Tuesday, September 17, 2019

What good is he if he just fans the fires of ignorance?

Calabria is a Sycophant

In terms of a bountiful and rich GSE communications opportunities, the past several days were fabulous.

Last week—give or take a day--provided three major GSE moments.

First there was the publication of the underwhelming, very disappointing and crudely cut and pasted GSE Treasury Report, which I hoped was going to unveil all the Admin demands to free the GSE’s from Conservatorship, but it didn’t, leaving more questions than answers; followed a few days later by the Senate Banking Committee appearances—coordinated to explain the GSE report, by witnesses Treasury Secretary Steve Mnuchin, HUD Secretary Ben Carson, and the new GSE regulator Mark Calabria, Director of the Federal Housing Finance Agency (FHFA).

BUT, right smack dab in the middle—manna drops from Heaven, possibly surprising to everyone, except for the Admin officials who likely got tipped by insiders to the timing and content of the report—the Fifth Circuit Court issued a decision which favored two key points for the plaintiffs (GSE investors) in the Collins case.

The Fifth found that FHFA’s structure--set out in the 2008 Housing and Economic Recovery Act (HERA)--was not constitutional and the agency overstepped its authority instituting the 2012 net worth sweep.

Both matters were remanded to the lower court for reconsideration.

(The 2012 aggrandizement of all future Fannie and Freddie revenues, the NWS or Net Worth Sweep, which to date has produced $310 Billion going to the Treasury,  not preserved for protective capital or dividends for shareholders was called into question by the Fifth.)

But, unless someone knows what and when the internally competing Administration interests will do in response to the decision, the logical questions everyone has-- not just investors--have no Treasury/FHFA provided answers, yet.

But, like it or not, this all appears to be a 2020 issue, unless another shoe drops or Treasury seeks a settlement, since other litigants may rise to challenge the government in related matters.

This is a good reason for us all to “stop, look, and listen,” as they used to advise us public school students in the 1950’s (and that was before they showed us how to “duck and cover under our desks,” in case incoming Soviet nuclear bombs were soon to drop).

A Brief Blog Look Back 

In my previous blog, I chose BIGLY to call in question the Treasury’s choppy, written-by-a- committee report on its still very vague plans (lots of intent but no action or schedule discussed) to free Fannie and Freddie from their 11 years in servitude, otherwise called “Conservatorship” and what I believed was Calabria’s feckless role as the GSEs safety and soundness regulator but simultaneously a would-be executioner.

Before I get into what PO’d me the most about Mark Calabria’s Senate hearing performance, I must note I don’t believe the Trump execs working on the ”end Conservatorship”  task have their collective hearts in the exercise, because that action alone, i.e. freeing Fannie and Freddie from Conservatorship, violates what many  GSE-critics have been saying/seeking for years—and it’s their guys (with a little help from the court(s)—whose DNA will be all over the “free them” rules/requirements.

Last year, Steve Mnuchin brought into his Treasury shop Wall Street’s Craig Phillips largely to draw up Treasury’s plan ending Conservatorship.

Phillips completed his work months ago, then he was pushed out of Treasury. I don’t know why or by who but Kudlow and Calabria, or his Hill buddies, are my prime villains.

Early on, I relished/enjoyed going after Mark Calabria for what I considered his two-face treatment of the GSEs, while delivering his spiel about ending Conservatorship and returning them to full private ownership.

My response was “haff kaff, harumpph!.”  

(For you kids or seniors who don’t remember--kudos to the character Major Amos B. Hoople of “Our Boarding House,” daily and Sunday comics fame. “HKH” was his go to phrase when he was spinning to other renters or blusteringly trying to fake his way through matters he really didn’t understand.)

Calabria's Errors and lack of honesty

A few things also angered me about Calabria’s many public appearances.

He took over his job as if he was coming into a mortgage penal colony, carrying a whip and a gun and somehow believing he had to cage these snarling systemic mortgage beasts. He showed no respect for his job or the institutions.

Naturally, engaging in “Bureaucracy 101,” he first asked Congress for more resources, staff, and authority.

Conveniently, Calabria also ignored GSE abuse at the hands of previous GOP and Democrat Treasury Departments, Congress, the media, and other ideological foes, as well as his own agency personnel.

Since donning his FHFA hat, I never once saw him once given the GSEs credit or kudos for what they’ve achieved over the past 11 years during the harrows of Conservatorship; no good words about the companies or their workforces and what they have produced, like—when times were tough--hoisting the national mortgage system on their shoulders and carrying it, ensuring a constant flow of mortgage liquidity throughout the nation to qualifying families.

Two weeks ago, he did limit some pay to senior GSE execs.

He showed no understanding or appreciation of them generating over $305 Billion in earnings, with all of it going to Treasury via his agency’s 2012 sweep, when it aggrandized all future GSE income.

