Mortgage Stuff, Honest: "Hello Governor"

 

Fannie/Freddie Mortgage Future?

 

Jaret Seiberg, Guggenheim Partner’s first rate DC financial analyst, invited me to join Michael Bright—Tennessee Senator’s Sen. Bob Corker’s principal Banking Committee staffer--and him in NYC last week to discuss with GP’s clients and others mortgage finance reform, the variety of proposed alternatives and the many remaining business and political hurdles facing the eternal question, “What to do with Fannie and Freddie?”  

Double thanks to Jaret and Michael for the opportunity and their flexibility, when at the last moment I had to cancel personally attending and they let me join via conference call. 

Michael discussed the many substantive issues surrounding the Senate’s Corker Warner cum Johnson Crapo (CWJC) legislation and some of the history which generated it.

 

Yes to F&F in Some Form

 

My task was to make a case for why F&F should not be abandoned because they still add value and offer smooth and steady operational hope to the nation’s primary and secondary mortgage markets. 

I argued that virtually all the legitimate issues people had with F&F have been solved via regulation or easily could be going forward. Most people who still opposed the two, largely, were swayed by a false narrative. 

As Michael spoke about his* legislation the 2008 “Conservatorship” events and offered explanations for the policy results which evolved, I imagined a bunch of well-meaning Treasury people, operating under immense pressure, trying to build a lifeboat during a hurricane using a variety of hasty figurative patches to get them over. Some of the fixes worked and others are now being challenged both in court and in the policy arena.

(*Behind any major piece of legislation are one or two staffers who shape it, meet with affected interest groups, the Administration, quietly lobby, build support, shoot down opponents, occasionally substitute for their “boss” and then synthesize for and strategize with their principal on developments. Bright did and does this for Corker.) 

The case I made for Fannie Mae and Freddie Mac was simple.

They successfully produced voluminous amounts of mortgage financing, for a variety of income groups, and worked well before the post 2005 PLS debacles. Since being put into “conservatorship,” they still are spectacularly successful—buttressing the nation’s mortgage market-- when their regulation was tightened up post-2008. 

I suggested, with some regulatory relief and little legislative head knocking, they could be revived and permitted to play a principal role in the mortgage market before any of the various F&F alternatives could be operational.

 

Stayed Away From Political History

 

And “no,” I didn’t go into the role of the 2004 GOP trying to destroy certain Fannie execs with sham charges of “securities fraud,” possibly ushering in the PLS debacle when replacement Fannie officials to those deposed started buying the private label garbage.

One item I hope I established was my oft stated belief that no massive change in the nation’s mortgage finance structure—especially which abolishes F&F--can effectively be governed by federal regulatory officials because of competing institutional regulatory agendas and turf wars.  

I thought that was a vulnerability in the CorkerWarnerJohnsonCrapo bill (where Senator Corker, to his political credit--with Bright’s help—clearly was a driving force).

 

Why F&F in the Future Makes Sense

 

The current bank regulatory regime (Fed, FDIC, CoC, Treasury) and now CFPB—before you would even add CorkerWarnerJohnsonCrapo’s (CWJC) contemplated  Federal Mortgage Insurance Corporation (FMIC) apparatus--largely remains reactive, meaning the bad guys do their evil deeds and only get caught after the fact when and if the regulators catch them. 

I’ve written about other CWJC problems, including the fact that no lender, anywhere, was mandated to make lower income housing finance available, despite a special housing trust fund set up for that purpose. It was in the statute but absent any language requiring banks/lenders to use the fund made it near useless. 

Also, several Banking Committee members expressed concern over handing the mortgage market to the nation’s biggest banks, which had not earned that reward, especially just 7 years after they had ravaged the system with their own—not F&F-- private label securities (three or four times more damaging than whatever F&F errors were and what the GSEs cost). The banks’ flawed mortgage bonds carried ersatz or fake ratings provided by their friendly rating agency business partners. 

We talked that the next iteration of the CWJC or even a perpetuation of F&F could, in fact, get overtaken—or heavily impacted--by legal proceedings before Congress ever acts.

 

Major Unknown, the Court Cases

 

Bight and I agreed the “Third amendment” court cases were beyond our ability to analyze and predict content or timing, only that it likely won’t stop with Sweeney’s final opinion and that Congress doesn’t like to screw around, legislatively, where major court action is pending. 

A Judge Sweeney decision for the “takings” plaintiffs could have major financial as well as possible structural consequences. 

