, success can produce burgeoning economic activity and more jobs in and around those new households. 

That’s not or shouldn’t be, exclusively, a Republican or Democratic goal, but a responsible public policy objective which politicians in both parties can endorse. 

Since events have conspired to make congressional cooperation a rarity, the Obama White House should seize that opportunity and-- working with the Federal Housing Finance Agency’s Director, Mel Watt--use  Fannie Mae’s and Freddie Mac’s ample capacity  to do good and well, at the same time, seeking to expand the number of eligible borrowers and generate additional jobs.

Sure, Mr. President, your guys cut a political deal with Sen. Bob Corker (R-Tenn.) — which I am sure God and Tip O’Neil will forgive—but how about putting the same energy into picking up the cudgels on your end NOW and move aggressively with regulation to finance more rental and homeownership activity and allow the country to reap the attendant commercial and employment benefits, too? 

As Jim Millstein (pronounced “Mill-stEYEn” for those who don’t know) and others have suggested, the ball is in the Obama court, the bat in his hands, he’s behind wheel with no real obstacles fronting him.

He needs a few good lawyers—and one or two good pols-- and then just has to do it.

Mary Miller Speaks; the Result Floats!

Yet it appears that the White House is timid and may not be ready to listen to Watt and the industry groups.  

This past week Treasury tried to throw cold water on burgeoning calls to energize Fannie and Freddie through regulatory action. 

In remarks claiming inability to properly capitalize them, outgoing Treasury official Mary Miller took a weak shot at derailing industry and other requests for Obama Admin F&F action through regulation, claiming it would take “20 years” to refill their capital coffers. (See below.) 




The lady may be the best of the best at Treasury, but seriously, who can accurately measure what’s going to happen—financially and economically—in the next 20 years? 

Treasury couldn’t even see that F&F were poised to earn major revenue in 2012 and 2013. 


The OMB this year projects that F&F will earn about $155 Billion over the next 10 years. The enterprises already have paid back all that $187.5 they were given, with a still-growing cash cherry on top.

If this Admin--which says it can change the “conservatorship rules”--would let F&F keep some/most of that $150 Billion that alone would be a pretty good dose of recapitalization.

But Miller tries to induce doubt and fear when saying it will take a generation to build F&F’s capital. 

Ms. Miller must have forgotten that her White House and Treasury bosses endorsed—and still are rooting for--the (“heh, heh, heh”) CWJC legislation, which calls for raising $500 Billion in new protective capital in its first five years for the private insurance which is supposed to make the nation’s mortgage finance system far less dependent on Uncle Sam?

Really Mary, that bill is “Francisco Franco” dead, but from where/whom did you think all that money would come? 

Mary Miller is leaving the Administration and I think she was sent out to “take one for the team” with her transparent suggestion.

Poor Mary, we hardly knew ye!


The Hammer “Hammers” 

Just after completing this final blog draft, I received an email from, David Fiderer, whom I call, “The Hebrew Hammer,” writing about Mary Miller’s remarks. 

Well that's complete idiocy.  The GSEs make money, not only from financing new mortgages, but by holding and insuring the mortgages on their books. So the revenue from their core business should not plummet like it would for originate-to-distribute banks. 

The GSEs would be well capitalized but for the cash drain imposed on them by the senior preferred stock agreements.  

Also, the extraordinary profits of the last 15 months are really prior period adjustments to illusory GSE losses during 2008-2010. Rumors of the GSEs collapse were greatly exaggerated.  

So sayeth “The Hammer.” 


FHFA Steps in It, Again


I am sure that most of FHFA’s F&F 2013 report sent to Congress on Friday was done before Mel Watt came on board—at least I hope so.

But at some point Watt might want to look into why this agency keeps peddling bad news stories and doesn’t want to take credit for F&F successes. (See Tim Howard’s comment above, sent before this report was made public last Friday.) 

No other federal financial regulatory agency is that chary, reluctant to praise itself and belligerent to its regulated institutions. Are the agency GSE-haters—who exist in senior spots at FHFA--so insecure and baffled? 

Shut them down or root them out, Mr. Director, or you could end up “wearing” their disparaging opinions like an unwanted cheap suit.


Tim Howard Weighs In 

In a similar vein, writing about the “FHFA F&F Stress Test,” I was dismayed with what I thought was a lack of regulatory candor and honesty (just like the aforementioned “2013 report to the Hill”). Sure, FHFA had to discuss how the two night fare in hypothetical bad times, but the agency must have a keener eye than it lets on.