The Fifth Circuit said the FHFA--now, his agency--violated the law with that action.

He could NOT see or praise, after their hands were virtually tied in 2008’s Conservatorship, when it was alleged both had “failed business models” and  were swirling down the industry’s commode.

Paulson’s Treasury officials, followed by Obama Democrats did the same, building the myth the GSEs were hopeless/helpless. 

But together Fannie and Freddie fooled them all and turned around their financial performances.

That action was aided when those same time-limited regulatory accounting tricks began reversing themselves.

The GSEs suddenly started to make massive returns from new business, along with the self-reversing phony bookkeeping ploys adding to GSE revenue.

Fannie’s and Freddie’s business books, lost their red tinge and turned black under girding the GSEs dramatic financial return, where they’ve been for the past several years.

But Nada recognition from Calabria.

He has spent a lot of time vilifying the GSE and announcing what he hopes to do to them and take away from them, that he forgot—a rookie regulator error—that you can’t talk about taking away valuable pieces of the GSEs and otherwise limiting them under your rule and then try to sell the investing public into putting their money into marginal or partially wrecked mortgage vehicles. And, Mr. Director, if you don’t quickly settle with GSE shareholders, what investors will want to put their money into any other scheme Calabria supports to replace the GSEs, if the record isn't cleared of recent past Treasury/FHFA financial theft.

Mark, choose a Mulligan, try a do-over.

Cheer and cherish Fannie and Freddie and hope the billions of dollars you hope they’ll attract whenever you free them—becomes the much needed capital you keep lamenting they don’t have. Remember, it’s the same investing public hearing your bleating complaints and shortcomings who must provide that needed investment capital/protection.

Do you want to project that Fannie and Freddie are gilt-edged or wobbly needing your fine hands/mind????

Try and connect your behaviors, man, and see how one undercuts the other?

Keep your personal ideological GSE dislike and lack of respect hidden in your closet

With your deeds and words, do all you can to make the world want to own the GSEs, which then makes your’s and the Admin’s job much easier. 

That includes stopping trying to weigh them down with unneeded capital (less GSE revenue means less for new investors); selling Treasury’s 79% piece of the two indicating your support for their future as privately owned institutions and adding that deficit-reducing Amount to Treasury coffers; belay the lower their loan limits and stopping them from issuing certain single and multifamily mortgage products, again big downer to those folks you want to invest hundreds of billions.

Back to your wimpy performance before Senate Banking. For my readers to see for themselves, below is a verbatim transcript with Calabria and Senator John Kennedy (R-La.), a clearly GSE-misinformed solon, ranting and making up scenarios which easily you could have corrected and educated him, but in doing so, you would have had to straighten him out and also laud some Democrats who helped drive super beneficial  systemic risk-reducing mortgage market changes before Donald Trump was elected.

Instead of telling Kennedy how well the GSEs did on the GSE stress test which your own agency conducted and published the germane results just a few weeks ago, how consistently each of them for the past 10 years have produced extremely low losses, have benefitted from the CFPB and QM mortgage market changes (before 2016) which prohibit PLS mortgage loans (with incomplete docs or no incomes)  coming into the GSE market (but still persisting among private banks), you fawningly and uncourageously punted and agreed with Kennedy suggesting the GSE mortgage market is not well.

Instead of disagreeing with Kennedy and, gently, saying he wasn’t describing today’s GSE mortgage market but one more than 11 years old, you nodded in agreement with him and never said a word about his mortgage market ignorance.

I'll let readers go through your exchange and decide how honest you were with Kennedy about the GSEs and about the oft-told GSE lies which you didn't try to correct.

Senate GSE Hearing (9-10-2019), total exchange between Mark Calabria and Sen John Kennedy (R-La.)