Hypothetically, if a conservative GOP president is in office when a decision is rendered, he might not appeal to the SCOTUS and even side with the investors; while a new D president could appeal or if convinced of the GSEs value may to use that decision to build a financial/capital revival. 

Among other possibilities, in my pitch, I suggested since F&F now have repaid all that they were given in 2008 (with a growing surplus), the Treasury Department could let them keep some of their earnings to build capital. I further suggested, the two under certain conditions would be able to fund themselves, without Uncle Sam’s red, white and blue gilding. (It’s Important to note that Jaret doesn’t agree with me.)

 

Congress Listens to Financial Stakeholders

 

More importantly, the industries which bring home ownership to Americans know F&F and like working with them—as they have for almost 40 years—there always some exceptions, but not many. I’ll repeat my belief that some of the nation’s largest institutions want a F&F option in the market to securitize their product and reduce bank portfolio risks.

 

As they’ve just shown, those financial interest groups do speak to Congress in major ways, including making significant political contributions. 

Operational familiarity and continuity are important virtues in an $11 Trillion US mortgage market which can’t afford a “time out” or lengthy transitions (CWJC had five years but most people believed that it would take 10 or 15) where the future is uncertain at best, because legislation left open so many key issues.

 

Folly If Hill Ignores GSE Regulation

 

Fannie and Freddie have been tightly regulated for the past 6 years and—assuming that regulation stays in place—there is little chance of a repeat of the subprime debacle for reasons everyone knows (the primary one being F&F cannot touch low quality mortgage loans). 

With QM mortgages now the rule, F&F as principals in a mortgage finance system offering common products, common prices, competition among primary lenders, efficient operations, and with their own money at stake, would be far better at regulating their customers (most of which are banks or bank affiliates) against consumer and systemic abuse than any federal agency.  

The nod goes to the GSEs because federal agencies can’t ever have real “skin in the game,” meaning revenue at risk (except in a very indirect way) and therefore can’t have the same incentives nor employ the operational policing, with consequences, which F&F would possess. 

A further benefit—if one is worried about a future real estate collapse--with the nation’s banks of all sizes, mortgage banks, credit unions, and other lenders upstreaming a lion’s share of the nation’s mortgage loans through the two securitizers, if any prospective market threat evolved, the nation’s mortgage markets and tax payer risk would be quarantined with two easy to reach and heretofore strongly regulated firms.

 

GSE Myths, Just Hang On 

I contended to the GP audience the major case against F&F is based on a faux allegory, people blaming them for the 2008 financial meltdown and more. These fables were successfully generated and sold by their former business and political enemies--most but not exclusively on the Right--some of whom persist today and beat the same tired drum.  

Faux F&F allegory complements their use of air brushed bank history, since I’m still waiting for anyone in the GOP to admit, in 2006-2007, the major banks and investment banks—outside of the F&F systems—created and sold well over $2 Trillion in poorly underwritten MBS, with tainted ratings and only the institutions’ fast plummeting names backing them.

 

Those PLS securities, which their originators sold worldwide, are what made a domestic US real estate downturn an international dilemma. 

Again, I believe that only a new president with both congressional chambers controlled by his (or her) party will set the stage for any omnibus mortgage reform  legislative proposal with the soonest that can occur is 2017. 

This Administration could move via regulation to make it easier for F&F to produce for the country. 

Maybe if Sarah Palin suddenly spoke ill of F&F, the President might react and vigorously support them. It’s worth a try. 

“Operator, can you get me former Governor Sarah Palin in Alaska? Tell EssPee its Bill calling.”

 

What Others Are Saying 

Military Help for the Ukraine

NYT article on military assistance to help the Ukrainian government.

http://www.nytimes.com/2014/07/27/world/europe/ukraine-rebels.html?hp&action=click&pgtype=Homepage&version=HpSumSmallMedia&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

Hillary Discusses Putin

Hillary Clinton talks about Putin in a CNN interview. (Mr. President, please remember, don’t trust Putin or his regime.)

http://www.cnn.com/video/data/2.0/video/world/2014/07/27/gps-clinton-putin-is-arrogant-and-tough.cnn.html

 

 NYT marijuana legalization editorial. 

http://www.nytimes.com/interactive/2014/07/27/opinion/sunday/high-time-marijuana-legalization.html?ref=opinion&_r=0

 

Maloni, 7-28-2014