Monday, July 4, 2016

Keep Them, Already

To GSE critics, little about Fannie Mae and Freddie Mac seems right or praise worthy. Not even the fact that they have operated seamlessly supporting the nation’s real estate and mortgage finance markets for the past eight years, despite being encumbered by Conservatorship’s federal handcuffs.

What that means (he said condescendingly to the F&F detractors) is the GSEs continue to deliver huge amounts of mortgage credit, reasonably priced to all eligible families in every part of the nation, despite the fact the federal government has deprived them of needed capital to protect against losses. And the two mortgage giants did it with no scandals or smirches, a success story the big banks can’t come close to matching.

Admit it, they work

Systemically, Fannie and Freddie worked and still work well for consumers and mortgage market professionals, i.e. large and small lenders, Realtors, builders, MI’s. I said and have written the GSEs have worked in the past and I believe will more effective in the future if recapitalized.

It’s that line I enjoy rubbing in the faces of those touting the “get rid of the GSEs” proposals, as they lamely flash their ideas at us because virtually every substitute or successor they offer --since it’s operationally new and untried—schematically has higher mortgage costs, unrealistic operational expectations, misplaced rewards, and the chaotic undefined transition to a massive unfamiliar mortgage system. That alone should worry most consumers and policy makers.

Replacement schemes are “Pigs in a poke”

That doubt and uncertainty over junking today’s efficient mortgage system with one or more of the Fannie and Freddie proxies is why Congress has doubt and been reluctant to dissolve the GSEs. It’s a Devil Congress knows.

In their zeal to dump the GSEs, their antagonists fail to grasp housing and housing related commerce, which the GSEs bolster, is almost a fifth of our national GNP.  Screw with one--and badly--then the other will suffer, dramatically

GSE opponents refuse to value what Fannie and Freddie provide/provided and what’s succeeded.

They failed “well”

When asked exactly are their objectives, most “End the GSEs” types involve buzz words, phantom issues or ones still present in their own plans. They promise: to bring “private capital” to the mortgage business (but what if it doesn’t appear?); reduce dependence on the federal government (which few of them do because they keep Uncle Sam in a prominent role); abolish “a failed business model,” which frustratingly (for them) succeeded, providing the past eight years of copious flowing mortgage money, i.e. liquidity.

You can’t say that the GSEs have a bad business model and then whine Fannie and Freddie own or securitize too much (50%) of all U.S. mortgages. Someone is doing business with them.

That Treasury-labeled GSE failed business model allowed Fannie and Freddie to repay the US more than $245 Billion for the $187 Billion they were “given” in 2008--in just three years beginning in 2013--and the two continue to support more than 50% of all US mortgages.

As my Aunt Goldie might say, “We all should fail so well.”

The Urban Institute--which recently solicited nearly 20 “new mortgage system” think pieces, saw many include financial recipes with elements that never have existed in concert in our $10 Trillion-- which represents @17% of our annual Gross Domestic Product (GDP)—national mortgage market (which shouldn’t be trifled with flippantly).

Wake up and smell the coffee, the GSEs work

My premise (which in part explains the clumsy steps others use to fix a system that’s not broken) is that the mortgage market with Fannie and Freddie sitting well-regulated atop it, performs far better than most all of the alternatives. (See past eight years!)

When the GOP and the Right bloviate over how this action would repeat the mistakes of the past, I’ll remind them of two things.

You cannot legislate away memories, no matter how good your statute.

Incredulously and mindlessly, to me, the past two Administrations and the Congress showed far more deference to the country’s wrong-doing big banks than the GSEs. Those same banks are the beneficiaries in most of these new ideas.

Someone needs to remind the Urban Institute authors about bank foxes guarding housing chicken coops.

In the broad national bailout in 2008-2009, Treasury and an ignorant Congress favored the red ink spilling banks far more favorably than the better run and more conservatively managed GSEs. They compounded it by holding hands and ignoring more punitive treatment ladled out to Fannie Mae and Freddie Mac post-Conservatorship.