KENNEDY:  Thank you, Mr. Chairman. Mr. Director, as an American do you believe that I have a right to own a home even if I can't afford it?  
     CALABRIA:  I -- I think you have a right to own property, yes. Own a home, no. Whether you can afford it is -- opens up to whether you can actually buy that home. I mean it's -- it's the same in terms of view of the right to -- you have the right to drive a Mercedes. Whether you can afford or not's a separate question. So I'm not sure where you're going with the question, Senator. Be helpful for me to parse that out.  
     KENNEDY:  I just want to -- want to understand your philosophy. Do you -- do you -- do you think that as an American, if I can't afford a home I have a fundamental right to have other Americans subsidize me?  
     CALABRIA:  Thank you for the clarification. The short answer would be no.  
     KENNEDY:  OK. Yet, I think everybody on this -- this committee -- I think everybody on this panel believes we ought to do everything possible to make homes and mortgages affordable.  
     CALABRIA:  Absolutely.  
     KENNEDY:  OK. We can agree on that, right?  
     CALABRIA:  Absolutely. 100 percent.  
     KENNEDY:  Why would a lender make a loan without verifying income.  
     CALABRIA:  Agreed.  
     KENNEDY:  Why would they?  
     CALABRIA:  I think the only reason that lender would reduce due diligence like verifying income is because they can pass that risk along to someone else --  
     KENNEDY:  Yes.  
     CALABRIA:  -- like the taxpayer.  
     KENNEDY:  Yes. (Inaudible) because they can -- they can sell it (ph) to you guys.  
     CALABRIA:  Absolutely.  
     KENNEDY:  I mean, isn't that the fundamental problem here? How we got in trouble, was underwriting standards?  
     CALABRIA:  Absolutely. We are the ones holding the bag at the end of the day, after everybody else in the process has made money and walked away, it is the taxpayer holding the bag.  
     KENNEDY:  Well what have you done to fix that?  
     CALABRIA:  Well Senator, we've begun -- I guess tomorrow will mark 5 months on the job. We've already started doing a bunch of due diligence internally, try to make sure that we have the regulatory (inaudible) –  
     KENNEDY:  That wasn't a fair question. What did -- what did your predecessor do to fix that over 11 years?  
     CALABRIA:  I -- Senator, I think that to me, I'm looking at what needs to be done going forward. I -- obviously I would have preferred to inherited a different situation than I did but -- 
     KENNEDY:  Excuse me for interrupting, but you know, we're limited on time, Mr. Director. Have underwriting standards gotten any -- any more realistic?  
     CALABRIA:  They've gotten worse, not better. Certainly at the GSEs. We saw massive expansion the last two years, at least, where a whole lot of high -- high income -- high DTI loans were done that weren't previously being done. So underwriting standards have eroded.  
     KENNEDY:  Yes, that's what I thought.
  CALABRIA:  And it concerns me greatly.  
     KENNEDY:  Well, this is just one -- one point of view. This whole thing is a car wreck. It's a dumpster fire. We spent $190 billion of taxpayer money and we're in worse shape.  
     CALABRIA:  Agreed.  
     KENNEDY:  Now, here's what I think we ought to do. I'm not in love with every aspect of your plan, but I'd encourage you to get somebody to put it in the form of a bill if you haven't already, get it introduced and let's mark it up in this committee, Mr. Chairman and Mr. Ranking Member. Let's -- let's put it in front of the committee and let senators be senators, and let's try to put out the dumpster fire. What do we have to lose? I mean, how long have we been talking about that? Doing nothing is hard. You know why? You never know when you're finished.  
     CALABRIA:  Senator, I couldn't agree more.  
     KENNEDY:  Now, if that doesn't work -- and I'm not going to mislead you. It's going to kind of be like slamming -- trying to slam a revolving door, pass a bill through the Senate. I would encourage you, Mr. Director, to saddle up and go. Tell me what you can do with your administrative authority to put out this dumpster fire.  
     CALABRIA:  Well, the first thing we're hoping --  
     KENNEDY:  And by that I mean encouraging people to make loans to people who clearly can't afford to pay them back.  
     CALABRIA:  Senator, we will be de-risking the GSEs, particularly in the --  
     KENNEDY:  What does that mean?  
     CALABRIA:  That means that on one hand, if your leveraged 1,000 to one you can't make loans that are almost guaranteed to go bad, so we have to be able to improve the quality of the lending of the GSEs in a way that is sustainable, that doesn't end up -- I 100 percent agree. If we do nothing, this is going to end very badly and --  
     KENNEDY:  Well of course it is. We're going to have a recession at some point.  
     CALABRIA:  Absolutely.  
     KENNEDY:  What was the leverage ratio, Mr. Chairman? $0.19 for every $100?
     CRAPO:  That's what I understand.  
     CALABRIA:  1,000 to one at Fannie Mae.  
     KENNEDY:  Now let me say it again -- I got one second left. Let's put this bill in front of this committee, Mr. Chairman and Mr. Ranking Member, and let's see what we can do. I listened to Sherrod's (ph) comments. He made some good points. I don't agree with all of them, but I think we ought to flesh it out. But if we're not, let's just admit that Congress is just going to sit on it's ice cold lazy butt, do nothing and you need to get started trying to fix this car wreck, Mr. Director. Thank you, Mr. Chairman.

Why Senators seldom get smarter?
Because they are lied to, often by Administration witnesses (from both parties), and enjoy their smug ignorance.
Do you think anyone, on the Committee staff or his personal staff, will tell Sen. Kennedy how in the dark he is, or ask him how two companies can build capital when a series of Treasury officials have taken $310 Billion away from them at least $120 Billion now could be protective capital?
So much for ideological car wrecks and dumpster fires!!


Anonymous said...

Let’s all also remember that it is the villain described Administration, Mnuchin, Calabria and Trump who is actually doing the work to correct what Husain’s Administration enacted, the NWS to fund the Democrats ACA Website and Health Care. Let’s also not forget Director Watt, all that he accomplished.

