Idle Thoughts

It is the best of times, it is the worst of times…..

As I noted in my last (brief) blog, lots of GSE-centric things have occurred in the past few weeks.

Most Notable:

--Acting FHFA Director Joe Otting offers provocative and positively pregnant statements about returning the GSEs to greater/full functionality (but Devil is in the details);

-- Fifth Circuit Collins en banc hearing generates some hope for a pro-plaintiff’s decision;

--Senate and House Banking Committee Democrats submit amicus briefs to Fifth Circuit intended to signal WH Hill D’s want to solve GSE issues with legislation, not regulatory action;

--stories about Treasury officials liking what they see in “Moellis plan” (largely pro-GSE, save excessive capital requirement) and possibly using it as part of an “executive GSE fix”;

--HBC Chair Maxine Waters (D-Cal.) prioritizes reviving Fannie and Freddie and their former affordable housing mission:

--GSE preferred and common stock prices increase to recent highs (but not historical ones).

Good news/Bad News

Right now, there is a lot of GSE optimism from investors and others and you have every reason to feel good after a decade of fallow years.

Despite current moods, the wind is not at the backs of we GSE advocates. The “bad guys” will get louder and more numerous as any positive GSE momentum grows.

While early reviews from the Fifth Circuit hearing saw senior judges asking tough questions of government (defendant’s) lawyers. Plaintiffs still need a majority of the 16 voting judges to prevail at this legal stage.

Most –but not all—of the plaintiff's same arguments originally failed to move Judge Lamberth or any of his judicial colleagues in subsequent GSE cases in other courts, save one or two instances.

All of those past august jurists, like Lamberth, decided that the federal government--under HERA--could do whatever it wanted to Fannie Mae and Freddie Mac…and pretty much did and got away with it.

Meaning, we’ve lost far more cases than we’ve won.

Beyond the government lawyers possibly lying and withholding facts from Lamberth--which happens more often than we think--why will this outcome be different than previous ones? Judges “read the newspapers” and know that this Admin, many in the media, and most of the congressional GOP think ill of the GSEs?

It wouldn’t shock me if the en banc Fifth Circuit judges just take for granted that (government) lawyers lie.

Possible Damages

Nobody knows exactly what damages a supportive 5^th Circuit might award plaintiffs. We’ve all seen and discussed financial estimates, with guesses running from $100 Billion to $300 Billion.

Any of those would be a massive award and draw fire.

With many R’s disliking Fannie and Freddie structurally/ideologically and many D’s disdaining the “hedge funds,” I think congressional opposition would be loud and possibly dominant, especially when the Trump Administration is running huge federal deficits with few positive prospects to staunch the red ink.

Oh, and forget about that fact that there are thousands of small investors—not just hedge funds—among GSE shareholders. Plaintiffs largely have been demonized as hedgies and there is no way to undo that fact, plus these lawsuits have plenty of hedge fund money driving them.

IMO Legislation not likely

I think you can forget about GSE legislation* in 2019. While while the Democrats have won the House, there aren’t 60 votes (ultimately) in the Senate for a progressive “free the GSEs with an enhanced affordable housing role” statute nor many in the House for dismantling Fannie and Freddie. 

As a possible Democrat presidential candidate SBC ranking D Sherrod Brown (D-Ohio) has to be especially careful about the national impact of any statutory changes—housing or otherwise—he champions or supports.

Brown’s Committee also includes announced presidential candidate Sen. Elizabeth Warren (D-Mass) as well as **Mark Warner (D-Va.), one of the Senate’s richest members who likes to crack wise and denigrate the GSEs.

One thing which can/should be considered by the Congress (are you listening Chair Waters, HBC members, Senators Brown and Warren?)—especially with the growing number and business volumes of non-bank mortgage originators—is to subject the non-bank mortgage lenders, as well as the nation’s largest banks, to statutory low-mod mortgage origination goals rather than putting that burden exclusively on the GSEs, as uit is now.

Keep the GSE goals--even make them slightly higher--but support the GSEs by requiring primary market lenders to find those same eligible borrowers and make those loans. Pass new legislation; don’t rely on the existing, quite flaccid Community Reinvestment Act (CRA), as toothless a tiger as you can create…no matter how much the banks complain about its toughness. When you hear the big banks bitching about CRA, think “rabbits complaining about being thrust into a brier patch.”

(* One caveat is if the WH’s executive action leaves an agreed on  designated “hole” for Congress to act and add something to its exec order. Bearing in mind Congress always can act to amend or create legislatively anything it wants, but massive GSE reform has confounded Congress even when the GOP controlled the Senate, House, and White House because Fannie and Freddie are too valuable and cannot easily be replaced, absent a viable alternative and a much larger consensus.)

Resolution?

Because of the congressional loggerheads, which have existed for years and haven’t been solved by the welcome new D House majority, I still look for a Treasury scheme implemented with the inherent authority it and FHFA have. Ideally, some version of the “Moellis Plan,” with lower GSE capital mandates which Tim Howard eloquently argues for in his blog this week. Both Senate and House Banking members—and their staffs—need to read Moeliis and understand what it proposes.

In the same context, policymakers need to understand there is a cost to excessive capital, in higher mortgage rates, fewer families served, and systemic inefficiency.

But, with the absence of real congressional understanding of how our nation’s mortgage markets work, there always will be a large Hill soft spot for those who blindly argue “more capital is better.”

(**Last week Warner was quoted complaining that the GSEs advocates were seeking “private gain and public loss,” a tired old falsehood that originates with the bank-dominated anti-GSE FM Watch group.

(In my 21 years at Fannie Mae, there never was one dollar of corporate losses not balanced and offset by corporate earnings, with no maneuver or request to ask the taxpayer to pick up those debts. In addition, in those same two decades plus, I never heard one senior corporate executive suggest Fannie’s myriad mortgage business initiatives or product executions contained zero risks because “Treasury, the taxpayer, or Uncle Sam,” would bail the company out. Certainly, Fannie never operated like that in my time.)

(Senator Warner, who likens himself to a sophisticated financial markets student, should know better and be less flippant with his characterizations, if for no other reason than some 6000 Freddie and Fannie employees, or more, are his Virginia constituents.)

Maloni, 1-29-2019

Corker

See Investor Unite's Tim Pagliara go toe to toe (with Corker elevating his height on an airplane seat) over the Senator's financial dealings.

http://tennesseestar.com/2019/01/25/off-the-record-sources-say-bob-corker-instigated-confrontation-on-plane-with-prominent-tennessee-gop-donor/