Needed reminder, since 2008, when Fannie and Freddie were pressed ganged into running the nation’s mortgage markets—a task they’ve done with few glitches or sparks--the big banks have committed more heinous federal banking law violations and victimized more American taxpayers, than all HBO’s Game of Thrones battle and pillage.

While those depositories aren’t as entertaining as Tyrion and Cersei Lannister, Ramsey Bolton, Daenerys Targaryen, and Jon Snow, they likely are more venal, owing to their laundering Mexican drug money, playing footsie with Middle Eastern extremist elements, gouging veterans on their mortgage payments, manipulating the LIBOR index to which virtually all US adjustable rate mortgages, which banks profitably hold on their books, are indexed, etc. etc.

In recent fines alone, the banks have paid Uncle Sam more than $125 Billion for those transgressions, with those costs just passed back on to their banking clients, Joe and Mary Everyone (that’s you and me, dear blog readers!).

DeMarco and Bright

Which brings me the latest “plan” to do away with Fannie and Freddie, proposed by two veterans of this ongoing fray, former FHFA Director Ed DeMarco and Michael Bright, a onetime legislative staffer to Sen. Bob Corker (R-Tenn.), both now beavering away at the Milken Institute.

Because of their respective backgrounds, one reporter suggested their ideas might have a more Conservative appeal.

DeMarco and Bright commit the entry level base error, i.e. they effectively do away with the GSEs, by turning them into insurers owned by banks, i.e. “the lenders,” and then further giftwrap the mortgage market to the big banks, with a recreated Government National Mortgage Association (Ginnie Mae) in charge and with Ginnie’s federal guarantee intact.

The designers admit their plan is unfinished. It exists as a broad outline on the Milken website. But enough is known about it and them to comment on its chances for broad acceptance.

IMO, those chances are slim and none and slim hasn’t even entered the arena, yet.

Brief history lesson. Ginnie Mae was created in 1970, in the same statute that privatized Fannie Mae, and Ginnie was given Fannie’s old job to be the government securitizer of federal guaranteed loans (FHA and VA) while the new Fannie was spun out of the government to finance conventional or non-government insured mortgages.

The cngressional reason for doing so was that it already had HUD, occasionally derided by both D’s and R’s as “10 floors of basements,” but wanted fresh ideas, fresh blood, fresh thinking and non-government managers, responding to private sector mortgage market demands, to buy and securitize conventional loans. Skills they didn’t see among civil servants.

And for most of 45 years that privately owned GSE model—with Ginnie as part of the government securitizing insured mortgages--succeeded and did what Congress asked, generating far more homeownership than the original creators ever imagined.

It’s Uncle Sam, no matter what you do

Ginnie Mae is government through and through. That’s not a putdown but a fact.

The Government National Mortgage Association—because of what it has done for the past 45 plus years--has none of the necessary in house talent or business history required to run a sophisticated secondary mortgage market, despite some operational similarity with Fannie and Freddie—since primary market lenders just feed Ginnie already federally insured mortgages for its securities. (Psst, at one time, Fannie even acted as the “back office” for Ginnie Mae.)

Few Ginnie Mae employees know risk management, few employees understand capital requirements, few employees have conventional market history, and—at the end of the day--they still are a federal agency that possesses a green eyeshade bureaucracy, sloth, and little creativity which Congress wanted to avoid for the conventional mortgage market.

So Ed and Mike embrace a lame government agency—which I am sure they claim can be brought up to snuff quickly--to run their brave new mortgage world. Yet they still want the big bank recipients of their largesse to enjoy Fannie and Freddie “insurance” wrapped, presumably, in a federally guaranteed Ginnie security.

Are they going to bring the bankers breakfast in bed, too?

No matter how they spin it, you also put/leave the federal government and the taxpayers on the hook—directly and indirectly—in this fete-for-the-banks. Once again, it would take years to transition, and with no certainty that it can work better than what exists now or work at all—except for richly gifted plan’s “owners,” which surprise, surprise are the big bank lenders.

What a sweet deal for the banks.

Oh and who or what will regulate this new beast and, exactly where have you hidden that crucial affordable housing mandate? That singly important element was missing in Mr. Bright’s last legislative creation—Corker-Warner cum Johnson-Crapo--and was one of the reasons it died in the Senate after barely getting out of the Senate Banking Committee?