I am 100% more confident today that this is heading in the right direction then any time since 2008. You forgot to mention Senator Brown’s comments or any other Loony Liberals stance. Surely Senator Kennedy clearly understands what’s transpired. The script was written before the hearing.


Anonymous said...

F/F did zilch to maintain mortgage market liquidity after the 2008 conservatorship. It was the FRB, purchasing over $1.8 trillion in MBS (the securities isssued by F/F), that provided the liqudity. There were no private sector buyers for this paper.

In fact, during that period, F/F were actually liqudating their mortgage portfolios -- draining liquidity from the mortgage markets.

The 2nd largest buyer of F/F were the much despised TBTF banks. They also provided liquidty.

Pre 2008, the GSEs were, no doubt, liquidity providers. Post 2008, the were a drain on the markets.

The two fundamental role of the GSEs from 1968 to 2008 was to provide liqudity to the mortgage markets and (after 1981) transfer interest rate risk away from the banking system.

And the question none of GSE gang wants to answer:

Who will buy MBS without a federal guarantee?

Bill Maloni said...


Do you really think Sen. Kennedy understood what he was saying or the mortgage market?

But for him to claim--and Calabria to agree--the GSEs have been a failure since 2008 is a bit over the top, wouldn't you say.

11 years of no major credit losses, over $310 Billion in earnings, and no headline operational failures, except in the minds of certain ideologies, right?

You can't have it both ways.

Before you lionize this current Treasury/FHFAcrew, let's see it out to when they, finally, produce a true end of Conservatorship.


Second Anon--

"Zilch," strange description

Someone in GSE-land provided enough liquidity so that the two have $5 Trillion in mortgage assets on their books. Those largely are securities, filled with thousands of individual mortgage loans, which lenders made to borrowers, and which Fannie or Freddie applying their corporate guarantees, made liquid for the lender-issuers to sell to institutional investors.

In 2005-2008, the big bank lenders and Wall Street IB's tried to do it themselves and made a huge financial mess of their PLS exercise and lost far more money than the GSEs.

But, thanks for redaing and writing.

Anonymous said...


I appreciate your allowing me to post.

But to be blunt, the GSEs only performed bookeeping functions. Important as such functions are, they did not bring liquidity.

The liquidity was provided by the FRB and the TBTF banks that provided the mortgage borrowers with dollars to buy thier homes. The GSEs simply acted as an intermediary.

And the FRB and the banks bought the MBS because of the Treasury committment (under the PSPA) to provide capital so the GSEs could meet all obligations. In fact, the FRB would have prohibited from purchasing any MBS unless the Treasury committment was there.

The GSE corporate guarantee and $5.00 will buy you a coffee at Starbucks.

Bill Maloni said...

Anon, thanks for your perspective and your bluntness --

But ultimately, the Fed and the Treasury (not to mention the heavily subsidized bank deposit insurance system) are the ways and means for virtually every commercial enterprise/action in the nation, acting as the ultimate provider of liquidity for all US economic activity.

So the GSEs are/were very effective intermediaries or conduits (since so many in DC have their own ideal GSE replacements, doing exactly what F&F do).

So tell me, if the GSEs are as useless as you say, why haven't past Congresses--including some with the GOP in control of the White House and the Hill--done away with the burdensome GSE beasts???

Anonymous said...


The GSEs have a federal charter that provides exemption from securities laws. These exemptions enable certain efficiencies that add up when you originate $1.5 trillion.

And the federal charter enabled the PSPA. Through the PSPA, the Treasury was able to provide a guarantee on MBS without the amount of that guarantee adding to the federal debt.

So any entity with a federal charter can replace the GSEs -- nothing magical in what they do.

Pre-2008, the GSEs performed a valuable role in taking on the interest rate and prepayment risk of mortgages away from the banking system. That role provided the bulk of the GSE earnings prior to 2008.

Acting as liquidity provider and transferring interest rate risk away from the banking system is what is needed and what is missing. And the GOP stripped the GSEs of that role -- a long standing goal of theirs, if I may add.

Bill Maloni said...

Anon--In 2002, when I still worked at Fannie, F&F chose to voluntarily comply with the main requirements of the '34 Act and began filing annual 10Ks and quarterly 10Qs, shortly thereafter.

I don't disagree, but--as I've asked dozens of times rhetorically in my blog, why go through all of that cost, market delay, chaos and reconstruction of a $10 Trillion national mortgage market when the one we have worked and still works well?

You might want to review the stuff I accused Calabria of ignoring the performance and success of the GSEs in meeting their statutory responsibilities?

On paper, you might be able to design a more efficient Defense Department, HUD, or Agriculture Department, but should you initiate those federal policy changes???

Bill Maloni said...

