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.
Hillary
Discusses Putin
Hillary Clinton talks about Putin in a CNN interview. (Mr. President, please remember, don’t trust Putin or
his regime.)
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
7 comments:
Great job Bill on representing the other side on this reform! I'd assume Corker is already familiar with your blog and knew the line of thinking he would get from you beforehand. From my perspective you did a good job representing all the key points you've been talking about for years. Hopefully it makes a difference with their future efforts. Was there any positive feedback from them, or was it more of an information gathering exercise from their side?
Thanks, Matt--
You are the second person to ask a variant of that question.
Truth is that nothing in the comments/questions--more aimed at Michael than me--indicated any long term support or hope for a revitalized F&F and not being physically present prohibited me from mingling and getting any real feedback.
That doesn't mean it didn't exist, since I assume that some, many, all of the audience were investors just that nobody blabbed it.
I suggested to the last person who asked your question that they speak to/email Jaret Seiberg to see if he had a sense or even would discuss it.
To be fair to Michael Bright, I sensed a certain skepticism in the questions he was asked about how the various bill parts would mesh when compared to the functions and roles in today's mortgage market.
Since the bill still is a proposal and theoretically still being massaged by its sponsors to attract more support, there is no way to measure what may occur and how the parts, players, and new regulatory regime would work in concert.
I have lots of doubts because of the variety of mortgage market stakeholders who backed off, shied away or even opposed CWJC.
As noted, I can't see that changing until 2017, if then.
The situation almost begs the Obama Administration to do something via regulation, which goes beyond tinkering at the margins.
Thanks for the updates Bill. I am a long time holder of some Guggenheim securities, including RZV and RPV. I am appalled of their lack of forethought in excluding many of their own clients that have made long term investments in Fannie Mae and Freddie Mac.
Not sure how those things work. I've done many of these conference calls and never get into who the invitees are--beyond "clients"--or what criteria the host uses.
Generally, though, they can provide a tape or they leave the recording up for people who missed the original.
I can ask Jaret Seiberg about GP's practices and will post his answer for you.
Matt--I mentioned your concern to Jaret Seiberg and he suggests you contact him at GP.
Let me know if you need his email address.
Hi Bill,
I will get in touch with you and Jaret soon. I am not an expert, nor a big shot of any kind. My primary concern is that me and anyone else who invested in Fannie Mae 5 years ago are treated like vultures. There were many investments I had to choose from at that time. Thousands of various investment choices have gone through the roof since the economy has recovered. No one is treating any other of the investments as vulture investments. I thought that housing, the economy, and the GSEs would recover and they did. Now I feel that someone is trying to retroactively undo my correct call on this investment and take it away from me because I am a bailout vulture. I find this line of reasoning ridiculous. I also invested in RZV at $10 and now it is $60. No one is trying to take away that gain from me and my Fannie Mae investment should not be treated any differently. I could have easily put that money in several other places and received a great return as well without having to be told to feel guilty about it. There are thousands of other investors with my same concerns, yet we are cast aside as money grubbers.
I feel Fannie Mae and Freddie Mac do a lot more for Americans than the casual taxpayer realizes and that knowledge gap is being taken advantage of by the treasury and many in congress. I believe a strongly regulated, reformed GSE can be a solid company going forward and help many realize the American dream without putting taxpayers on the hook again.
Not only am I concerned about my investment, but also in the hope that my kids can afford to get a loan on their own home in the future. I'm also concerned about my property value when lending tightens even further with a drastic reform of the GSEs.
The exclusion of GSE shareholders from these types of meetings really concerns me and makes me feel that all the people that should be advocating for me are not doing so. I should really be used to it by now, but this one just got to me this time.
Thanks for providing a place for me to voice my concerns.
Matt--I am glad I can help, if nothing more than to let you vent.
My sympathy is with both common and preferred investors, having been one of those myself, at one time.
And I know Guggenheim's business revolves around investors
of all sizes, although--as someone who worked for me used to remind me at bonus time, "bigger is better."
But, if you made me finger point at a culprit, it would be--once again--the Congress, which never, never understood the role of GSE investors even long before "Conservatorship" was a fact.
That was the result of not understanding business, in general, and thinking F&F were government agencies.
My standard lobbyist line when I hit that on the Hill was, "Sir/Mam, Federal agencies aren't traded on the New York (then!) stock exchange.
It didn't help them totally understand investor interests but but gave them something to think about.
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