Bill Maloni's GSE Blog

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