Monday, October 27, 2014

F/F Issues, Watt, Legal Brief, and Other Matters



Watt’s Speech, Cooper Brief, and More


There were two major developments this past week, weighty with meaning and worth reviewing, plus some related events.

First up is Mel Watt reviving 3% down payments.

FHFA Director Mel Watt announced his not well kept secret to allow (perhaps mandate is a better word, since neither can refuse) Fannie and Freddie to begin—again--securitizing 3% down mortgages, a previous practice that had been junked for safety and soundness reasons. (Link to Watt’s remarks.) 

While there were several welcoming comments for Watt’s action, it was far from universal. Some commentators expressed concerns about inviting back “subprime.”  (See W Post editorial link below.) 

I disagree with those critics and don’t think these limited steps usher a new subprime era. Lenders, investors, and the government all are smarter and have better control over that unlikely development. 

Where I agree with the Post editorial is that the federal financial regulators are making a mistake scaling back and lowering their Private Label Securities (PLS or non-F&F) “required skin in the game” rules, since that’s where the red ink hemorrhage and major problems originated before the 2008 real estate meltdown. (Yes, over $2 Trillion in faulty PLS mortgage bond creation, not by F&F but the big banks and investment banks.) 

This latest regulatory caviling shows what happens when lenders whine, drag their feet, making borrowers suffer, and federal overseers quickly fold their cards and rush to accommodate the banks and mortgage companies. 

Meanwhile at FHFA, Watt creatively is trying to use his regulatory authority to stimulate what lenders should be doing on their own, lending to lower income families, which—if they truly did—would be a man bites dog story. 

Some reactions to Watt’s speech 

Major lenders still expressed “buy back” worries (see link to John Carney’s WSJ article covering that), saying they might not do the new 3% down mortgages.

Guy Cecala’s Inside Mortgage Finance carried this from the MBA meeting, last week, on how some banks might react.  

“The mortgage credit box contracted quickly as the housing market slid toward disaster in 2007, but it’s proving to be much more difficult to stretch it back to what used to be considered normal.”
“The subtitle to this week’s annual convention of the Mortgage Bankers Association could well have been access to credit, an idea that clearly dominated the conversation in Las Vegas. Despite the recent unexpected drop in mortgage interest rates, most observers believe originations in 2015 will track closely to this year’s sluggish level. Part of the problem is relatively weak home-purchase lending.”
“And don’t expect any of the megabanks to move quickly to loosen their underwriting standards to attract new customers. During one of the sessions at the convention, David Steckel of Bank of America said his institution has focused on capturing more of the customers who fit into the company’s credit box rather than making that box bigger.”
“About half of BofA’s mortgage originations in the first half of 2014 went to current bank customers, said Steckel. Still, the new lender-friendly representation and warranty framework unveiled this week by the Federal Housing Finance Agency may make the bank a little more interested in considering expanding its credit box than it was six months ago, Steckel said.”


The (stuffy) Economist weighs in on Watt’s call for lower down payment F&F lending. (Brits should be among the last people lecturing the US.)

Ditto, the NYT.

Vox criticizes new policies.

What Maloni Thinks…. 

Most banks and mortgage banks will reveal themselves and frustrate Watt’s move, slow walking any new lending, citing the "possibility" of buyback requests—until Watt gives them something concrete so they don’t have to “worry” as much! 

If lenders followed the F&F automated underwriting rules--and didn't try screwing mortgagors or investors manipulating the underwriting criteria--they would have very few buyback requests. They get into trouble when they cut corners, hoping that nobody will catch them.

Go forward Mel with your not so new changes, but watch the lenders closely—maybe increase the GSE post purchase review procedures—noting carefully the loan quality lenders ship to F&F. 

More Action on Third Amendment Cases 

There are several “third amendment takings” law suits, working through three separate courts.
I discussed Lamberth’s and Sweeney’s initial (and questionable) decisions last week.

Judge Royce Lamberth ruled to dismiss an Administrative Procedures Act (APA) claim against the government that will be appealed. Judge Margaret Sweeney’s opinion only rejected Fairholme Capital’s hiring Tim Howard to view certain information under the document “discovery’” she granted Fairholme lawyers earlier this year.

In an earlier Iowa federal court action, Judge Ross Walters heard a third case--brought by plaintiffs Continental Western Insurance Company---and like the Lamberth opinion, dealt with the Administrative Procedures Act (APA) as well as the Housing and Economic Recovery Act (HERA). 

