Just geezing! Is he or ain't he??

(Official communication from 7-11 Dairy and PR Departments to Fifth Circuit Court: Urgent, possibly will need an en banc photograph of judges for upcoming milk carton production. Please contact our New Orleans office ASAP.) 

Calabria: Honest good guy or Golem? 

It may be too soon to ask this, but is Federal Housing Finance Agency (FHFA) Director Mark Calabria being “too cute by half,” flying a “black flag,” or at least false GSE colors?

Just wonderin'?

All of the big news has been Calabria’s several prominent public appearances and bold annunciation of his plan to free the GSEs from their 11-year conservatorship, resurrect the originals, with variations of recapitalization and private ownership thrown in.

Indeed, most of the pro-GSE crowd has gone gaga happy over his comments, because the media coverage has juiced GSE stock values.

But if you believe “leopards never change their spots,” you have to remember Calabria was a member of the Senate Banking Committee staff (seldom GSE-friendly when the Republicans ran it); claimed he helped write HERA (not GSE-friendly); worked at CATO (never GSE friendly in God’s lifetime); worked for Vice President Pence (not GSE friendly); generally has opposed most things Fannie and Freddie in his multi-employer career; and keeps on saying things which suggest that Fannie and Freddie should  be capitalized like the nation’s biggest banks, which is a flawed assumption based on any logical comparison between the GSEs and banks.

Despite all of the discordant right-wing noise from the Pollocks, Whalens, Pintos, Carneys, etc, hoping to weigh down Fannie and Freddie effectiveness, by demanding bank-like capital standards lashed to the GSEs, Fannie and Freddie are not banks and don’t operate as banks do. 

Banks are depository institutions, their consumer accounts, i.e. checking and savings are insured against loss by Uncle Sam ($250,000 per account). Banks use that money, along with other resources, to provide individuals and business customers domestic and international loans and investment products. Those loans have a complex variety of inherent risks which the bank must properly capitalize against. 

Those institutions also offer home mortgage loans, but that’s a secondary business. Most—but not all of their home loans—are sent to Fannie or Freddie for conversion to very liquid mortgage-backed securities that get sold to institutional investors.

Under the FHFA, since 2008 the GSEs have become monoline insurance companies, with no ability to hold loans in portfolio except as a process of selling them off to reduce risk.

Today, with their home loan guarantee authority, their clients are mortgage lenders, for which Fannie and Freddie create mortgage-backed securities—from batches of whole loans--and earn revenue from fees they charge to originate and guarantee payments from those mortgage bonds to major investors.

F&F's primary risk is credit risk, meaning mortgage borrowers approved for GSE financing, could—but seldom do--fail to pay their loan monthly because of excellent underwriting. 

Those who advocate treating GSEs and banks as operationally identical or similar, do so--generally--to financially harm the GSEs. 
Those gremlins know there is a cost to excess capital (in higher borrowing rates on the loans they securitize), which in turn would make the GSEs less competitive and injure Fannie’s and Freddie’s ability to widely help US mortgage consumers who would pay more. 

Tim Howard, who understands and writes more coherently about the nation’s secondary mortgage market, repeats this fact over and over in his regular blog. 

JP Morgan’s CEO Jamie Dimon discussed the need for accurately measured protective capital last month in his April newsletter to shareholders (P.31), in discussing mortgage capital. 

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business. That business, in particular, highlights one of the flaws of our complicated capital allocation regime. The best way to risk manage a bank is to use risk weights that are actually based on risk. However, since most banks are also constrained by standardized capital (a capital measure that does not risk-adjust for the lower risk of having a properly underwritten prime mortgage), owning mortgages becomes hugely unprofitable.”  (Thanks, BE!)

The relevant financial capital point is Fannie and Freddie only deal in prime mortgages, the risk on which is far lower than commercial loans and other bank credit extensions.

The National Association of Realtors (NAR), which strongly endorsed Calabria’s nomination, warned him in a letter this week about his GSE agenda—which appears frenetic like the new Director is running before he walks—when he talks about multiple GSE changes he would like to make without understanding the impact on consumers of his decisions. Politely, Realtor trade association called his actions "aspirational," not employing a bunch of less flattering adjectives and adverbs.

https://narfocus.com/billdatabase/clientfiles/172/3/3389.pdf

Calabria might be playing a teasing congressional game, seeking new authority to create GSE competitors, where he has no authority--but, in the media, asks Congress for the same--even before he makes good on his/the Admin’s plan/offer to free Fannie and Freddie from the conservatorship yoke and return them to private ownership and functional market operation.

(Hey Mark, some additional advice, your fellow federal financial regulators may not like the brash new kid on the bock upstaging them and boldly using his sharp elbows to ask Congress for new powers, at their expense.)

Calabria is Coming From Where??

Let’s imagine for a second that someone scratched the new GSE regulator deep enough and unmasked a dyed-in-the-wool GSE opponent--and a fellow traveler with Fannie’s and Freddie’s MBA and TBTF and ex-Obama spoilers--facts which most of Calabria’s prior professional career argue is his correct portrait.

If he is not operating with the Treasury’s approval, then his performance will invite a smackdown from an angry GOP superior.

If he is being directed from above, then the game’s over—despite all of the Admin hot air about ending the conservatorship—someone powerful wants to prolong the GSE indentured servitude. 
If not, then he is freelancing.

How/why would Calabria slow the progress of what Mnuchin and others have indicated they want to happen soon???

Hubristically, Calabria might pretend he needs new authority to make the mortgage world more competitive and attract his phantom private capital dream--as well some yet-to-be-created GSE clones—while informally soliciting his Senate R and media pals to trumpet his request. 
That would slow things down and make some senior  Cabinet heads look foolish.

If that's his game, Director C should practice threatening to hold his breath and turn blue, when the House Democrats suggest Calabria first climb a rope and, next, do something, reportedly, that’s anatomically impossible but often advocated by one’s foes?

If grilled mightily and exclusively on higher GSE capital—before the GSEs are freed and urge to raise fresh capital—Calabria would have to justify (something beyond “more capital is better, Senator”) why he endeavors to jack up capital levels on a company which just announced a superb past 10-year delinquency record (2009-2019) of .33 on all of their mortgage activity.

One-third of one percent delinquency rate--not a failure rate, just borrowers who are payment-late for whatever reason--is pretty impressive over the past 10 years and a performance any bank would love to have. 

To the point. A company which achieved that exemplary performance easily can protect itself--and the taxpayers--with 2.5% capital rate, but hardly requires a burdensome 6% or 5% provision.

If Calabria chooses an excessive capital number in the bank range, he knowingly would sabotage the GSEs, which just is what the big banks want. He might, but while hinting at it, Calabria hasn't called specifically for it.

But, I could be wrong. I have been once or twice before. Is there hope for the FHFA’s new Director? Nothing in DC is over until it's over. 

Calabria’s heart-warming nomination hearing story regarding his hardworking single mother and the importance of meeting their family's monthly mortgage payment indeed was worthy of repeating. Thank you for sharing it, Mr. Director.

But remember, sir, there are millions of American families, similarly situated or worse off, still trying to secure that piece of the American dream. If your FHFA actions make it harder for Fannie and Freddie to do for them what the GSEs have done for millions and millions of other U.S. families, your aspirational talk rings hollow.

Maloni, 6-6-2019*

(*Pretty important date for me, as it is my beloved, late--and only sib--brother Lou's 82nd birthday. You're deep in our hearts Bro.)