You have one in your new proposal don’t you? Oh, you don’t?

Then, just get back to us on that.

To Ed DeMarco, who failed miserably in his role to preserve GSE assets as the GSE’s statutory conservator because he was so intent on “winding them down”--not protecting/nurturing their assets and operations--and Michael Bright, no matter what your ideological allies tell you, you have about half a mortgage system proposal and not a very promising one at that.

Maloni, 7-4-2016


Anonymous said...

Great post Bill! thank you for your work

Bill Maloni said...


I left a little out, like the GSEs can handle some marginal modifications, but don't need many.

The challenge--and its a monstrous one--is to get policy makers, "industry shareholders" (not the GSE variety), the media, and the Hill to recognize that much is F&F properly designed and very operational.


It's not a perfect analogy but it applies.

The US has a wonderful, albeit older (almost 30 years), close supporter killer jet aircraft, the A10 Warthog, which is masterful at tearing up enemy tanks, lines, fortification, positions and personnel, using it gatling gun cannon which can fire up to 4000 (tank killer) rounds per minute..

But, there is a cabal in DC, defense contractors, and on the Hill that insists on dumping it, incurring huge new expenses to bring a new plane online, criticizing the Warthog, because it's age.

But, it works and has worked, superbly, in the Gulf and Bosnia.

It is super effective at what it was intended to do, the US forces love it, but those Ignatius that new contract money (think banks seeking GSE income) and all that goes with it (think some in Congress trying to kill the GSEs) are intent at belittling and retiring the Warthog.

Anonymous said...

you seem to be omitting the fact that the lawsuits are in a dogpile now...

we have rulings on motions to dismiss coming at least one per month starting august...

that and a motion to compel that sets off a wave of amendments and suppliments

go judge sweenney

Anonymous said...

the gov dried all the money to see how they work with zero reserve of capital. my opiniĆ³n is f&f has had a good performance with that adverse siuation. in my opinion, these companys are accomplishing the goal for which they were created (Provide stability and liquidity in times of crisis)

Bill Maloni said...

First Anon--Not omitting lawsuits; just have no control over them.

Not the case where people are dragging out--for public, policy makers, stakeholders, and congressional approval--their favorite "abolish the GSEs" (save Tim Howard) plans.

My target audience isn't the courts but the public.

I am rooting like Hell for the plaintiffs throughout the legal system. But as I wrote to someone yesterday, it isn't easy to sue the government and there are more judges than Lamberth who believe the government can't make mistakes.

Bill Maloni said...

Second Anon--You are right they are, again which is why policy makers/Congress are slow moving.

But, try explaining that success and why they are working to someone who doesn't know what they do or where they fit in the mortgage finance chain, which unfortunately covers too many on Capitol Hill.

Anonymous said...

Excellent article with fitting response to all the lobbyists in the guise of housing experts.

Putting FnF in conservatorship was biggest mistake of 2008 crisis. It was done by WDC/WS together save their own skin. Most of the lawmakers gave in to demands of scaremongering Hank since lawmakers did have time nor expertise.

Anonymous said...

hi Bill I want to send you a letter. I looked up your address and found two Bill Maloni , one in Chevy Chase and other in Kilbourne Pl . Which one is the right?
Thank you

Bill Maloni said...

First Anon--
But--Once the courts do, initially, whatever they will do (which, if it's for the plaintiffs, will help educate some in Congress). In the next Congress--bodies may change but mindsets are the same--will have to dig in and try to decide many of these same things, which is why GSE supporters need to keep ringing the bell, even if it means saying the same things to some of the same people.

The bad guys haven't stopped doing that with what I consider lies.

Second Anon--

I am the one in Ch Ch.

Anonymous said...


Despite all the efforts by so many experts/lobbyists to come up with alternatives to FnF,
politicians/Gov will never allow any private entities to control FnF or secondary mortgage markets for practical reasons.