Last Anon--You also might want to review the periodic times when the nation's banks left the mortgage market because of the risks the industry couldn't effectively manage.

Anonymous said...


The GSEs of your time are not the GSEs of today. For the GSEs of yore, the PORTFOLIO function was the big deal. By buying mortgages and MBS, the GSEs provided liquidity to borrowers. Issuing MBS was a means to this end. When Bush/Paulson terminated the portfolio role, they had no back up other than the FED. And it was this portfolio role that made the GSEs so vital to the U. S. economy.

Now, the GSEs are some odd provider of mortgage credit insurance -- with no PORTFOLIO role. Issuing MBS is the end. And the capital for the credit guarantee is entirely provided by the taxpayer. Some advocate that releasing them from conservatorship will let the GSEs become profitable. I seriously doubt any institutional investor is going to buy MBS from an entity without a federal backstop.

Bill Maloni said...


You're making a great case to allow the GSEs to have some portfolio function.

FHFA--which nobody is suggesting go away--I am sure could regulate (menacingly/feverishly so, I am certain) that role.

Gustave H. said...

I think the onus is not on the GSEs themselves to prove their absolutely evident necessity. It is also on the banks, who, twice now, have ceded their attempt to take over the entire primary and secondary market by blowing themselves up. The S&L crisis and post-2004 shitshow clearly show this for all to see. The GSEs, for whom tranching methods developed by the RTC and FSLIC, also called, ‘vacuum cleaners for bank dogshit’, were essential in shaping the current secondary market, got their big roles precisely because the banks left vacuums after blowing up the markets. Twice.

As Howard as often said, the banks don’t need the 20-25B in yearly profits that the GSEs make. They just want the neighbourhood policeman of credit standards that is the GSEs out of the way. The GSEs have to police because they take the loss om their guarantees.

Bill Maloni said...

Thank you Gustave H--

I appreciate your reminders of those times.

But I believe some of the previous blog commenters were challenging the need for the GSEs, more than just the history.



Friend Gary Hindes published the following. It sounds like Mr. Calabria who seems to believe the GSEs need to pay an exit fee needs, again, to read Hindes perspective.


Gustave H. said...

Happy to oblige, Bill. I think you and Howard put it best: the current system works too well. Anyone wishing to come up with a new system must answer what’s better than the current system, in which even the much-maligned portfolio business is not a significant factor anymore. The narrative of the imperious legislative and lobbying conduct of the 90s GSEs be damned: we are more than twenty-five years on now.

I have found no one able to articulate why legislation will happen, nor have I found anyone able to adequately take into account why a slew of bills never even got to the floor. The Ginnie route seems to be the newest prospective Frankenstein, along with charters for new GSEs, which will most definitely not keep prices level across the country and will thus cripple consumers more than in the current system. Hell, Kaplan, Parrott, Demarco organized an Urban Institute panel discussion during which Ginnie CEO Maren Kasper clearly articulated the small size of her work force and the fact that Ginnie only passes through government-originated loans. It’s a far cry from the decades-long build of private skills and databases within Fannie Mae and Freddie Mac.

TINA and the Warrants, it’s a rock band, isn’t it?

Bill Maloni said...

You've been reading my mind and my emails!!

Please stop that! ;-)

Anonymous said...

In 2008, the GSEs had what -- $40 billion in capital and a guarantee portfolio in excess of $5 trillion and a portoflio of close to $2 trillion.

And in the summer of 2008, Fannie Mae had to pay a premium of 100 basis points above Tsy rates for 2-year debt!!!!!

All the money 'earned' by the GSEs was due to taxpayer support. The taxpayers were taking all the risks (save the $40 billion in capital).

And the 'earnings' were nothing but a tax on borrowers.

Unless we are to believe an entity with $40 billion in capital and borrowing at 100 bp over Tsy (for 2 years!!!) for a $2 trillion portfolio can generate profits!!

Bill Maloni said...

Anon (Come on guys, adopt numbers or something for distinction purposes)---

Forget the remaining open court cases for a moment; so, your PRACTICAL alternative is.........??

(PRACTICAL means politically achievable, making good sense for the consuming public and the variety of business interests in the mortgage finance chain.)

Anonymous said...


There is no solution -- that is why the GSEs have been in conservatorship for 10 years.

MBS investors, despite what you read on the web, do not want ANY credit risk. Unless there is 100% capital, these investor want a federal guarantee. From 1968 to 2008, the securities of the GSEs had the 'implied guarantee'. During the 2008 crisis, investors wanted an expiicit guarantee. That is why the GSEs had to pay a 100 bp premium to borrow money. Borrowing at such rates will bankrupt the GSEs.

MBS investors still want a explicit guarantee. That takes legislation -- which will not happen.

Any kind of Treasury wrap will be insufficient unless it provides 100% protection.