As predicted, the government circulated Lamberth’s ruling, urging other courts (Iowa and presumably Sweeney) to embrace that finding.
Fairholme’s law firm, Cooper and Kirk—a party to the Perry suit on which Lamberth ruled--filed a brief with Judge Walters last week in Iowa, in response to the government’s courts’ call to “follow Lamberth.”  It contains many items—see below--likely to be in Cooper’s non-lead plaintiff’s appeal of Lamberth’s original decision, supporting the US government. 

I. The Perry Court’s Boundless Interpretation of Section 4617(f) Is Wrong. ........................4

A. The Net Worth Sweep Exceeds FHFA’s Powers and Functions as

Conservator. .............................................................................................................4

1. As conservator, FHFA has no power to take the Companies’

profits for itself or to give them to its sister federal agency. .......................5

2. As conservator, FHFA must work to preserve and conserve the

Companies’ assets and to place the Companies in a sound and

solvent condition. .......................................................................................10

3. As conservator, FHFA must exercise its independent judgment and

cannot make decisions at Treasury’s direction. .........................................11

4. As conservator, FHFA may not take steps to wind down the


5. As conservator, FHFA may not make arbitrary and capricious


B. HERA’s Jurisdictional Bar Does Not Shield Treasury’s Unlawful

Conduct. .................................................................................................................15

Here is a Value Walk article on this matter, plus a link to the entire Cooper filing.

Also another document link without commentary.

I am a bit shocked these two judicial decisions seem so far off the mark of statutory and legal reality.

Certainly, Lamberth’s which is far more significant than Sweeney’s,  makes even veteran lawyers wonder what the Judge was thinking in ignoring various court precedents and finding “arbitrary and capricious” protection for Treasury which doesn’t exist in law.

The Lamberth ruling will be appealed and much of what Copper and Kirk will say then is reflected in the report (above) sent to Iowa Judge Ross Walters. 

Part of me still is pissed/outraged at how many people—including jurists who should know better—seem inclined to believe the worst concerning Fannie and Freddie, and that no mistreatment or abuse of them, their officials or shareholders is beyond the pale.

All of which supports David Fiderer’s belief that the “F&F Big Lie” (evil and responsible for the 2008 financial meltdown) is so ingrained it may never get washed out of our national consciousness.
Yet a national mortgage market, without Fannie and Freddie and the affordable fixed rate financing they insure, would be an ugly consumer-unfriendly system.  GSE critics never seem to make that critical connection.
When the Administration, in the form of Mel Watt, goes to Las Vegas to tell the Mortgage Banker’s that help is on the way, what principals did they employ to stimulate conventional mortgage finance—Fannie and Freddie? And he didn’t even offer an Obama, “Thank you very much and excuse me for dumping all over you.”

Will Lucas Challenge Jeb for Banking Chair?

Rumor is that Frank Lucas (R-Okla.) may challenge Jeb Hensarling (R-Tex.) for the chairmanship of the House Banking Committee, when the House R’s vote for leadership positions in December.
Hensarling is tight with Speaker John Boehner (R-Ohio), but Lucas, a member of the Committee, is considered a bright and well thought of Member with leadership skills. He’s also a long shot to unseat Hensarling. Here’s a POLITICO story about the possibility. 

SCOOP: HENSARLING FACES COMMITTEE CHALLENGE — POLITICO’s Jake Sherman, Lauren French and John Bresnahan: “Oklahoma Rep. Frank Lucas is considering a challenge to Texas Rep. Jeb Hensarling for the chairmanship of the House Financial Services Committee, in what could be the first marquee power battle in the House this fall. ‘I’ve been approached by several members about their concerns on the direction of the Financial Services Committee and the indication that they would like to have a different way of going about things compared to the last two years,’ Lucas told POLITICO.

“Frustrations with Hensarling are pervasive throughout a huge swath of the House Republican Conference. The Texas Republican is a favorite of some of the conservative right, but has had extreme difficulty producing legislation that could pass the House. He struggled to pass a flood insurance bill, he relented to leadership and passed an extension of [Ex-Im] and has [TRIA] set to expire because of disagreements within the committee. His PATH ACT, which eliminated Fannie Mae and Freddie Mac, never had enough support to make it to the House floor.”

EARLY HANDICAPPING — per a plugged in financial services industry rep: “Can't see any scenario where a Lucas challenge would be successful. First, precedent to allow consecutive chairmanship of different committees would create havoc for Speaker Boehner. Second, The Texas delegation would be adamantly opposed to the move. And, lastly, Lucas' strategy of calling Hensarling soft on CFPB is ludicrous. 