In describing what I thought FHFA ignored, I wrote that F&F have acquired 5 years’ worth of outstanding, very safe “books” of business (annual securitization business activity) since being forced into “conservatorship” in 2008.

I pointed to the first fact generating substantial revenue and how the 2012 “dividend sweep” decision—now being contested in court--repaid the taxpayers the entire $187.5 Billion initially infused in F&F, in less than 3 years.

More money gets added to that overall payment every business quarter, as F&F to date have sent $18 Billion above the original $187.5 Billion debt to the government’s general fund. 

A few days ago, Tim Howard and I went to lunch with an accomplished DC-based financial services analyst and we talked briefly about that same issue. 

With Tim’s permission, below is his near verbatim follow up communication he sent to our lunch companion telling him why Howard thinks the chances are unlikely that Fannie and Freddie again will become another 2008 financial basket case.

Those peddling this line of thought seriously lack understanding of how F&F’s mortgage business works or have an alternative agenda. Here is what Tim wrote.


Thanks again for lunch; I appreciated getting your insights on the current goings-on with mortgage reform.

There was one topic I thought we might get to but didn't, that I wanted to follow up on.  It was the argument, which I first read in an op-ed by Mark Zandi and Jim Parrot in the Post, that one reason the status quo is not sustainable is that with Fannie and Freddie not being permitted to hold any capital another bailout is inevitable-- and that this second bailout will both shake investor confidence and trigger an adverse reaction from Congress.   

Zandi and Parrot say: "Mortgage defaults will increase again in the next recession, and Fannie and Freddie will suffer losses. Without capital, they will have no choice but to borrow again from the Treasury to meet their obligations." It's easy to read their first sentence as a mere statement of fact.  It isn't.  Yes, Fannie Mae and Freddie Mac's credit losses will very likely rise during the next recession, but credit losses are a far cry from corporate losses.  For credit losses to become corporate losses, they would have to grow larger than all of Fannie's and Freddie's other sources of income (less administrative expenses) combined.  That's highly unlikely. 

Consider the numbers for Fannie Mae.  Because it's been raising guaranty fees on its new business, it now is making about $12 billion per year in guaranty fee income.  It gets another $4 billion or so in net interest income from its portfolio business (although that number will decrease over time as the portfolio continues to shrink).  Its fee and other income average about $1.5 billion per year. With G&A expenses of around $2.5 billion annually, Fannie Mae's pre-tax net income is about $15 billion per year, and growing (even with the portfolio shrinking). 

Put aside for the moment the remaining losses on Fannie Mae's pre-2009 books of business (but remember, the company has a $45 billion loan loss allowance--a form of capital-- which should be more than enough to cover them).  What are the chances that losses on the post-2008 books will rise to $15 billion per year at any time in the foreseeable future?  

I believe they are almost non-existent.  The post-2008 books were very conservatively underwritten (too conservatively, in my view).  The quality of these loans is at least as high as the loans Fannie Mae put on when I was CFO, and during the 1990-2004 period those loans had an average annual credit loss rate of 2 basis points.  Fifteen billion in credit losses, on today's balance of $2.8 trillion in outstanding guarantees, would be a credit loss rate of 54 basis points.  You really can't get there from here.  Today's Fannie Mae has far too much income for losses on QM loans to threaten its bottom line, even in a recession.   

I understand why one (or in this case, two--Zandi and Parrot) might want to make the political argument that having Fannie Mae and Freddie Mac operate in conservatorship with no capital is a knife-edge that could topple into disaster, and therefore a reason why an imperfect Johnson-Crapo is the better alternative.  But I wanted to make sure you knew that, economically, if Fannie and Freddie are kept in conservatorship with a net worth sweep, there is almost no chance taxpayers will get the losses critics predict; they instead will receive a very large stream of deficit-reducing income for a very long period of time.

Although that wasn’t his goal, I think Howard’s comments about F&F’s current ability to manage business losses—with adherence to their current product acquisition rules--underscores the point I made in my challenge to the Obama Administration to encourage greater F&F financing activity. 

Since the Admin will not shut down Fannie and Freddie and Congress won’t blow them up, an Obama limited F&F revival would be supported by Governors, Mayors, other public officials, commercial developers, residential builders, minority advocates, Realtors, lenders of all kinds, including the major banks. 

And, who knows, maybe make this Administration look good, which it hasn’t for two years. 

It also would not preclude anyone from returning later to the Fannie and Freddie reform/restructuring discussion. 

The GSEs aren’t disappearing, use them well! 


Maloni, 6-16-2014