People like Tim Howard, the Moelis Crowd, etc. are living in a dream as they beleive investors will by MBS issued by an entity with 3% capital.

Bill Maloni said...

Anon--Here's where I am on that question.

Because of the demand from institutional investors seeking long-term safety and higher return, investors will buy the best available execution in the market.

It hasn't been tried, yet, but that well could be the GSEs with only a partial full faith and credit guarantee. With the edge going to them because of their operations and market history.

Bill Maloni said...

Need a new term because it if is "partial," it's clearly not "full faith and credit," but you get my meaning.

Anonymous said...


A 'partial' federal guarantee is like 'partial' protection aganist getting pregnant or getting an STD -- its is worthless.

Thanks for allowing me to post this as Tim Howard deletes anything that disagrees with his narrative:

Tim Howard and others repeatedly say that the GSEs did not need the Treasury cash in 2008. In 2008, the GSEs were leveraged 150 to 1 in the midst of the worst credit crisis since the Depression. If anything went bad, the losses would have gone to the taxpayers. If things went well, the profits would have gone to the Treasury. This is the classic definition of 'socialized losses and privatized profits'

The GSEs were gambling with taxpayer funds.

Gustave H. said...


Your argument is circular. If there is no solution, let's keep the system we had. If there is one, let's give it the capital a guarantee business needs. If they only want a guarantee absent a sensible capital rule, why not look toward the utility model?

Let's have a look at the loss rates on the entire book of business of the GSEs during all time periods. It will give you a numerical answer to your call for capital, and will serve to inform the need for an explicit guarantee. Don't worry, I'll wait.

Your insistence on MBS investors needing a 100% capital-backing in whatever form begs the question: why would we even need a secondary market, in that scenario? Does everyone trust Basel-regulated banks backed by a 100% of capital and their underwriting/investing prudence? That would give us a world in which a gargantuan multitude of private parties willingly buy mortgages off of hamstrung banks to sell them off themselves. It seems, at best, unlikely.

I will gladly give you arguments in exchange for your arguments, and stand ready to be corrected.

Gustave H. said...

I have to add:

Taxpayer money is a funny term. What about mortgage rates and the wealth built up? During the 90s, anti-GSE folks put up a clever narrative of how much the GSEs' profits were made up of the implicit guarantee and their lower cost of capital, trying to make the argument that their low double-digit profits (in billions) were not really due to their underwriting prudence.

No one has calculated the profits and built-up household wealth of the taxpaying consumers that took out mortgages backed by the GSEs during their years in business. It would be a tough job, but it would sure help to balance the narrative of being "only backed by taxpayers", which in itself is a farce. They have also been backed by underwriting standards and shareholders, because unlike banks, they do take the losses on the MBS they pass through.

And what about calculating the taxpaying consumer costs of the underwriting 'mistakes' the banks have made through the decades?

Peter Wallison and Ed Pinto have dulled your mind, anon.

Anonymous said...


1) The system we had (from 1968 to 2008) involved the GSEs buying mortgage assets to provide liquidity to borrowers. They no longer do that. The system we had is no more.

2) The 'system we had' did not rely on the GSEs acting as an overpriced/under capitalized mortgage insurer. The 'utiility model' (proposed by Moelis, Howard, etc.) does not provide the mortgage markets with a non-bank liquidity provider. The non-bank liquidity provider was the reason for FNMA.

2) Your statement "... MBS investors needing a 100% capital-backing in whatever form begs the question: why would we even need a secondary market, in that scenario?". A 100% credit guarantee creates an instrument with interest rate and prepayment risk -- the instrument sought by TBA investors.

2) Enabling borrowers to finance the purchase of homes with 30Y fixed-rate mortgages and build wealth was the intent of the govt in creating FNMA. But that was through the PORTFOLIO function -- where FNMA provided liquidity buy purchasing mortgage assets.

3) The FNMA business model relied on the 'implied guarantee'. And investors in TBA securities were willing to accept that guarantee. Not anymore. Investors now want an 'explicit guarantee'

4) FNMA/FMCC can have 3% capital, 5% capital, 15% capital -- but these companies still won't be able to create a security without ANY credit risk. And investors in TBA markets will NOT purchase any such security.

5) The PORTFOLIO business was the reason for the existence of the GSEs. If they can't do that -- not sure why they should exist.

Gustave H. said...


First of all, I take issue with the fact that you have not answered my points about loss rates and the built-up taxpayer wealth the GSEs have contributed to.

Your first three points seem to hinge on the fact that you separate the guarantee business from the portfolio business and then flatly assert that the guarantee business is almost useless. Your points come down to, 'well, a non-bank liquidity provider is something different from a pure mortgage insurer, and by the way, they don't do the portfolio business anymore so they don't provide liquidity anymore, and the 30 Y FRM was only based on their portfolio business so the GSEs are useless now.'