Canadian Terror: One Man’s Opinion 

I was in my car for three hours last Wednesday, listening primarily to CNN radio on Sirius. The CNN news people interviewed several Canadian media types, Members of Parliament, and others, trying to draw them out about the horrendous shooting of a Canadian soldier and later the Parliament attack, which produced the shooter’s death. 

To a person—unlike what I think would have happened if a similar event occurred in DC— the interviewees--unrelated, except for their shared Canadian citizenship--refused to speculate about who the gunman was (pre public identity), his motive, and his connections to other worrisome (Muslim extremist?) events. 

No diatribes against Muslims, ISIL, or Al Queda, just several different variations of, “We don’t know enough yet to guess and until the facts come out….!” 

Kudos for the stoic and thoughtful Canadians! 

What Others Are Saying 

Valuewalk says Lamberth blew it.


Former FDIC chief, Bill Issac, weighs in on F&F investors getting shafted.


Aaron Task on Yahoo business.


FHFA’s IG investigators get to carry weapons reports IMF.  I hope their weapons weren’t air dropped to the FHFA folks. Who knows where they could end up, given the bulky winds over DC, maybe at the ABA or Financial Services Roundtable staging areas as the trade groups import extremist bankers from adjoining states!


Just found a new (for me) Fannie site,, and discovered an informative lead article. 


Turkey and the Kurds 

If you are as confused as I am about what is happening with Turkey, the Kurds, Syria and Iraq, then join the club. Anyone have a “good guys—bad guys” program with distinguishing jersey colors and numbers? 


W Post: Obama’s ISIS Effort “Half-hearted”—Ayup!


The GOP Corner. Those southern R’s.

The Republican Speaker of the Alabama House--who also is the head of the Alabama state GOP--may be a very bad boy, if the criminal charges against him hold up.

Don’t forget to Vote Next Tuesday and, also, support Halloween for the kids (of all ages) in your neighborhood.

Maloni, 10-27-31



Monday, October 20, 2014

Lots of Sweeney Reaction; New GSE Tasks


From Pariah to Presidential Advisors

The Obama GSE Hypocrisy Rolls On 


When in doubt look to Fannie Mae (for help).

The reliable word, when Barack Obama first was elected, was that his (badly uninformed) "people" told him to stay away from Fannie Mae issues and officials, because the company was a festering mess. 

He did, later actually turning against the Fannie business model and calling for its disassembly. 

But, some of thought that political paranoia ended when in 2009, he nominated a former Fannie colleague and friend, Donald Remy, to be the General Counsel of the US Army. (Remy had senior legal positions at Fannie, the Justice Department and was an assistant attorney to the Army GC, previously.) 

One McCain Memory (Thank You!)

But, the old Obama doubts returned when a Senate Armed Services Committee GOP staffer, working for Sen. John McCain (R-Ariz.)*, suddenly claimed that the Committee hadn't realized Remy had served as a Fannie lawyer and Obama—wilting from pressure--promptly folded his hand and pulled the plug on Donald (who went on to be named the NCAA’s chief legal officer). 

*During the 2006 presidential campaign, when candidate John McCain began making disparaging GSE comments, I told the NYT that McCain’s campaign staff was filled with ex-Fannie consultants, causing the McCain camp some long faces and embarrassment, especially when it became known his campaign director still was on Freddie’s payroll. So, I knew why the Senator disliked Fannie.

From a June 13, 2009, n ABC Network news transcript: “An administration source pointed out that Remy fully disclosed his tenure at Fannie Mae in other documents provided to the committee, including his Senate Armed Services Committee Questionnaire, his National Security Questionnaire and his Public Financial Disclosure Report.” 

But when desperate and unable to call Ghostbusters, you call....

The President didn’t do the “Fannie blanch” at Tom Donilon’s six influential years of "Fannie service," when—in 2010--he tabbed Donilon to be his National Security Advisory. Nor did Barack let Tom Nides Fannie’s service-- before Nides had returned to Wall Street-- stop him when he named Nides in 2011 to support Hillary Clinton when she was Secretary of State.

And now President Obama has chosen, former O’Melveny and Myers lawyer and Fannie Mae consultant (who also served as VP Joe Biden's Chief of Staff) to be the country’s "Ebola Czar."

Good luck, Ron, just pull off your normal excellent job. The nation needs your best. 

One Klain Memory  

When working with Fannie, consultant Ron Klain produced an exemplary piece of work, a proposed strategic (as opposed to just tactical) Fannie attack aimed at the FM Watch antagonists, its member companies, their principals and lobbyists.