SPSPA concrete life savers were forced on FnF without any thinking but at the behest of WS lobbyists. It was done Surreptitiously, completely misleading congress/public. Initially congress/public were told that conservatorship was temporary. Then came the NWS (private agreement without congressional law) to disband FnF. That is why even after 8 years congress has not passed any new laws and nothing much has changed. NWS is clear violation of GSE act even for net worth positive FnF to disband itself. Only congress can disband net worth positive FnF and nobody else has the authority.

The big question is, Will ever Gov give up its control over FnF and control over secondary mortgage markets. Secondary mortgage markets are essential part of Gov/Fed’s monetary policies and FnF are the Gate Keepers for Secondary mortgage markets.

WDC/WS allege that FnF have unfair advantage over others just because common people think that FnF have Gov implicit guarantees. Will any sophisticated investor ever invest without reading Gov charter and FnF prospectus which clearly disclaim Gov Guarantees of any sort?

Currently nothing prevents any other FI from doing whatever they want (including what FnF are doing) without any controls or unfunded social mandates by Gov. But other FIs hate competing with FnF. Other FIs have been hatching plans for long time to own all the business of FnF along with 100% explicit Gov guarantees and none of the controls and mandates by Gov.

Any alternatives are non starters without 100% explicit Gov guarantees or with the all pervasive controls and mandates by Gov. How will they reduce dependency on the federal government with 100% explicit Gov guarantees? If Gov provides 100% explicit Gov guarantees then Gov is not going do away with all pervasive controls and mandates.

Pre-conservatorship FnF model was the best option for Gov with private risks/capital but with full Gov control.

Bill Maloni said...


I agree with much of what you say.

Reread what I wrote this week where I stated, "You cannot legislate away memories, no matter how good your statute."

That means, no matter what Congress creates, if it comes to a new mortgage finance structure, markets will remember the 2008 Treasury/Fed actions. Those memories and not the words in the statute, will guide the market's actions.

I left a big chunk of prose out of this week's blog, where I started to say how Congress might address this historical and business reality.

But dropped it (saving it for later), not because my idea was so avant garde and creative, but because I didn't want to dilute and change the subject from how I feel about the UI and related alternatives and my message that I think virtually all of them--save Tim Howard's utility idea--cannot work as well as some slight variation of the GSE originals.

The public/stakeholders/policy makers/Congress/media need to grasp that before they will consider anything which allows F&F to stick around, no matter how wonderful they perform in the interim. Although that's a lot better than the many bank regulatory/legal foibles since 2008.

A court decision, anywhere, for the plaintiffs will make some/many in this town think twice about their abolish the GSEs mantra.

Anonymous said...

I read there will be a decision on the court of appeals case before August 31. It is my understanding that's because the judges time on the court will be up and new judges will take their place. The current judges cases are not passed on to the new judges so there will be a ruling before their term expires.
Am I right in thinking that?

Bill Maloni said...

I'll have to double check with my court experts (which I am not), but I thought the appellant court (reviewing Lamberth) was going to render a decision before then.

Bill Maloni said...

Anon--Sorry for being so slow getting back.

Yes, next two months--with no specific dates--should feature appellant decision and Sweeney announcement.

Don't know how Judge Thapur's discovery tonight (he found he owns 16 shares of Fannie common, somewhere) will affect the schedule of the Robinson case in Kentucky. He's asked to meet with lawyers from both sides.

My friendly legal source also said, outside chance of Delaware too, again in the next 60 days.

Bill Maloni said...

To the Anonymous who sent this message and the follow up letter.


Anonymous Anonymous said...
hi Bill I want to send you a letter. I looked up your address and found two Bill Maloni , one in Chevy Chase and other in Kilbourne Pl . Which one is the right?
Thank you

July 5, 2016 at 12:26 PM Delete


Your letter has a number of very constructive thoughts in it and reflects thoughtful approaches. It also has one or two questionable items, but that's not my point.

Can I reach you by just sending my response--and ideas--to the brief address on the outside of the envelop you sent?????

I will do that anyway but it would be nice to know in advance it will find you.

Bill Maloni said...

Anon, who sent me the letter.

I just answered to the return address on your letter; I hope that was sufficient for you to receive it (it seemed one or two elements too few).

Anonymous said...

Bill, sorry I've just seen it today. The letter will not arrive. Please, mail me to

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