We can debate 'what they do' semantically forever but the fact is, we all know what the guarantee business consists of. You can say, "they don't provide liquidity anymore", but you'll have to explain what you mean exactly. I take it as a statement of your insistence on the portfolio business being the only salient part of the GSEs. In that case, the wind down of the portfolio business to its current state of around 200 to 250B dollars should, in your world, have decimated the existence of the 30 Y FRM. It didn't. In fact, Treasury itself pointed this out in its latest report.

Investors are currently willing to accept a 3B capital cushion, a line of credit, and even a Treasury blandly sweeping 100% of the profits above the 3B capital cushion to itself. Explicit, implicit, let's have it paid for and make sense, so there is no distinction between the two.

Any security will have credit risk. TBA investors do purchase such securities and pay for the insurance on it. It's called, the guarantee business. Again: let's look at the loss rates on the entire book of business and then answer the capital question. A risk-based standard serves the banks just fine, so let's tailor one for the GSEs as well.

Who said anything about wanting the portfolio business back anyway?

Anonymous said...


I clearly stated that it was the GSEs buying mortgage assets (not providing some guarantee) that contributed to much wealth accumulation by taxpayers. Alas, the GSEs no longer fulfill their intended mission and have gone to some re-invented mission.


1) The FRB stepped in and replaced the GSE and purchased nearly $2 Trilion in MBS and banks stepped in and purchased an additional $1 trillion in MBS -- to replace the GSEs. Even then, PIMCO estimates nearly 1 million qualified borrowers were unable to get loans.

2) Under the SPSA, the Treausry is obligated to provide as much capital as the GSEs need to avoid principal loss on MBS. That is why investors buy MBS. They don't care about the capital held by the GSEs.

3) "Any security will have credit risk". Surely, you jest. Do GNMA MBS have credit risk? Do US Tsy securities have credit risk?

4) Interest rate risk investors cannot rely on historical default rates. The don't have the resources to even analyze such risks. They want full indemnification against losses from defaults. They aren't going to accept Tim Howard's word that defaults will never exceed 3%.

5) Freddie estimates the cost of catastrophic protecton at 5 bp on the total size of the pool. I suspect that at 3% capital, taxpayers are taking on more than catastrophic risk. so the cost should be closer to 10 bp. On $5 trillion, that is $5 billion annually. And I still think that is a bad deal for taxpayers.

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Bill Maloni said...


Based on my vast experience, I learned a long time ago NOT to trust anything Freddie prepares, including statements from their leaders.

I didn't call you Shirley; but, Ginnie not was more than five years ago, was losing money because of poorly underwritten loans they had securitized and it was shaking up the HUD world pre-Trump.

If the GSEs have no role than the Home Loan Banks have less--except to find system jobs for old thrift and small bank execs (see Alex Pollock); they just borrow money and send it to small and large institutional bank lenders, with no designated housing task.

Bill Maloni said...


I found several articles like this, showing Ginnie's operational inadequacies and problems. In my memory, ever few years major crap happens at Ginnie and they never seem to improve their dealings with lenders who use Uncle Sam's fisk (literally) and make millions. This report to Congress is a very recent one.


Gustave H. said...

Thanks, Bill!

And you know, if you’d call me Shirley I’d surely ask for a good dress to go with it! Word on the street is you’re a cross-dressing fanatic so bring your best!

Freddie always seemed like a conniving little brother to me. What’s your view of their current operations? Layton’s comments switch from hits to misses at the drop of a hat.

Ginnie is the little sister who’s too young to play poker.

Gustave H. said...


I think we’ll have to agree to disagree on some points, and agree to agree on others. Many of your points are good, but do not entirely address what I adress, and vice versa. For example, “any security” did of course not include T-bills nor Ginnie securities, which both consist entirely of government-originated and directly guaranteed debt and thus, in my view, fall outside of our discussion. I can see why you would take fault with my rather wide statement, though. Mea culpa.

The last, and only, SPSA draw after 2012 was purely the result of a drop in value of DTAs due to tax reform. I don’t think we have to discuss the GSEs’ severe overpayment of the SPSA after the third amendment was instituted.

Also, I don’t think loss rates come down to “Tim Howard’s word”, but I agree that the government backing has historically been necessary for investors who do not have the inclination nor time to analyze every security the GSEs pass on. That can easily be addressed by putting up a paid-for loss fund and sensible capital. By the way, the banks have got the same backing, they just get treated better during bailouts. Especially when the treasury secretary’s first name is Hank.

It seems to me that you like to look at the GSEs without comparing them, their benefits for consumers, and their backing, with those characteristics of other financial institutions.

Thank you for a lively discussion!

Anonymous said...

@Gustave, @Bill

How is this for a soluition:

The FHA guarantee fee is about 80 bp.