Based on Klain’s rich research and arguments, had Fannie adopted his plan, it might have saved a lot of people from losing their jobs and the company getting heavily besmirched by the GOP and Fannie’s business and political opponents and it would  have been so much fun to implement.
But, Klain’s idea was rejected by those above my pay grade, a fact I didn’t support and never will understand.
I wonder when and if the WH will back off its “Fannie bad!” script, they once aimed at individuals and publicly still used against the institution.

Maybe this week?

Fannie & Freddie Get New Obama Tasks?

Mel Watt and HUD Secretary Julian Castro will speak this week to the Mortgage Bankers Association’s annual meeting in Las Vegas (recently the trade group said it had association earnings $9 million over last year’s).

Most of what Watt and Castro will say has leaked (hey, its Washington isn’t it). 

Reportedly, Watt will ask Fannie and Freddie to again finance/securitize 97% LTV loans. The Admin and the industry hope this return to limited 3% down financing--with slightly lower credit criteria--will jumpstart American housing finance, building and purchases.
The other rumored development is that Watt will announce F&F providing funds for two multifamily and rental low income programs. Past GSE regulator s balked at funding them, because: (1) the Administration never prioritized the recipients’ needs; (2) didn’t believe the GSEs had the money for the efforts; or (3) Treasury desperately wanted all the F&F earnings for the general fund 9see first reason). 

So now a desperate Administration once again is turning to the two Gorilla mortgage finance entities to help with housing problems the “private” banks and other lenders won’t/can’t do on their own. Gee, sound familiar? 

Hasn’t America seen this picture before, say in 1992 and later when the Bush and then Clinton administrations leaned on F&F to do more for low income and minority families?

Given this regulatory reinvigoration, what will the Obama Admin do when the next US Senator or GOP Member asks for F&F to be shut down or phased out?? 

Ludicrous and “Ludicrouser” 

(Personally, I call “Bullshit” on judge Margaret Sweeney’s decision to deny Tim Howard access to “discovered documents,” while she claims he still can work for plaintiffs Fairholme Capital. I am pessimistic about a plaintiff’s victory because I think—but can’t prove—the Judge was reflecting her inclination on the core hearing question.) 

Here is a link. 

Sweeney’s objections to Tim Howard are a shaky concluding Howard, only, is a risk to leak information. 

She said he owned/owns Fannie stock; he wrote the US government was wrong in charging him and others with crimes, allegations that later a federal judge threw out of court; and he settled some OFHEO restitution demands with no personal assets lost. 

Despite claiming she wasn’t questioning Howard's honesty re stock dealings, she does exactly that and ignores that Fairholme's lawyers filed a formal notice--which Tim had signed when Fairholme approached him—assuring the court that he would not buy, sell, or trade in any securities for the duration of the trial/hearing and until such time as Judge Sweeney rendered her final decision.

Howard’s Book Said What?


In rejecting Howard’s proposed role, she argues  he said the federal government—i.e., Fannie's regulator, then known as the Office of Financial Enterprise Oversight (OFHEO)--had wrongly accused him (and two other Fannie execs) of "securities fraud," a 2004 charge, compounded, when the Bush SEC supported it. 

These events, and the intervening eight years until a federal judge threw the matter out were covered in Tim's book, published last year. 

Sweeney's view suggests, if the federal government f****d you over and you say it, you can’t be part of legal discovery on some future related case. (Why, will Howard the consultant invent material not in government files?)

Way back, Tim did give up some claims to financial assets in his settlement with OFHEO (as did Frank), which OFHEO, by design, over 6 years ago and Judge Sweeney, again, last week grossly/significantly inflated their value. 

Look carefully at what they "gave" and then answer: why would anyone not do the same to get the vengeful OFHEO absurdist hacks off their back? 

To make their prize look more impressive, OFHEO six years ago valued the “captured” securities at their much higher initial award price, not their depressed near zero dollars market price (April 2008). The regulator also counted as part of the settlement a cash payment to Treasury from an insurance company. 

Result, the $6.4 million that both OFHEO and Sweeney claimed Howard "paid" to settle the bogus OFHEO charges was made up of worthless underwater stock options, a contribution to a housing non-profit of stock he hadn't been given, and cash paid by an insurance company. 

None of it was out of Howard’s (or Raines's) pocket, or represented any admission of guilt. Sweeney knew all that—since it was made clear in a motion submitted by Fairholme’s lawyers—yet she still chose to portray the settlement as if it consisted of real money. 

Administration Hyper-bloviation? 

In opposing Howard participating in “discovery,” defendants told (a gullible?) Judge Sweeney-–again, suggesting Howard would mistreat the data—that the government is sitting on information about two companies it has tightly controlled for the past six years, that are conservatively operated and spitting out annual billion dollar profits—which if revealed could have “external deleterious consequences”  and a “destabilizing effect on the nation’s housing markets? 

(I think I now know where Uncle Sam’s true “Area 51 and Roswell UFO crash” data is kept!)

Also, with regard to Mel Watt and Mike Stegman claiming Howard should be kept away from these financially momentous, powerful and weighty government records, really, what are you guys smoking, or what is it you truly fear? 

I cannot comprehend what in the Fannie Mae/Freddie Mac record(s), if divulged, could cause serious and catastrophic damage to the mortgage finance system, but Judge Sweeney swallowed that propaganda whole.

Compounding her myth acceptance, Judge Sweeney raked Tim Howard with her legal claws, possibly reopening old wounds on a man whose reputation federal Judge Richard J. Leon helped cauterize two years ago when Leon ruled none of the claims against Howard (and Raines) had any merit?

Why the Government’s Fear and Anxiety? 


I suspect that there are a skein of documents that show OFHEO/FHFA was a Treasury tool, an empty suit, a "conservatorship" puppet failing to vigorously chart F&F's financial recovery, which the Congress called for in the Housing and Economic Recovery Act (HERA). 

And further, there might be documents which would show Treasury mismanaged its "third amendment sweep," when it underestimated how quickly Fannie and Freddie could rebound given the housing recovery starting in 2012 and it probably bent/broke the law in denying F&F any earnings from which they might be able to recapitalize. 

Those facts will show up somewhere, ideally in Sweeney’s court or maybe as part of an appeals hearing on the original Lamberth decision.

But, none of that justifies Sweeney’s clumsy trashing of Howard's character. Unless her mind is set and she plans to back the government’s actions—“discovery be damned”—meaning she has to fantasize events and possibilities supporting where she’s headed on the larger case matter.

David Fiderer on Judge Sweeney’s Decision


In a communication to me, our insightful lawyer friend, David
Fiderer, who has been through major financial services cases, with discovery and similar matters, offers the following. 


“Anyone who works for the plaintiffs’ lawyers—a small army of support staff that consultants, the secretaries the file clerks—is bound by the same confidentiality strictures.”

(Maloni asks, how many dozens or hundreds of these folks can pass Sweeney’s more pure than “Caesar’s wife” test, which she applied to Howard only?) 

“The US government defendants basically are saying that since Tim Howard is so desperate to reestablish his reputation—ignoring that it already had been restored in a court of law--he is disposed to breaking the law and disclosing confidential information to the public Of course, if you accept the defendant’s other premise, the danger is nonsensical. The defendants claim the GSEs are joined at the hip to the government, so how could the market react one way or another if the preferred and common shares are, for all intents and purposes, nonexistent.”

“Do you think Judge Sweeney understood that Howard (and Raines) went through an eight-year federal court case, which featured 65 million pages of hearing material and testimony, and there is not one shred of evidence that Tim Howard ever divulged anything from those records until his case was history and he authored a book?”

“And for the umpteenth time, shame on anyone who dares to claim that the Fannie Mae “accounting scandal,” had one iota of substance.”

Maloni on Real Ebola Worries

(I wrote this before, Ron Klain, was named the nation’s Ebola Czar. My concern is one where his longtime friend, former Obama National Security Adviser Tom Donilon, can help Ron.)

Given the reality of “Ebola in the US,” which for now is more spectacle and headless chickens running around (three known cases and one death), does anyone but me think that ISIL or some other nut case group--maybe just some right wing domestic terrorists--might consider the DC, New York, Chicago, or LA water supply a good place to dump some Ebola inducing poisons??? 

What Others Are Saying 

Fannie stock performance.

I love the Washington Post's schizophrenia. Always looking to exploit their editorial opposition to Fannie and Freddie, the Washington Post got hung up, once again, when Fannie’s stock last week was one of Wall Street’s best performers and it was listed by the Post on the business page as such. But wait “Posties” aren’t Fannie and Freddie government agencies, how can they appear on the stock pages?

The Washington Post’s Dina Elboghdady talks about the coming F&F underwriting changes.


David Sims, writing in Seeking Alpha, likes Dr. Clifford Rossi’s “recapitalize F&F with their earnings” regulatory proposal.


Value Walk comment on Sweeney decision 


Wells Not Making Many Home Loans, Why?


The GOP Corner

Abortion and the GOP


Senate Minority Leader McConnell Leads only by 4% 


Hey, no matter who your candidates, remember to vote on Nov. 4, 2014; it’s your right (and duty).

Maloni, 10-20-2014