Apply this rate to the unsecured (or at best, secured by mortgages in default) debt of the GSEs. At $500 billion (their current outstanding amount), this is $4 billion annually.

The GSEs have $5 trillion in credit guarantees. Apply a rate of 20 bp (10 bp for credit risk, 10 bp for the payroll tax, etc.). This 20 bp assumes the GSEs have 3% capital. The 10 bp is from Freddie paper and seems line with credit risk paid on CRT transactions. So this amount is $10 billion.

So we have $14 billion in annual payments.

The TBA market would function. No one has to rely on Tim Howard's word. Investors would have a stock that yielded about 6.6% pre-tax.

Bill Maloni said...

It makes sense.

Is either one of your two US Senators on the SBC?

If so, ask one to consider shopping it to the Crapo or Sherrod Brown.

(Note: Major CNN story today (online) is Jim Parrott crapping on the outline of the Treasury deal.)

Anonymous said...

I think FHFA will not appeal to SCOTUS. If SCOTUS decides that because FHFA is unconstitutional, NWS is voided. By the argument, Sweeney may decide the original conservator ship and senior share purchase by Treasury are voided too.

Bill Maloni said...


But here, I am more confident "FHFA" isn't calling the shots, it's the WH/Treasury/DOJ.

That group will have to measure its steps by how it thinks the Admin will do in the SCOTUS, on which they must feel pretty good....unless they truly have pissed off Roberts?

Anonymous said...

Looks like fNMA was offering discounts on G-Fees to select players. Calabria discovered this and put an immediate stop to it

It is rumored that the FHFA saw through this artificial manipulation to get around the G-Fees we set, and requested that F&F eliminate the subsidies and have grid ratios move in line with how the MBS market is valuing the interest only (IO) piece/strip.


Bill Maloni said...

But, if FHFA has good management and operational control over GSE activities--which I am sure Calabria will vow he does--why are "discounts" cause for FHFA to step in and "BigFoot" management's decision?

I discussed this on another site and it only says to me that Calabria is imposing--in the absence of losses or any problems related to offering discounts to good customers--his judgment over management.

I think what Fannie was doing is what many businesses do. Why Director Mark is that wrong??

Check with your big bank buddies and ask them if they incent return customers with emoluments.

Better yet, ask big bank mortgage lenders if they like what you just did?

Ask your allies at the Mortgage Bankers Association how it sits with them when you take cash from their pockets?

Remember, your job isn't to stifle GSE creativity just ensure it stays within the law, which BTW--if you stop overreaching and making rookie mistakes-- might make them attractive to the investors you claim you soon will need to provide new GSE capital(a lot more than you'll want beyond unencumbered quarterly earnings).

Anonymous said...


I agree with you it was the big banks that likely alerted FHFA to what was going on. The discounts would most likely have gone to non-bank orignators such as Quicken or Guarantee Rate.

The problem with discounts to volume originators can be reduced to but one word

Non-bank originators have zero incentive for quality underwriting. They can dump the loans to the GSEs. And if the loans go bad, they just walk away.

Banks originating bad loans and selling to the GSEs face put back risk. And, worse, they face the risk that the FDIC will force them to settle.

But this is a further sign that this Administration plans to release the GSEs will be like releasing tamed/neutured lions into the jungle (a reference to a movie that was big when I still had hair -- "Born Free").

Bill Maloni said...

Anon--Easy on the thinning hair comment, some of us represent that comment!!

Calabria: "There's gambling at Rick's?"

My point was why--if FHFA has good operational control over the GSEs--would volume "discounts" become such a major issue/surprise, in the absence of credit losses on the discounted product, etc.

The GSEs are trying to act as other financial services players act and FHFA/Calabria wants them to be HUD.

Anonymous said...

IMO, the Tsy/FHFA want to release the GSEs without any federal guarantee or with some fig-leaf guarantee that the TBA markets no longer will accept.

BTW, none of the recap and release crowd ever mentions the nearly $500 billion in straight debt that F/F issue to fund their so-called successful business model. And that market evaoporates without a full guarantee.

This kind of ruling makes it even less likely will survive upon release.

Anonymous said...

Looks like the Tsy/FHFA are playing hardball on the NWS. They are letting F/F keep more earnings but the preferred shares owned by TSY increase by the same amount. The cash stays in the GSE account, but the GSEs need to pay the TSY back.

Bill Maloni said...

Earlier today with an email response to a small group of close GSE friends, I said the whole deal is a "mug's game."

What Treasury/FHFA give on the front end, they will try and likely succeed, retrieving on the back end in their negotiations.

Who/what will stop them?

The piss-willy (my mother's favorite description of the weaklings) boards--now stacked with Admin friends--won't act as if they have a stake in the companies' futures and will roll over and accept as much of the Treasury report recommendations as Calabria--shilling for the big banks--can jam down their throats.



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